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Texas Summer Energy Price Trends

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Summer is here and all energy market participants in Texas – end-users, generators, traders and suppliers – are nervous about the market. Will this summer be a boom or a bust when it comes to Texas energy prices? This affects customers that have not hedged this summer and are on an index product. It also affects customers looking to fix a term contract, which are impacted by near-term price trends.

Last year, the forward markets traded much higher in anticipation of a repeat of 2011, when prices skyrocketed to an all-time high. But it quickly became apparent that 2012 was going to be a bust and prices were low and lacked volatility. That was good news for customers that had not fixed their rate, but not for those that had bought power who regretted their decision. One thing is certain: the volatility of the Texas market is all built into the summer months, primarily July and August. Around the clock (ATC) wholesale energy prices for most months trade in the $30/ to $40/MWh range while the summer months trade in the $70/ to $80/MWh range. This premium is due to the risk of day-ahead (DAM) and real-time prices (RTSPP) spiking to the offer cap due to extreme heat.

What will this summer bring? Will we see a repeat of 2011 when heat battered most of Texas with Dallas temperatures reaching 100 degrees for more than 40 days and Houston recording its hottest month on record? Will interval prices repeatedly hit the price cap ($3,000/MWh at that time, but was raised to $5,000/MWh as of June 1, 2013) and summer ATC prices averaged more than $130/MWh? Or will we see pricing similar to 2012 when prices averaged near $25/MWh? The 2011 heat caused traders to aggressively hedge against a repeat of 2011 and those that did hedge were extremely disappointed by the low price. But for everyone else, it was cooler and much more bearable for end-users’ pocket books.

The answer mostly depends on the weather.

The major difference in the weather between 2011 and 2012 was significantly more rain in 2012 because drought generally exacerbates heat. Rain and cloud cover helped keep temps in the mid 90’s instead of surpassing 100 degrees, and that helped keep demand for electricity at a sustainable level throughout the summer.

So back to 2013. This summer’s forward prices haven’t quite reached the same levels that were traded ahead of last summer, but there is still a significant premium to the non-summer months. As always, weather forecasts from private and government forecasters vary greatly and are difficult to rely on. Recently, we saw near-term forecasts warming up for mid-June and heat rates immediately rallied for Texas trading points. But we have yet to see any sustained spikes in the DAM or RTSPP. But summer has just begun, so watch out.

Posted: June 12, 2013