Dec. 4, 2018 - The Electricity Reliability Council of Texas (ERCOT) released its December Capacity, Demand and Reserves (CDR) report, which forecasted a historically low 8.1% summer reserve margin for 2019.
Facing reliability issues, the PUCT will likely rule at its next meeting on January 17 on a proposed revision to the Operational Reserve Demand Curve (ORDC) calculation. If approved, power prices will trade at a premium for the next few years.
Texas is experiencing a supply shortage, as demand growth is outpacing capacity growth. This means higher power prices which in turn equals higher fixed prices. It takes 2-3 years from planning, development, and implementation to bring a new power plant online.
What is the Capacity, Demand and Reserve Report (CDR)?
ERCOT releases its CDR report every May and December, which includes planning reserve margins for the next five years. The reserve margin is the difference between available supply and projected demand (based on normal weather). ERCOT’s minimum target reserve margin is 13.75% of peak demand. The 2019 reserve margin of 8.1% is a historical low. ERCOT plans to enter the summer with a 5,881 MW reserve capacity.
Why are reserve margins declining? Reserve margins are in decline due to coal plant closures, delays and cancellations of new projects, and a higher summer peak demand forecast.
In recent years, low-cost natural gas and renewable resources have flooded the ERCOT market, creating a supply glut. This caused a two-year run of historically low power prices, which eventually forced many high-cost coal plants out of business.
There’s not enough planned generation to keep up with demand growth. Recent delays and cancellations of planned projects have contributed to the low reserve margin. Current power prices are too low, making investment in new generation projects unattractive.
The PUCT will likely rule at its next meeting on a proposed revision to the ORDC calculation that would increase power prices in effort to bring more supply into the the market.
What is the ORDC and how will changes improve reliability?
When reserves fall below 5,000 MW a real-time reserve price adder, based
off the Operating Reserve Demand Curve (ORDC), activates and increases power prices as reserves decrease. The ORDC is designed to incentivize power plants to run generators and to fund high cost emergency resources. When reserves decline below 2,000 MW, the real-time settlement price goes from $4,500/MWh to $9,000/MWh or value of lost load (VOLL). VOLL is the price at which consumers, on average, are indifferent to having their power shut off.
Proposed Changes
The proposed revision to the ORDC calculation would increase the slope of the curve as reserves decline from 5,000 to 2,000 MW. This would result in higher settlement prices. The intent of this change is to attract more supply into the market. The PUCT will likely rule in favor of the revision at its next meeting on January 17. The market is showing higher power prices for 2019-2022 in response to the proposed revision.
Will this affect my current contract?
Changes will affect index contracts and future fixed rate contracts. Future start contracts face significant price risk. If looking to stay with a fixed rate contract, you’ll want to lock in as soon as possible. Texas Energy Exchange is very knowledgeable in managing price risk and can help find the best product for your needs.
Summary
The proposed revision to the ORDC calculation will increase future power prices. It's advisable to lock in your next contract for any fixed rate contract expiring between now and 2022. Texas is experiencing a supply shortage and needs more generation. High power prices attract new generation. If you plan to wait for better pricing, it'll be a few years. Don't wait.