Houston — The Electric Reliability Council of Texas' systemwide real-time wholesale power prices on Tuesday spent more than four hours above $1,000/MWh and 90 minutes around $9,000/MWh, but industry observers Wednesday said they generally doubted it was enough to incentivize conventional generation capacity growth.
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Evan Caron, former head of TrailStone, an energy asset management company based in Austin, Texas, said this week's pricing is unlikely to prompt investment in retaining or expanding capacity in ERCOT, because the real-time price jumps "barely moved the forward curve" in Tuesday's trading.
The July 2020 on-peak package settled around $86.21/MWh on Tuesday, up from $85.03/MWh on Monday and $82.62/MWh on Friday, according to the Platts M2MS forward curve. Wednesday's price jumped to $95.66/MWh. As context, the July 2019 on-peak package averaged $79.33/MWh in August 2018.
The August 2020 on-peak package settled at $135.95/MWh on Tuesday, up from Monday's $134.11/MWh and Friday's $130.34/MWh, but Wednesday's price jumped to $150.74/MWh.The August 2019 on-peak package averaged $122.33/MWh in August 2018.
"While yesterday's market outcomes are still being analyzed, it is unlikely that these high prices were sustained for a long enough period to signal on their own that new investment is economically viable in ERCOT," said Michele Gregg, executive director of Texas Competitive Power Advocates.
'HEADWINDS OF A RECESSION'
Campbell Faulkner, senior vice president at Houston-based OTC Global Holdings, an interdealer commodities broker, said, "I do not foresee additional generation based off of the past two days, particularly gas baseload plants.
"The ultimate question is: Will companies facing the headwinds of a recession be willing to bet on financing and continued low gas prices?" Faulkner said in an email. "If gas remains low, more gas ... capacity will be built, but it's a difficult act, especially for firms that remember the price volatility from just a few years ago. Five-dollar gas changes a large amount of the economic structure for gas baseload power production, and a lot of firms have been burned building capacity in ERCOT."
Several industry observers foresee additional price volatility in the summer of 2020, when ERCOT's latest Capacity, Demand and Reserves Report forecasts a planning reserve margin of 10.5%, up from this summer's 8.6%, but well below the 13.75% considered the minimum necessary to ensure ERCOT has capacity-related power outages no more than one day in 10 years. The planning reserve margin is the percentage by which generation resources exceed forecast peakload.
"Prices next summer should be very volatile, particularly if the summer is warmer than this year," Faulkner said. "Most of the June-July stretch was relatively cool, limiting peak demand on the ERCOT [grid]. If we continue to see coal units retired along with the constantly growing demand for power in Texas, seeing [Energy Emergency Alert] events might become much more common."
Asked whether presidential politics may be delaying final investment decisions for generation in ERCOT, TrailStone's Caron said, "Possibly, but we will lose the rest of the coal fleet regardless."
"One day doesn't make their year, especially as they were all probably 80% or more hedged coming into the month," Caron said.
OTC Global's Faulkner said the "extremely low thermal cost of gas vs. thermal coal" is a bigger factor that presidential politics on thermal generation investment.
"Much of the hand waving and bluster from Washington casts a shadow but does not directly act to inform the hard reality of generation mix and grid reliability in Texas," Faulkner said. "Anyone who claims that there will be a totally renewable electric supply anytime soon is either consigning the 'rest of us' to poverty via extremely high energy prices or is totally ignorant of the realities of a stable electricity supply (physics, grid planning, etc.)."
WIND OUTPUT EFFECTS
One factor that appears crucial during Tuesday's price spike is the lack of wind output during peak times.
While acknowledging that ERCOT declared an Energy Emergency Alert for the first time since 2014, TCPA's Gregg said, "ERCOT managed the grid exceedingly well."
"However, the correlation between reduction in wind and the need for reliable thermal generation cannot be ignored," Gregg said. "The desire to have renewable energy should not overshadow the need to also invest in reliable thermal generation."
From a high of around 16 GW between midnight and 1 am Tuesday, the wind fleet's hourly average output dropped to less than 2.8 GW around noon CDT, and stayed below 5.5 GW through 5 pm CDT. ERCOT's highest systemwide average prices ranged from 3 pm to 5 pm.
"We're likely to see many more price spikes like this in the future," said Sean Kelly, CEO of Amperon, a New York-based grid analytics provider for utilities, retail electricity providers and independent system operators.
"The systemwide load curve is higher due to rapid population growth, and had the temperature been a few degrees hotter, demand could have blown right through the 2.3GW of reserves," Kelly said in an email. "From a price perspective, the market design is working, but high prices alone won't save the grid from blackouts."
This was the first summer since the Public Utility Commission of Texas mandated changes to ERCOT's Operating Reserve Demand Curve, a price adder that increases as reserves reach scarcity levels, that increase the likelihood and magnitude of those price adders.
However, Adam Sinn, owner of Aspire Commodities, a Houston-based energy trading company, said the ORDC produces "a perverse incentive for the operation of a safe, reliable and efficient grid."
"The ORDC is a capacity payment, but unlike the capacity mechanisms or market put in place in other electricity markets, there are limited, if any, requirements or restrictions accompanying the payment," Sinn said in an email Wednesday. "Thus, for example, a generator can be both the cause of an ORDC payment as well as a recipient of the payment. That does not seem to be an efficient or incentive-aligned market design element."
-- Mark Watson, email@example.com
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