In June electric rates are going to drastically increase for the next three years, and you have time to avoid it.
What would you do?
If electricity was gasoline and you knew that in June the cost per gallon would increase more than 50% for 36 months, you’d jump at the opportunity to sign a long-term contract to fix gas cost at $1.80 per gallon. That’s because past experience forms future habits. You’ve experienced a sudden long-term increase in gas prices, but you’ve only seen electric costs decline contract after contract. Electric rates will increase drastically, it’s only a matter of when. If your current contract ends before October 2018, it’s already happened. If your current contract ends between October 2018 and October 2021, rates will increase in June.
How to avoid and manage rate increases based off contract end dates.
Contracts ending before October 2018
Texas is facing unprecedented short-term price volatility due to low generation reserve margins; rates for this summer have increased more than 50 percent, but you still have options. Short-term rate increases can be managed by spreading it across a long-term contract, because power prices for 2019 and 2020 are still trading near the 3-year average. Do something ASAP. Rates have increased weekly by $0.001 per kWh since February and will continue to do so until this summer.
Contracts ending between October 2018 and October 2021
Sign as quickly as you can and for as long as you can. The longer the contract term, the lower the rate. You still will be able to find a rate near historical market lows if you choose to do something before the beginning of June 2018.
Under contract through October 2021
Group A) If your annual usage is below 1,000,000 kWh, wait until 2021 to sign your next contract, it will return the lowest rate.
Group B) If your annual usage is above 1,000,000 kWh, you’re large enough to sign your next contract now through June 2027 for a fixed rate between $0.035-0.039 per kWh.
Why rates are increasing
How the ERCOT market works.
ERCOT is an “energy only” market and relies on price volatility to incent new resources. High prices entice companies to build new generation to the grid, while low prices force higher cost power plants to run at a lower capacity or in extreme cases retire portions of their operations. If generation retires from the grid in large quantities, rates are increased from a less stable supply of electricity flowing into the market. If available generation reserves fall below 13.75% of the forecasted peak demand, 12-month power prices increase to reflect uncertainty for the coming summer. When summer volatility is measured in real time, 36-month power prices are adjusted to reflect the additional peak summer load risk. If summer demand is less than the forecast, power prices will stay unchanged due to ERCOT’s annual growth rate, unless generation is added to the grid. If summer demand is less than or equal to the forecast, forward power prices will increase for the next 36 months to reflect the additional peak summer load risk.
How power prices impact supply
How supply impacts power prices
Decreasing power supply = lower reserve margins = uncertainty and volatility = Increased power prices
Increasing power supply = higher reserve margins = stable and reliable = reduced power prices
How reserve margins impact forward prices
Speculation before real time volatility
Reserve margins fall below 13.75% of the forecasted peak demand = increase in power prices through the coming summer
Real Time Volatility
If real time summer volatility is present, forward power prices will increase 36 months into the future.
If real time summer volatility is not present (meaning our reserve margin stayed above 13.75%), forward power prices will remain unchanged.
Increasing Reserve margins = lower power prices due to increased stability (less dependency on high cost generation)
Low reserve margins = volatility = high power cost
High reserve margins = stability = low power cost
WHY power prices will increase for the next 36 months.
Power plant closures and delayed gas projects have shrunk our generation reserve margin from 18.9% to 9.3% (well below the targeted 13.75% safe margin). 2018 power prices are reflecting uncertainty for this summer and have increased more than a 50% since February. Uncertainty isn’t yet being priced into the future cost of power for October 2018 through October 2021, because the market is waiting to measure peak demand in real time before it impacts future prices. Once real time volatility occurs in June/July, future power prices will adjust to reflect the additional peak summer load risk by increasing prices.
ERCOT needs new generation added to the grid to push power prices down, but that’s where the challenge lies. Current forward prices are not providing a strong incentive to build new generation, so until the forward price market reflects the additional summer volatility, financing new generation projects will be extremely difficult. Once the forward price market reflects the additional summer volatility, new gas builds will be ordered, but those take 24-36 months to bring online.
How it all happened
Market Insight
January 2016 – October 2017
Power sold at historical lows. Everything aligned perfectly giving ERCOT consumers the lowest power prices ever recorded.
