On behalf of the team at 5, I am pleased to forward our market letter for the first quarter of 2021. This letter focuses on the latest Black Swan event, Uri, the winter storm that hit Texas in mid-February. The storm caused a catastrophic loss of generation and triggered an extended period of extremely high energy prices. This letter provides: (i) a summary and chronology of the legal and regulatory proceedings that Uri has spawned; (ii) a snapshot of how the storm has impacted a variety of market participants including municipal utilities, wind farms, renewable purchasers, commercial and industrial buyers, and the natural gas market; and (iii) an overview of legislative efforts to address electric reliability in ERCOT.

So far, it appears as if no one is ready to make price adjustments to customer bills in the aftermath of Winter Storm Uri. Neither the Texas executive branch, the legislative branch, nor the Public Utility Commission of Texas (PUCT) are very eager to be the one that steps up to order the re-pricing of wholesale Real-Time Index or Ancillary Service prices that have been in question over the past month. Instead, it seems like everyone is resigned to allowing the lawyers to argue their cases and leave the outcome up to the courts.

From time to time, events occur that reshape and redefine an industry. These events can often prompt stakeholders, lawmakers and customers to question and reevaluate some of the basic premises on which an industry was built. This is the kind of event that happened across Texas during the week of February 15, 2021. While the power outages and the arctic temperatures sent shockwaves throughout the state’s energy markets, the personal toll was equally, if not more, devastating. Millions of Texans were without heat, electricity, and water for days where the thermometer struggled to climb above freezing. But, as is often the case, calamity brings out the best in people as neighbors came to each other’s aid to help wherever possible. And while this story will certainly be told and assessed through gigawatts, hertz and dollars, none of these units can begin to measure the human pain and suffering that was caused by this event.

Conservation Needed

To all businesses and homes in Texas fortunate enough to still have power, please reduce electricity consumption throughout the rest of Monday and Tuesday. The Texas electric grid is experiencing unprecedented strain, and many have been without power since early Monday morning. You can help by reducing the setpoint on your thermostats, turning off and unplugging non-essential lights and appliances, closing shades and blinds, and avoiding use of large appliances (ovens, washing machines, etc).    

The entire mid-continent is bracing for an historic cold weather event over the next several days. In Texas, energy regulators, delivery utilities, and market participants are making advanced plans to keep the population safe and warm throughout this event. What's in store is not only an energy market issue but also a public safety concern as well. It goes without saying that electric power is a critical service in our modern lives and we should all take precautions against extended power outages over the next few days.

It may have taken almost four years, but the price for summer, on-peak power in Texas has finally returned to levels that were observed prior to the announced retirement of four Luminant power plants during the fall of 2017. With strong growth in both wind and solar generation in various stages of completion, the power market in Texas appears to be back to where it was before the anticipated loss of generating assets, which kicked off multiple years of price volatility. Figure 1 shows the wholesale electricity price for each of the next five summers (2021 – 2025) as they’ve traded from Sep 2017 to the present.

Next summer’s peak demand in Texas is forecasted to grow by about 3% compared to the summers of 2019 and 2020. The good news is that new generation is being added at a faster rate, which will create a higher Reserve Margin where the amount of electricity supply exceeds the forecasted demand. Most of this new generation is coming from renewable power projects across Texas. Once it is operational, the Samson Solar project, a 1,310 MW solar array in Northeast Texas, will become the largest solar farm in the US.

The weather has been unusually warm this month, which has drastically pushed down natural gas prices. This stretch of higher temperatures in Texas and across the US has taken a lot of energy out of both the natural gas and electricity markets. It has also created very attractive opportunities for shorter-term purchases, since natural gas is the fuel for many for power plants across Texas. Moderate temperatures along with low spot price volatility from this summer have created weakness in future heat rates and also contributed to this electricity market correction.

Yesterday, November 5th, ERCOT released its Seasonal Assessment of Resource Adequacy (SARA) for the upcoming winter season. In summary, the grid operator expects to have plenty of power plant capacity available this winter. ERCOT expects winter peak demand to top out at 64.5 GW, just shy of the all-time winter peak demand record of 65.9 GWs*. 

Since early 2018, the forward power market in Texas has been in various states of backwardation (prices for a commodity get less expensive into the future). This backwardation made longer retail electricity agreements attractive as each additional year purchased was a chance to capitalize on lower futures prices and reduce the overall weighted average price. Last fall, the slope of that backwardation reached its maximum negative slope (see Figure 1). On November 1, 2019, the price for calendar year 2021 was trading at approximately $44/MWh, while 2028 was trading below $24/MWh. The $20/MWh discount from 2021 to 2028 produced a significant amount of backwardation and a downward sloping forward market for wholesale electricity.