Two weeks ago, ERCOT released its initial reserve margin estimates for the summer of 2020.  The reserve margin is the difference between the peak forecasted load and the amount of installed generating capacity available to meet the grid’s electricity demand. This summer, ERCOT estimates that 82,403 MWs of installed generating capacity will meet a forecasted peak demand of 76,696 MWs. This equates to an estimated reserve margin of 10.6%, which is 2% more than the reserve margin that ERCOT reported going into the summer of 2019. ERCOT expects that an additional 7,633 MWs of generating capacity will be added to the grid in the next six months. Most of this new generation will be from renewable power sources and natural gas fired generating assets. 

This past August, electricity prices in Texas hit historic highs over several days.  Prices rose from the typical range of $20 to $30 per MWh to $9,000 per MWh during the second week of that month.  Figure 1 shows daily prices during the week of August 12, 2019.

In commodity markets, a bear market cannot stay bearish forever. Typically, a commodity market does not stay in backwardation (where prices get cheaper into the future) for long. The forward electricity markets in Texas have been in a backwardated state for a while as prices in the outer years have been steadily falling. However, it seems as though the market has found a support (floor).

There are two things we were watching closely this summer:

• The temperature and its impact on the ERCOT reserve margin.
• Tariff updates from the delivery companies.

In terms of the weather and ERCOT reserve margins – everything was fine until the second week of August.  In the month of July, North Texas didn’t see a 100º day until the last day of the month, which is rare.  But as mother nature often does with averages, August arrived and reset everything back to “normal.”

Many states throughout the country, especially along the East Coast, have aggressive plans to construct solar and wind farms to produce electricity.  States such as New York and Maryland have established mandates that will require up to 50% of the electricity in those states to come from renewable sources over the next 10 to 15 years. And while these goals are admirable, the facts are that strong, sustained winds and lots of sunshine are not abundant in the Northeast.  Additionally, there are plenty of opposition groups that, may ultimately, block these initiatives which will require new transmission lines to distribute this electricity.

Over the past two months in Texas, we have witnessed our dream summer: a July where there was plenty of rain across the state, where North Texas didn’t see an official 100-degree day until July 31st, and where both Real-Time electricity index prices were tame, and forward summer prices fell. Then August came.  The streak of sub-100 degree days ended, a high-pressure weather system settled in and we were all reminded of what summer in Texas is all about.

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.