ERCOT summer forward curves have crested toward $160/MWh for July/August

November 6, 2018

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ERCOT summer forward curves have crested toward $160/MWh for July and August in the wake of an ERCOT ISO report that reserve margins could be below 10%. ERCOT President and CEO Bill Magness said, “A growing economy and retirements of generating units will tighten reserves available on peak summer days.”

Historically, tight reserve margins indicate a power market where generators can earn scarcity rents far above their variable cost of generation. In the past, Texas heat waves resulted in sustained price spikes near the market ceiling price for several days. However, this traditional thinking does not account for the new dynamics of renewables, which have a relatively small capacity contribution compared to their expected contribution toward energy. Yes, the ERCOT ISO is right that the capacity contribution of renewables can be small under extreme meteorology’s, but the expected energy production of renewables make the odds of ERCOT generators realizing scarcity akin to previous regimes, where reserve margins dipped below 10% a statistically extreme event. While the summer may produce select hours with high prices, the odds of having these prices persist for a sustained period such as a heat wave become a statistically extreme event.

The implications of the market fundamentals suggest that the realized average spot energy prices will fall below the monthly summer forward marks of this late spring and early summer. At the same time, we expect the volatility in day-ahead and real-time prices to continue to increase as a greater portion of the energy supply is derived from intermittent renewables.

Gary Dorris, PhD

Dr. Dorris has been a pioneer of innovative solutions for energy risk management and portfolio planning for over two decades. For the past 20 years, Dr. Dorris has led the organic growth of Ascend to an industry-leading 150+ person energy analytics software and consulting company. He has been a pioneer of innovative solutions for modeling power markets to support real-time operations, portfolio management, and resource planning for over two decades. His expertise is highly sought after to provide board of director presentations, expert testimony on risk management, asset valuation, and resource planning, including acting as the lead expert witness for Merrill Lynch in the prominent Enron proceedings. He has performed independent market assessment to support over $30 billion dollars in project financing. He has been an advisor to multiple Boards of Directors. Prior to founding Ascend, Dr. Dorris served as CEO of e-Acumen, a 60-person energy analytics software firm. He began his career developing structured power transactions at Citizens Power & Light.

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