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ERCOT Heat Rate Trends

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ERCOT wholesale electricity prices have been weak throughout the last several months. This is partially due to the movement in natural gas, but mostly due to Heat Rate trends. Heat rates can be used as a measure of power plant efficiency, but from a pricing perspective, reflect the relationship between gas and power prices, and are actively traded in the ERCOT market.

For more on how heat rates work, read our previous blog on this topic. Quickly, heat rate units of measure are MMBtu/MWh reflecting a quantity of gas to generate a MWh of electricity.

Specifically, summer heat rates (July-August) have dominated the volatility seen in ERCOT. This has been an ongoing trend, but over the last 18 months, that trend had been for the heat rates to trade higher.  However, summer heat rates have recently traded significantly lower as a result of a moderate Texas summer. Temperatures mostly hovered below normal with some above normal for a few weeks here and there. The lack of significant prolonged heat prevented the new price caps of $5,000/MWh from being tested. With no price spikes in the real-time markets, the forward markets fell. The July-August ‘14 heat rate contracts were traded between 24 to 25 prior to the summer, but by August 10 had fallen to 19 or lower. When converted into a wholesale power price, the result is nearly a $25/MWh decline (or 2.5 cents/KWh) over just a couple of months. This is huge and reflects reduced fear of future price spikes.

Since the middle of August, the summer ‘14 heat rate has moved higher again as it bounced off of nearly a two-year low and is currently trading around 20.50. Although not quite the 19 that we were seeing recently, this is still at a significant value since there is still future risk in power prices if next summer is hot – don’t forget 2011 when the summer was abnormally hot and power prices went into the $150/MWh average for the month of August.

The move higher in recent weeks was a result of a few events. On September 3, Texas experienced a very hot day in the low 100’s and that was the first time we saw price spikes in 2013. The heat rates moved higher following this event. There has also been ongoing debate regarding the merits of a capacity market versus an energy-only market in ERCOT to provide sufficient capacity to meet peak demand. This is not new news, but the ongoing discussions to address thin reserve margins, including the potential revamping of the current ancillary services, have continued to cause uncertainty in the market and have pushed prices higher.

But regardless of the recent uptick, heat rate declines have caused a significant change in ERCOT forward prices, and the change has been good for businesses looking to lock in long-term energy prices.

Posted: September 18, 2013