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Energy Market Update: August 21, 2019

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When temperatures spike, so does demand for electricity. ERCOT saw so much demand last week that the RTO issued an emergency warning—here’s what Direct Energy Business Strategist Tim Bigler thinks it could mean for prices:

 

If you live or run a business in Texas, you’re probably aware that last week brought some interesting developments for ERCOT. On August 12 and 13, temperatures (and electricity demand) rose to the point that the grid’s reserve margin fell below 2,300 MW, triggering an Energy Emergency Alert, or EEA. It was the first EEA since January 2014. During normal grid conditions, ERCOT’s reserve margin sits at or above 3,000 MW.

As a more-or-less self-contained grid, ERCOT sets a cap on energy prices of $9,000 per MWh. During the time period in which the EEA was active, the $9,000 offer cap was reached for multiple 15-minute settlement intervals. In other words, prices bumped up against their externally-imposed upper limit more than once during the period in question.

What It Means For Texas

Reserve margins have been an area of concern in ERCOT for some time now. As coal and gas plants have been retired across Texas, the state’s reserve margin has tended to dwindle year-over-year. Additionally, the state’s considerable number of wind-powered facilities do not generate electricity if the wind isn’t blowing; if temperatures and demand spike while this is the case, it can create situations like the one that brought about last week’s EEA.

The effects of August 12 and 13 were felt almost immediately in the ERCOT forward markets, with prices for Q3 of 2020, 2021 and 2022 all spiking. The market is following a pattern of backwardation, meaning that contracts due farther out in the future are trading at lower prices than contracts due in the shorter-term. This is presumably driven by a belief that ERCOT’s reserve margin problem will get better and not worse, therefore decreasing risk over time. However, some less optimistic analysts have called ERCOT’s forecasts into question.

The important lesson from the EEA is that the events of a single week can have a significant impact on prices in the forward and futures markets.

What It Means For NYMEX Natural Gas

Texas is in the top 3 states when it comes to natural gas consumption for electricity generation. On the NYMEX, demand for natural gas for electricity generation has been high this summer—how (if at all) has this trend interacted with the spike in the ERCOT forward markets for 2020, 2021, and 2022? The answer is: not so much.

Natural gas futures for the years in question continue to decline in price, with 2020's sideways-moving price being the only exception.

While the effect of temperature and demand spikes can send the electricity markets reeling, the drama doesn’t always spread to the natural gas markets.

Protect your budget from ERCOT price volatility

Posted: August 21, 2019

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