4 min read

5.8 Degrees of Separation in North Texas

July 18, 2019

Market - ERCOT

Usually, hot summer weather starts to take hold in Texas during the month of June.  In most years, the temperature climbs steadily throughout that month with average temperatures at the end of June about 6 degrees higher than it was in the beginning of the month.  Typically, in Dallas, June’s average temperature is in the mid-80s with maximums that vary between 89º and 94º Fahrenheit.  This year, June’s average temperature in Dallas was 79.9º, which was 5.8º cooler than last year.  Average temperatures this May were also 5.6º cooler than last year.  The temperature differences can be seen in Figure 1 which shows the Cooling Degree Days in Dallas over the last six years.  A cooling degree day (CDD) is a measurement that quantifies the demand for electricity required to cool a building.  A CDD is the number of degrees that a day’s average temperature is greater than 65º Fahrenheit.   The data in Figure 1 shows that June 2019 was one of the coolest in the last six years with 30% fewer CDDs than last year.  And while May 2019 had the second highest number of CDDs since 2013, there were 30% fewer CDDs than last May.  The 6º (or so) of temperature separation from last May and June’s average temperatures have had a significant impact on wholesale electricity prices.

cooling degree days Dallas, TX

Figure 1: Cooling Degree Days (Dallas,TX), by 5

In Texas, summers are the dominant driver of electricity prices.  Figure 2 shows the forward price curve for wholesale electricity in North Texas out to 2029.  The blue line shows forward prices on 1.2.19 and the black line is the forward price curve on 7.11.19.   Since the beginning of the year, the price for electricity in August 2019 fell from $97.95/MWh to $63.25/MWh.  This sharp decrease has had a dramatic impact on lowering the wholesale price of electricity in North Texas for the balance of 2019.  The cooler temperatures in May and June have helped to put downward pressure on near-term electricity throughout ERCOT. 

A secondary trend that is immediately apparent is that there is a steep decline in electricity prices out to 2029.   And while this market backwardation (where prices decline into the future) in Texas is not new, one can see that prices for the summer months, most notably August, have decreased since the beginning of the year across all years out to 2029.  Note that this drop in future summer prices is influenced more by the production capacity of new renewable generation (mostly wind combined with solar) and less by the weather.  The combination of a relatively cool summer (so far) coupled with large amounts of renewable generation on the horizon has lowered the forward price of electricity in the summer months and have put downward pressure on prices across all months of the forward curve out to 2029.

ercot updates with arrow image 2

Figure 2: North Texas Forward Electricity Prices to 2029, by 5

While we do not know with any certainty just what the weather will bring, we do know that forward electricity prices are in a very attractive place to make both short and long term purchases.  Clients with open electricity positions should take action now to make those purchases while prices for the balance of 2019 are so low.  Additionally, the overall backwardation of the forward curve and drop in summer prices in all years out to 2029 make this a favorable time to make longer term electricity purchases too.

Topics: Markets ERCOT

Written by 5

Founded in 2011, 5 comprises a team of energy innovators, commodity traders, analysts, engineers, and former energy supplier executives. Together, they serve a broad array of private and public sector clients throughout the United States and Mexico, providing strategic advice on energy-related matters including procurement, demand-side management, rate optimization, regulatory intervention, benchmarking, bill auditing, RFP management, sustainability planning services, renewable power, and distributed generation. With an eye on growth, 5 has initiated a number of strategic partnerships and acquisitions, including the 2019 acquisition of Luthin Associates. 5 has been named to the Inc. 5000 list of fastest-growing companies in the U.S. for five consecutive years. The firm has also received numerous accolades and national awards for its corporate culture, leadership and innovation, including 5 consecutive years as a top 10 Best Company to Work for in Texas according to Texas Monthly Magazine.