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.
Dr. Dorris has been a pioneer of innovative solutions for energy risk management and portfolio planning for over two decades. For the last thirteen years, Dr. Dorris has organically grown Ascend Analytics to be a leading provider of quantitative software solutions for energy portfolio management and data infrastructure. His analytic innovations have extended toward the development of over a dozen software applications used by more than fifty energy companies. Dr. Dorris holds a Ph.D. in applied economics and finance from Cornell University and a B.S. in mechanical engineering and BA in economics with Magna Cum Laude distinction also from Cornell University.
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