Capacity Concerns in ERCOT

The question of sufficient resource adequacy in a Texas summer is evidencing itself in a spike of power prices. In years past, price spikes based on real shortages were natural gas-driven (think 2006 with Rita and Katrina where infrastructure damage included offshore pipes and Henry Hub force majeure).

Today there is concern about capacity (i.e. power plants/generation assets) and not natural gas (we have lots of natural gas!). A few factors are (1) recent announcement that a handful of coal power plants will be retired, (2) a lack of new generation being built, and (3) concerns of the reserve margin in ERCOT falling below suggested levels. Beginning last Thursday, there have been large spikes to levels here-to-fore unexperienced (see Round the Clock “RTC” numbers for North and Houston Zones, below):

August historically has the highest heat rate values (heat of summer). The current values for 2018, 2019, and 2020 illustrate this characteristic:

	ch5x16_NZ “North Zone”	ch5x16_HZ “Houston Zone”	ch5x16_SZ “South Zone”	ch5x16_WZ “West Zone”
18-Aug	55	54.82	55.53	55
19-Aug	42.25	42.89	43.45	42.34
20-Aug	38	38.65	39.3	38.09

The picture for annual peak values show us how they have been affected:

If you study the charts, you’ll note that there has been an upward move in values from mid-2017. We have discussed this in our “Insights” and counselled locking prices. That said, we didn’t see this degree of move this early in the year. Volatility is back and deserves respect.

Prices have jumped dramatically higher and reassures those who locked in prices already that their decision was prudent. It likewise causes concern for those who haven’t locked. Different alternatives via structuring have reappeared as a necessary exercise, seeing as how the assurance of a low curve has changed, not due to feedstock (natural gas), but rather to how much generation will be available (capacity).

There are answers but realistic ones. Hoping for a return to even early last week’s numbers won’t happen in our opinion. Panic is never advisable but neither is playing ostrich.

Please contact an Infinity Power Partners team member with questions or to discuss further.