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ERCOT forwards surge on summer's early arrival

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ERCOT forwards surge on summer's early arrival

Early summer heat waves in Texas are fanning expectations for high demand this summer, which, when coupled with recent resource retirements, appear likely to result in tight reserve margins and high power prices.

Forward curves in the Electric Reliability Council of Texas continued to rise in May, with the August 2018 contract May 31 closing price reaching $223.57/MWh, compared to the April 30 closing price of $196.34/MWh. Additionally, the June 2018 contract closing price on May 31 was $89.51/MWh, roughly double the April 30 closing price of $45.04/MWh.

If prices this summer settle as high as forwards indicate, retail energy providers in ERCOT that are not adequately hedged may face financial challenges. Competitive retail energy provider Breeze Energy defaulted on its financial obligations to ERCOT at the end of May, kicking off the process to move the company's 9,800 customers to providers of last resort.

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Forwards for the summer of 2019 have also increased steadily, as forward buying to manage 2019 risk picks up. S&P Global Market Intelligence Power Forecast projections for ERCOT also call for high prices, as added generation lags peak demand growth. The forecast for North Zone sees on-peak prices reaching $238.20/MWh in August 2019 and $254.85/MWh in August 2020. To see ERCOT projections extending out 20 years, see the Market Intelligence Power Forecast.

Outright prices settled significantly higher year-over-year for May, reflecting temperature-driven demand and increased scarcity pricing. Average around-the-clock settlement point prices in ERCOT's North Zone in April and May averaged $23.85/MWh and $32.69/MWh, respectively, compared to year-ago average prices of $22.56/MWh and $26.70/MWh, respectively. 15-minute prices spiked to $1,493.46/MWh on May 16 and $1,039.99/MWh on May 26.

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May saw significantly higher scarcity pricing than in recent years, with the real-time online reserve price adder reaching $256.04/MW on May 16 and maintaining a rate above $100/MW for an hour. For comparison, the real-time on-line reserve price adder reached a maximum of $54.38/MW in May 2017 and a maximum of $75.27/MW in May 2016. The operating reserve demand curve, which values diminishing reserve capacity in real time, was implemented after generation shortages caused high prices in 2011. With ERCOT forecasting a record peak demand of 72,756 MW for summer 2018 — 1,600 MW higher than the previous peak in August 2016 — real-time on-line and off-line reserve price adders may be heavily employed.

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