Recently announced planned retirements of 4,500 MW of generation capacity in the Electric Reliability Council of Texas, plus the indefinite shutdown of another 118 MW, would likely push reserve margins below ERCOT's target of 13.75%, ERCOT stakeholders learned Tuesday.
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During the ERCOT Board of Directors meeting Tuesday, Bill Magness, ERCOT president and CEO, said his staff was working to determine whether any of the resources announced for retirement are needed to maintain system reliability, which may prompt the grid operator to negotiate reliability-must-run contracts. Magness said these analyses should be completed by the board's December 12 meeting.
On Friday, Vistra Energy announced plans to close two coal-fired power plants, Big Brown southeast of Dallas and Sandow northeast of Austin, totaling about 2,400 MW of nameplate capacity in early 2018, after announcing on October 6 the planned retirement of its 1,800-MW Monticello coal plant in northeastern Texas in January.
Talen Energy informed ERCOT on September 27 that it intended to retire the 300-MW Unit 1 of its Barney Davis gas-fired power plant on the Texas Gulf Coast.
And on October 5, ERCOT issued notice that the city of Garland, Texas, planned to indefinitely shot two gas-fired units at its Spencer plant outside Dallas, with a combined capacity of 118 MW.
Beth Garza, who heads Potomac Economics' independent market monitor unit for ERCOT, said that if none of these units are needed for reliability, "we're looking at a much different situation going into the summer of 2018 than we had in what I call the 'fat and happy' times we've seen over the past few years."
The most recent report on the ERCOT region's capacity, demand and reserves, issued in May, showed reserve margins -- the excess in capacity as a percentage of projected firm peakload -- falling from 18.9% in 2018 to 16.8% in 2022, which is nevertheless above the 13.75% target estimated as necessary to prevent involuntary load shedding for capacity reasons more than once every 10 years.
Garza had prepared a report to the board on October 10, before Vistra Energy announced its most recent set of retirements. She had based her report on the previous announcements and an assumption that the city of Garland would retire its 470-MW Gibbons Creek coal plant northwest of Houston, rather than merely shutting the plant down on a seasonal basis, as Garland had originally announced.
Based on those assumptions, Garza had calculated that reserve margins would fall from 15% in 2018 to 13.1% in 2022. She said that if she assumed that Garland would keep operating the Gibbons Creek plant seasonally, but assumed the Big Brown and Sandow plants would retire, "these reserve margins drop by about 3%."
An S&P Global Platts analysis of these numbers indicates reserve margins ranging from 12.4% in the summer of 2018 to 10.6% in the summer of 2022.
"It's not surprising we see pressure on the coal fleet," Garza said. "Those [retirements] should not be surprising decisions."
Based on existing delivered prices for coal and natural gas, with a 7.5 MMBtu/MWh heat rate for gas-fired plants and a 10 MMBtu/MWh heat rate for coal plants, Garza said that "it appears that coal units were likely unprofitable in ERCOT in 2016."
"We're looking at interesting times ahead," Garza said.
Board member Peter Cramton, a University of Maryland professor of economics, said, "The market is working. ... Now is the time for us to let the market work."
Garza responded, "We have a market that is fairly easy for entry, and I think it's important to have an easy exit, as well."
Asked by board member Karl Pfirrmann, a former executive at Allegheny Energy and the PJM Interconnection, how the market might recover from what may be a tight supply situation, Garza said the retirements are likely to result in stronger forward power prices and better contracting opportunities for new generation, but she added, "it's likely that we may see higher, more volatile prices than we have seen in the past few years."
NEW PANHANDLE HUB APPROVED
In other business, the board approved the creation of a new Panhandle Hub for resources in northwest Texas -- outside the ERCOT footprint -- that directly supply ERCOT load. Creating such a hub makes it easier for Panhandle-area market participants to hedge their risk.
The new hub would become operational no earlier than July 1, 2019, which gives market participants time to adjust their current hedging strategies.
In a long-term weather forecast, ERCOT senior meteorologist Chris Coleman said the autumn period is likely to be 2 to 4 degrees Fahrenheit above normal for most of the state, except northwest Texas and the El Paso area, both of which should have temperatures less than 2 degrees above normal.
Regarding precipitation, the vast majority of Texas is forecast to have precipitation 25%-75% above normal, while almost all of the rest of the state is likely to have precipitation ranging from normal to 25% above normal. Only the far southern tip of Texas is likely to have precipitation below normal this autumn, Coleman said.
Hurricane season officially continues through November 30, Coleman said, but no hurricane has historically made landfall in Texas after October 16.
Coleman's preliminary winter forecast called for temperatures ranging from 1 to 3 degrees above normal for all except the northeastern quadrant of the state, which would have temperatures ranging from 3 to 5 degrees above normal.