According to a recent report, the Electric Reliability Council of Texas (ERCOT) expects that there will be enough generating capacity to meet periods of peak electricity demand this summer in Texas. Two weeks ago, ERCOT released its final Seasonal Assessment of Resource Adequacy (SARA) report for the upcoming summer (June to September) season. This report forecasts the peak electricity demand on the grid and compares that with the amount of electricity that can be produced by generating assets across the state. The difference between the forecasted amounts of supply and demand is called the reserve margin. 

The biggest story in Texas’ energy markets has been the collapse of West Texas Intermediate (WTI) crude oil prices. The price for the WTI May contract had its largest single-day decrease on Monday, April 20^th. It was also the first time in history that the price of crude was negative and closed below zero at the end of the trading day. There was a slight recovery the following day as the price rose above zero and settled at $10.01 per barrel on Tuesday.  In addition to having a massive impact on Texas’ economy, this unprecedented drop in the price of WTI crude is also having a significant impact on natural gas prices. 

In light of the impact of the Coronavirus on business operations, we are sharing information about Coronavirus and Contract Disputes circulated by the law firm Sidley & Austin.  It provides a high-level summary of the force majeure issues raised by the spread of this illness.  If your electricity and/or natural gas usage has or will be significantly affected by the spread of the Coronavirus, you should seek legal advice to determine if it is appropriate to provide a force majeure notice to your energy supplier.  As discussed in the document, the relevant electricity or natural gas contract provision may require “prompt” notice of the force majeure event.

There is good news for Texas electricity buyers.  The falling price of West Texas Intermediate crude oil, coupled with the threat of an economic slow-down caused by COVID-19, has put downward pressure on forward power prices for this summer in Texas.

Additionally, ERCOT released the preliminary Seasonal Assessment of Resource Adequacy (SARA) for this coming summer.  This report showed more growth than was originally expected in the amount of generating capacity available to meet this summer’s electricity demands.  The potential drop in forecasted electricity demand for this summer, along with favorable news in the SARA report, has come at a good time for some electricity clients in Texas. 

With 2019 finally behind us, it’s time to reflect on how spot/index prices settled last year in Texas and then examine how those prices are shaping the current forward market.

In 2019, index prices in Texas settled at one of the highest levels over the last 10 years.  Figure 1 shows that only 2011 (the year it snowed during the Super Bowl in Dallas with rolling blackouts and a very hot summer) and 2014 had higher index settlements than last year.  The high index settlement price for 2019 should not be much of a surprise given the index price volatility that was experienced in August and September.  Index prices in August 2019 cleared at the highest average price in the history of Texas’ deregulated electricity market, while index prices in September 2019 were at the 4^th highest level in ERCOT’s history.  Most of these high prices came from approximately 6 hours on August 13^th  and August 15^th and two hours on September 22^nd.

We are excited to have you join us for one of our upcoming regional market webinars.

As you have likely heard, national, and even global, natural gas prices have been falling.  In fact, NYMEX futures prices for the rest of this winter are all trading below $2.00/MMBtu and as shown in Figure 1, the balance of 2020 (Feb – Dec) is trading at $2.10/MMBtu.   These are the lowest prices we have seen since late winter/early spring of 2016.  Prices in the calendar year 2021 haven’t decreased as much, but are trading at all-time lows of $2.35/MMBtu.

Two weeks ago, ERCOT released its initial reserve margin estimates for the summer of 2020.  The reserve margin is the difference between the peak forecasted load and the amount of installed generating capacity available to meet the grid’s electricity demand. This summer, ERCOT estimates that 82,403 MWs of installed generating capacity will meet a forecasted peak demand of 76,696 MWs. This equates to an estimated reserve margin of 10.6%, which is 2% more than the reserve margin that ERCOT reported going into the summer of 2019. ERCOT expects that an additional 7,633 MWs of generating capacity will be added to the grid in the next six months. Most of this new generation will be from renewable power sources and natural gas fired generating assets. 

This past August, electricity prices in Texas hit historic highs over several days.  Prices rose from the typical range of $20 to $30 per MWh to $9,000 per MWh during the second week of that month.  Figure 1 shows daily prices during the week of August 12, 2019.

In commodity markets, a bear market cannot stay bearish forever. Typically, a commodity market does not stay in backwardation (where prices get cheaper into the future) for long. The forward electricity markets in Texas have been in a backwardated state for a while as prices in the outer years have been steadily falling. However, it seems as though the market has found a support (floor).