Texas Businesses Brace for Volatile Electricity Prices
In the past few years, an abundance of low-cost natural gas has driven down power generation costs in Texas. As a result, businesses in the state have enjoyed relatively low prices and little volatility in the market.
However, current market conditions suggest that this certainty may be coming to an end.
While low-cost gas-generated power was a boon to power consumers from 2015 through 2017, it also contributed to the early and unexpected retirement of several baseload power generators. Vistra Energy, for example, closed three coal-fired power plants in early 2018 that combined to produce roughly 4.1 GW of power in the state.
This kind of disruption has a significant impact on the electricity market. Shortly after Vistra announced its plans to close the plants in early October 2017, wholesale electricity prices spiked 13%, from $35.32/MWh on October 2 to $40.06/MWh on October 17. Wholesale prices increased again in February, after all three plants had closed and the market braced for the Electric Reliability Council of Texas (ERCOT) to provide forecasts on seasonal demand throughout the rest of 2018.
On March 1st, ERCOT’s Summer 2018 Seasonal Assessment of Resource Adequacy (SARA) report (which you can download from this page) projected a peak demand of 72,974 MW—roughly 1,800 MW higher than the all-time system peak set in August 2016.
With fewer generation resources available, the additional load anticipated on the system will likely push the reserve margin (the amount of excess generation capacity available) well below ERCOT's target of 13.75% and buoy the short-term bull market.
As you can see in the chart below, power prices in Texas were generally higher from 2012 through 2014, before the emergence of natural gas helped to drive down power prices in the state from 2015 to 2017. In early 2018, however, prices have returned to levels not seen in Texas since mid-2014, as the retirement of baseload generators and potential for record-setting summer peak demand drives down the state's reserve margin.
Energy buyers with expiring contracts or market exposure should discuss their options with their advisor, but we generally recommend staying out of the market and allowing prices to recede over the coming months.
This return to volatility is just a sign of broader changes in the Texas energy market. For deeper insight into navigating the challenges and opportunities in ERCOT, register for this webinar hosted by Energy Manager Today on Wednesday, March 28th, which will cover:
- Texas energy market fundamentals, and the best way to create competition for your supply business
- How proactive peak demand (4CP) management can save you an additional $45,000 p/MW each year, and how to make it easy
- What generator options are available for demand response, and the best (and worst) ways to finance them
- The differences between Emergency Response Service (ERS) and Load Resources (LR) DR programs, and how to maximize your earning potential