As Texas heat persists, ERCOT forwards indicate risk of triple-digit power prices

Judging by forward trading, Electric Reliability Council of Texas power prices will likely average in triple digits into September, after a brutal July heat wave pushed real-time prices into quadruple digits and the US National Weather Service forecast high chances of above-normal temperatures through summer's end.

Another factor may be the possibility of dwindling wind output – not on average, but at any particular peak period.

ERCOT North Hub August on-peak power hit a peak of about $277.85/MWh on June 7, likely in reaction to a heat wave then facing the ERCOT grid, but as ERCOT grid operators continued to maintain a conservative operations strategy – keeping more dispatchable capacity in reserves – August forwards dipped to about $175/MWh on June 30, according to Platts assessments.

Another factor in forward traders' confidence that August risk had diminished was likely falling natural gas prices. At the Houston Ship Channel, August gas peaked at $9.159/MMBtu on June 6, but fell to $5.229/MMBtu by June 30.

However, ERCOT North Hub August on-peak subsequently surged $93 to $305/MWh on July 13, when wind output plunged to about 700 MW, out of an installed capacity of more than 28 GW. ERCOT North Hub August has since had prices above $260/MWh.

As the ERCOT wind fleet has grown, so has its hourly average output, well above the five-year range for each month. However, average wind output tends to wane from June through September. Therefore, risk increases for sufficient wind power to be unavailable during certain peak hours in August and September.

'Nearly continuous triple-digit prices'

"I think it will be likely that there will be nearly continuous triple-digit prices for ERCOT in the next 45 days due to the exceptional heat causing peakloads to top 75 GW almost daily," said Campbell Faulkner, senior vice president and chief data analyst at OTC Global Holdings, an interdealer commodity broker.

Indeed, ERCOT data shows its peakload has averaged 75.8 GW month to date through July 25, which is higher than what was the all-time record peakload before 2022, 74.5 GW set Aug. 12, 2019.

Population-weighted cooling degree days have averaged 24.2 so far in July, compared with July's all-time monthly average of about 19.5 and August's all-time average of 19.9, according to CustomWeather data. A cooling-degree day is the difference between the daily temperature average and 65 degrees F.

The weather service's August temperature forecast indicates probabilities ranging from 40% to 70% for above-normal temperatures across the state, and the September-October-November forecast shows probabilities ranging from 40% to 60%.

"The power burn of natural gas caused by the huge increase in CDDs has become a significant factor in the fixed prices in ERCOT shooting up over the past year," Faulkner said. "Due to the hugely important marginal effect, Texas consumers have not benefitted from the large slug of renewables dispatched into the grid this summer due to capacity tightness and fuel costs. Overall, the prices have been relatively tepid considering the heat and load with prices being more normalized in the afternoons with only congestion causing 'big' spikes."

Real-time price spikes

Such spikes occurred in real-time with systemwide hub locational marginal prices averaging $1,664/MWh on July 13, for example, during which time the real-time price hovered near the $5,000/MWh systemwide offer cap for about four hours.

"That being said, the new priming point for real-time prices in the afternoon are now sub-$1,000/MWh versus $250/MWh in years past," Faulkner said.

By "priming point," Faulkner said, this is "the new normal, economically primed for that to be the norm as opposed to $80" for example.

"It's a behavioral benchmark where analysts and traders accept it as expected instead of very high," he said.

The $5,000/MWh systemwide offer cap persists until a "circuit breaker" in the market is tripped, when the offer cap drops to $2,000/MWh. That threshold is when the peaker net margin – a theoretical net profit for a gas-fired peaker operating with current real-time power and spot gas prices – exceeds three times the net cost of new entry, which is currently estimated at $105,000. Thus, if the PNM exceeds $315,000, the circuit breaker trips, and the systemwide offer cap drops to $2,000/MWh.

Faulkner said he still expects the PNM to exceed $315,000 relatively soon. If so generators can only hope for as much as $2,000/MWh, but he added: "I am of the opinion that units will continue to be available to bid in daily, if only to prevent the negative regulatory externalities."