Surplus supply of natural gas
Natural gas trading at historically low prices
ERCOT’s future generation reserve margins were projected at 18% or greater through 2021 (well above the 13.75% target)
Temperatures below the 10-year normal for five straight years
October 17, 2017
(Vistra/TXU) retired 4,334 MW of coal generation (-6.1% Generation Reserve Margin). These plants were unprofitable at current power prices.
December 18, 2017
The Capacity, Demand, and Reserve (CDR) Report updated Summer 2018 Generation Reserve Margins to 9.3% (previously forecasted at 18.9%).
Key Facts:
Gas Price x Heat Rate = Power Price $/MWh
Heat rate is one measure of the efficiency of a generator or power plant that converts a fuel into heat and into electricity. The heat rate is the amount of energy used by an electrical generator or power plant to generate one kWh of electricity.
ERCOT wants to maintain a 13.75% Generation Reserve Margin.
Summer 2018 reserve margin is 9.3%
Low reserve margins drive up heat rate values.
ERCOT continues to grow at a rate of 1-1.5% annually.
There are currently no gas combined cycle plants under construction in ERCOT.
Biggest factors driving power prices:
Natural gas spot price and futures prices
Generation Capacity Supply and Market Demand (Generation Reserve Margins)
A decrease in available generation capacity (retirements or delayed projects) = lower reserve margins.
Unexpected increase in peak market demand = lower reserve margins
Peak demand events cause ERCOT to deploy high cost emergency generation units triggering the market cap price.
If reserves drop below 2,000 MW (3% reserve margin), the market cap price of $9,000/MWh is triggered.
Heat Rates
Reduced reserve margins = increased operational time of generation during summer peaks = less downtime to clean the generators causes lower efficiency output = increased heat rates
The Futures Market and concerns moving forward:
Reserve margins for 2019 and outer years depend largely on new builds of gas and renewables.
ERCOT is an “energy only” market and relies on price volatility to incent new resources and current forward prices are not providing a strong incentive to build new generation.
Financing for additional generation projects could face challenges as forward prices are still low due to declining natural gas prices.
It takes around 12-18 months to build smaller gas units, and larger gas units take 24-36 months to construct and bring online.
Forward prices for balance of 2018 reflect the uncertainty for this coming summer, currently +50% higher from all-time lows.
Forward prices for 2019 through 2020 have elevated a bit, but if volatility occurs in June/July, the forward price for power 2019-2022 would rise to reflect additional summer load risk.
With Summer 2018 volatility It’ll take a minimum of three years to see prices fall back below $35/MWh.
Examples of rate movements for clients we priced before the December 18, 2017 CDR Report, and what they signed for after the report was released.
Summary
Contracts starting this summer are being impacted by increased heat rates and the anticipated deployment of high cost generation to the grid. The summer impact can be mitigated a bit by signing longer-term contracts. If you have a contract start date between September 2018 through 2022, there’s still an opportunity to secure a rate near historical market lows. When volatility occurs this summer, the forward price for power 2019 and beyond will significantly rise to reflect additional peak summer load risk. To reduce peak summer load risk, it takes 24-36 months to build new gas units. I understand the apprehension of signing contracts far in advance, but power contracts are different than your ordinary type of contract. Your need for power won’t go away, you can transfer contracts if you relocate or to new ownership if you’re purchased.
Want Custom Pricing?
Send an email to max.farmer@texasenergyx.com with the following information (All of this information can be found on your electric bill)
Your name
Job title
Company name
Billing address (street, city, state, zip)
Company Phone number
List the ESID Numbers that you want priced
Your current contract end date
Or a bill copy with this information.
I’ll have ONCOR email you a request for authorization to access your historical usage data (you’ll just need to click a link, type your name, and submit). Once ONCOR sends me usage, I’ll bid your next contract to 8-15 electric providers, and I’ll send you a summary comparing the annual cost of each option for a final decision. All that will be required on your end is to decide which plan you want, I’ll have an agreement to you within an hour from your selected provider to sign, and done!
Thanks for taking the time to go over this information, I know it’s a lot. Doing something now is 100% the right choice, so let us help you get your next contract in place, and I guarantee you’ll be happy you did.