Texas' wholesale power market experienced the lowest annual average electricity prices in 2016 since launching its nodal market in December 2010, putting future power plant investment and existing generators at risk, according to the Electric Reliability Council of Texas' independent market monitor.
According to Potomac Economics' 2016 State of the Market Report, filed with the Public Utility Commission of Texas on June 1, annual fixed costs for the generating units range from $80/kW-year to $95/kW-year, but during 2016 the market only bore net revenues of between approximately $23/kW-year and $29/kW-year, depending on the market zone.
"These results are consistent with the current surplus capacity, which contributed to infrequent shortages in 2015 and 2016," the report said. "In an energy-only market, shortages play a key role in delivering the net revenues an investor would need to recover its investment. Such shortages will tend to be clustered in years with unusually high load and/or poor generator availability. Hence, these results alone do not raise substantial concerns regarding design or operation of ERCOT's [operating reserve demand curve] mechanism for pricing shortages."
The mechanism relies on a power price adder that reflects increasing scarcity as generation reserves diminish.
According to the report, real-time power prices in ERCOT averaged $24.62/MWh in 2016, with the Houston Zone seeing the highest average at $26.33/MWh and the West Zone, with a high concentration of wind power, saw the lowest average at $22.05/MWh.
"The zonal prices in 2016 show greater disparities than 2015 because of congestion in the West and Houston [zones]," the report said. "The West zone average annual price remained higher than the ERCOT average until 2016 when increased congestion caused by high levels of wind output in the West cause the average prices in the West to be lower than the other zones. Additionally, transmission congestion related to power flows into Houston caused that zone to exhibit the highest average prices and reduced average prices in the North zone."
According to the report, congestion costs totaled $497 million in 2016, up 40% from the prior year.
Beyond those faced by investors in new generation, the report highlighted the economic risks that owners of existing coal and nuclear units face.
For the approximately 5 GW of ERCOT's nuclear capacity, the generation-weighted average price was $21.46/MWh during the year's non-shortage hours. Citing the Nuclear Energy Institute, the report said total operating costs for U.S. nuclear units averaged $27.17/MWh.
"It is likely that these units were not profitable in 2016, based on the fuel and operating and maintenance costs alone," the report said. "To the extent nuclear units in ERCOT had any associated capital costs, it is likely those costs were not recovered. ... Although not profitable on a stand-alone basis, the nuclear units have substantial option value for the owners because they ensure that the cost of serving their load will not rise substantially if natural gas prices increase. Nonetheless, the economic pressure on these units does potentially raise a resource adequacy issue that will need to be monitored."
The report said that given their efficiency disadvantage and higher non-fuel operations and maintenance expense relative to natural gas-fired units, coal-fired units in ERCOT have been losing market share to gas-fired generators.
"As with nuclear units, it appears that coal units were likely not profitable in ERCOT during 2016," the report said. "With the bulk of the coal fleet in ERCOT being more than 30 years old, the retirement or suspended operation of some of these units could cause ERCOT's capacity margin to fall to unreliable levels more quickly than anticipated. ... Coal units appear to be at greater risk of retirement than the nuclear units in ERCOT due to their relative age and inefficiency."
The market's current planning reserve margins have the market remaining oversupplied through 2022, "but [the] current projection of planning reserve margins combined with relatively infrequent shortage pricing may raise doubts regarding the likelihood of announced generation coming on line as planned," due to expectations of continued low prices.
Recent S&P Global Market Intelligence analyses show nearly 8 GW of new capacity coming online in ERCOT this year, while 11.5 GW of capacity is identified as "at risk" for retirement.