Houston — Electric Reliability Council of Texas power traders expect, or at least suspect, prices will be substantially higher in June-July 2020 than in June-July 2019, though slightly weaker in August 2020 than August this year, judging from recent forward prices. Market observers are not surprised.
Those expectations may seem counterintuitive, inasmuch as ERCOT's most recent Capacity, Demand, and Reserves Report forecast a planning reserve margin of 10.6% for the summer of 2020, 2 percentage points higher than that of the summer of 2019.
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The planning reserve margin is the percentage by which forecast peakload is expected to be exceeded by forecast available supplies. The PUC has set 13.75% as a target considered minimum to ensure no capacity-related blackout occurs more often than one day in 10 years.
So far in December, ERCOT North Hub on-peak June forwards have averaged more than $40/MWh, July forwards have averaged more than $110/MWh, and August forwards have averaged less than $183/MWh.
This past summer, ERCOT Hub real-time systemwide on-peak LMPs averaged about $32.25/MWh in June, about $39.75/MWh in July and about $205/MWh in August.
"This doesn't surprise us at all,” said Manan Ahuja, senior director of North American power at S&P Global Platts Analytics. "The prices were weak in June and July 2019 because of cooler than normal weather and August 2019 was warmer than normal. Assuming normal weather in June-July 2020, even with a bit higher reserve margins we could still see higher prices. In contrast, a return to normal weather in August 2020, along with higher reserve margins, would likely lead to lower prices year on year.”
The National Weather Service's November 21 seasonal forecast for June, July and August 2020 indicates probabilities ranging from 40% to 6% for above-normal temperatures throughout Texas.
Another factor in heightened expectations for higher prices in the summer of 2020 is the Public Utility Commission of Texas' decision in January to implement a second 0.25-standard-deviation increase in the loss-of-load probability used in calculating ERCOT's Operating Reserve Demand Curve, which raises prices systemwide as operating reserves decrease to risky levels, said Travis Whalen, a Platts Analytics power market analyst.
The LOLP change "effectively equates to the loss of around 300 MW of reserve capacity,” Whalen said.
"That eats into a chunk of the increased reserve margins, but is not reflected within that number,” Whalen said.
Campbell Faulkner, senior vice president and chief data analyst at OTC Global Holdings, an interdealer commodities broker, said he expects ERCOT's power prices in summer 2020 "will be extremely volatile, and we will likely see numerous price cap hits during very hot times.”
During a mid-August heat wave, ERCOT's systemwide real-time prices hit the systemwide offer cap of $9,000/MWh for several hours, and two Energy Emergency Alerts were declared, which enables ERCOT to deploy its Emergency Response Service.
ERS is a program by which large power users agree to curtail demand in exchange for cash compensation.
The summer 2020 volatility is expected "due to the already tight market coupled with the inability for load curtailment to replace the dwindling baseload capacity via loss of coal-fired generation,” Faulkner said in an email Tuesday.
"I would expect a number of EEA levels and wildly swinging grid stability until either there is a large reduction in load (via efficiency gains) or new baseload units [are] added to the generation mix,” Faulkner said. "Renewables will help shoulder the 2020 load until they don't — that will be what really stresses the grid overall.”
-- Mark Watson, firstname.lastname@example.org
-- Edited by Richard Rubin, email@example.com