Special Report: Texas, ERCOT and Summer's Heat

Texas, ERCOT and Summer's Heat

Extreme weather stresses the availability of sufficient generated power. This is true in all jurisdictions, particularly in the isolated island of power supply known as ERCOT. Texas has no meaningful interconnection with other jurisdictions. We can’t import more as needed. This is by design, something that is compatible with the independent nature of the state. Therein lies the rub.

In February, Texas was subjected to very cold weather that persisted for days. Generation assets couldn’t keep up with demand. This was a result of insufficient weatherization of virtually every part of the process from natural gas well heads, pipeline compressors, to generation infrastructure. It was a wake-up call for extreme cold, something not previously a concern of regulators and industry even though the grid operator, ERCOT, had admonished participants to correct but without enforcement powers. In the aftermath, rules and regulations have been enabled to remedy these shortfalls. The point here is that extreme cold is likely to return and Texas should be prepared.

Today, we are faced with an expected part of summer: Heat. We know by experience that the incremental demand created by hotter-than-normal temps will impact the swing users of power, i.e., residential users. Texas is an air-conditioned jurisdiction, more so than any other jurisdiction. Demand spikes with additional CDD (Cooling Degree Days) requirements. Power generation is finite. There are no “extension cords” that can help. The answers are to make sure that the assets available work properly and end-users conserve energy as much as possible. The latter depends on all of us reducing usage (raising thermostats’ settings, avoiding incremental usage where feasible, and other similar functions).

This is June. It’s just the start of what looks to be an extreme summer. Those who have locked pricing are set but those without locks are subject to the vagaries of inexact understanding as to what lies ahead. We believe the open-ended risk is unacceptable in front of the uncertainties and strongly recommend fixing procurement and let others wear the risk.

When securing power procurement via the forward curve, one reserves the amount of energy needed, passing the risk of adequacy to the Retail Electric Provider (REP). This capture of adequacy is called capacity. Heretofore, some loads (end users) opted to lift power via real-time (LMP). There was a reasonable risk for those suitable as LMP has historically provided lower prices (albeit with open-ended risk). This is not the case after February’s craziness of pricing. There have been changes made, but pricing is volatile when under stress and not suitable for any but the most sophisticated loads. Many avoid making tough decisions by doing nothing. Doing nothing is remaining short. Being short in a bull market with inflation raising its head along with hot summer is not prudent. Prices are higher due to uncertainty but it’s the insurance needed.