Forward curves in the Electric Reliability Council of Texas have shifted up in recent weeks as continued capacity constraints for summer 2019 have become clear. On Dec. 4, ERCOT announced that it expects a record-low forecast planning reserve margin of 8.1% for summer 2019 — well below the target reserve margin of 13.75% and the 2018 summer reserve margin of about 11%. The August 2019 North Zone on-peak contract closed at $172.91/MWh on Dec. 10, compared to the contract's price of $126.28/MWh on July 31.
S&P Global Market Intelligence 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 $132.65/MWh in August 2019 and $138.46/MWh in August 2020. Forwards may be higher than the Market Intelligence forecast in part due to the ISO's lower expected reserve margins. As of September 30, Market Intelligence forecasts a 2019 reserve margin of 12.1%. While this is below ERCOT's official target reserve margin, it is substantially higher than the ERCOT's forecast. To see ERCOT projections extending out 20 years, see the Market Intelligence Power Forecast.
As illustrated above, the differences between the reserve margin forecasts boil down to three factors: the Market Intelligence forecast of firm builds is higher than ERCOT's by 630 MW; ERCOT now expects about 1,200 MW fewer demand response resources to be available, and; ERCOT projects 789 MW of 'switchable' generation capacity (intertied to ERCOT and either SPP or MISO) will not be available next summer. Future updates to the Market Intelligence forecast for ERCOT will reflect adjustments to load and available demand response, and it is clear that much of the build projected by Market Intelligence will not be available in time for next summer. Switchable capacity is more likely to be available as these merchant power plants anticipate a stronger market in ERCOT than in surrounding RTOs.
Summer 2018 saw consistently higher power pricing in ERCOT compared to summer 2017. Higher and more frequent scarcity pricing was the primary driver for increased power prices, and that trend continued into the fall. Average around-the-clock settlement point prices in the North Zone were up 46% to $42.22/MWh and up 31% to $35.08/MWh, respectively, year over year in July and August. With the slimmer projected reserve margin for summer 2019, larger and more frequent price spikes are a distinct possibility. Competitive retail energy providers may feel the squeeze like Breeze Energy LLC did in May 2018, when it defaulted and its 9,800 customers transitioned to other providers.
For the full range of projections, see the Power Forecast.