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Recent ERCOT retirements set stage for a tightrope summer

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Recent ERCOT retirements set stage for a tightrope summer

The Electric Reliability Council of Texas is facing narrow operating reserve margins this upcoming summer after the recent retirements of several large baseload generating facilities. Monticello units 1-3 retired in January, removing nearly 2.0 GW of capacity from the grid, and the retirement of Big Brown units 1 and 2 in February removed an additional 1.2 GW. New gas-fired resources will not be coming online in time to relieve the strain, and unless the weather is unusually cool, the ERCOT system will likely feel the squeeze of the missing spinning reserves.

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Data from the U.S. Environmental Protection Agency's Continuous Emissions Monitoring System indicates the cycling operation of Monticello and Big Brown last summer, as seen in the chart below. Cycling resources provide operating reserves to the market, and the lack of these resources will likely lead to a lower level of operating reserves and greater occurrence of scarcity pricing.

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The 600-MW Sandow unit 5 plant also retired earlier this year. While Sandow 5 ran baseload during the summer months, replacing this capacity with resources that previously contributed operating reserves could reduce available reserves further.

ERCOT forward curves have shifted up meaningfully over the last several months as the market has processed the impact of the baseload retirements. On Sept. 29, 2017, before Vistra Energy Corp.'s October announcements of the retirements of Monticello, Big Brown and Sandow, August 2018 on-peak forward contracts for ERCOT's North Zone closed at $58.10/MWh. By Oct. 31, the August 2018 contract was up to $83.25/MWh, and on Feb. 28, 2018, the contract was up to $110.59/MWh.

S&P Global Market Intelligence Power Forecast projections for ERCOT's North Zone sees on-peak prices reaching $217.58/MWh in August 2019 and $231.91/MWh in August 2020. To see ERCOT projections extending out 20 years, see the Power Forecast section.

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Operating reserve demand curve pricing saw a significant spike recently, when the real-time on-line reserve price adder reached a maximum of $826.57/MWh and maintained a rate above $100/MWh for over an hour on the morning of Jan. 17, 2018. For comparison, in January 2017, the real-time on-line reserve price adder reached $32.44/MWh, and in January 2016, the adder reached $8.77/MWh. During an open meeting on Feb. 15, the Public Utility Commission of Texas ultimately decided not to make major changes to the wholesale power market ahead of the summer, despite ERCOT's projections that its reserve margin will fall below the target 13.75% for the first time since the implementation of higher price caps. The higher price caps — increased to $9,000/MWh from $3,000/MWh — and the operating reserve demand curve, which values diminishing reserve capacity in real time, were applied after generation shortages caused high prices in 2011. With ERCOT now forecasting a record peak demand of 72,974 MW for summer 2018, real-time on-line and off-line reserve price adders may be heavily employed.

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Higher scarcity and congestion pricing meaningfully boosted January estimated earnings for Bosque Energy Center, according to an analysis utilizing a recent S&P Global Market Intelligence template. Owned by Calpine Corp., the generating facility brought in roughly $5.4 million in profits in January 2018, well above January 2017 earnings of $0.3 million and January 2016 earnings of $0.7 million, and even above August 2016 and July 2017 estimated earnings of $4.8 million and $4.4 million, respectively.

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