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August scarcity pricing caps off a record-setting summer in ERCOT

Q2: U.S. Solar and Wind Power by the Numbers

Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

Rate case activity slips, COVID-19 proceedings remain at the forefront in August


August scarcity pricing caps off a record-setting summer in ERCOT

As anticipated, summer heat waves in Texas drove high demand over the last three months, which, when combined with the retirement of over 3 GW of baseload capacity in January and February, resulted in increased scarcity pricing that pushed power prices upward. August scarcity pricing peaked at $1,416.74/MW, higher than the July peak of $799.66/MW, but overall, the scarcity pricing mechanism was triggered less often in August than in July. August average demand in the Electric Reliability Council of Texas was 52.7 GW, up about 8% year-over-year, while August peak demand in the region was 69.8 GW, up 3% compared to August 2017.

The average August around-the-clock settlement point price in ERCOT's North Zone was $35.08/MWh, above the year-ago average prices of $26.79/MWh but below the July average price of $42.22/MWh. The 15-minute price for the North Zone spiked to $2,085.38/MWh on Aug. 18.

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Looking ahead, Power Forecast projections for ERCOT call for high prices in coming summers, as generation additions lag peak demand growth. The forecast for North Zone sees on-peak prices reaching $189.92/MWh in August 2019 and $197.92/MWh in August 2020. To see ERCOT projections extending out 20 years, see the Market Intelligence Power Forecast.

The August around-the-clock average price of $35.08/MWh was lower than the most recent S&P Global Market Intelligence Power Forecast projection for the month, $143.36/MWh. Scarcity pricing deployment, while meaningful, has not been as robust as anticipated, and generators may not be receiving their full return as a result. Around-the-clock prices will need to reach higher levels in order to encourage more capacity to join the ERCOT market.

August's settled prices should nevertheless provide a significant boost to merchant plant earnings in ERCOT. As an indicative example, S&P Global Market Intelligence estimated earnings for Bosque Energy Center over the last two years using a recent template. Owned by Calpine Corp., the 818-MW plant brought in roughly $7.5 million in earnings in August 2018, over half of full-year 2017 estimated earnings of $12.1 million, with the assumption of no hedges in place. The August estimate follows on the Market Intelligence estimate that scarcity events in July drove earnings to $31.5 million, an amount greater than estimated earnings for all of 2016-2017.

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August saw significantly higher scarcity pricing than in recent years, with the real-time online reserve price adder maintaining a rate above $100/MW for nearly three hours on August 18 and reaching a peak of $1,416.74/MW during that period. For comparison, the real-time on-line reserve price adder reached a maximum of $296.86/MW in August 2017 and a maximum of $76.41/MW in August 2016. The operating reserve demand curve, which values diminishing reserve capacity in real time, was implemented after generation shortages caused high prices in 2011.

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For the full range of projections, see the Power Forecast.