ERCOT’s Preliminary Summer 2019 Assessment: A Declining Reserve Margin
The ERCOT preliminary Summer 2019 Seasonal Assessment of Resource Adequacy (SARA) highlighted the declining reserve margins of generation in Texas. The report stressed that record load this summer could see a much higher frequency of energy alerts than ERCOT has experienced in previous summers. When ERCOT declares an alert, it can then take advantage of additional resources that are only available during scarcity conditions, according to an ERCOT press release. The potential for ERCOT to call emergency alerts this summer has increased since last summer, given the lower reserve margins.
All four stress scenarios that ERCOT examined within the report had reserves below 2,000 MW and, in multiple cases, showed reserves falling to zero. Customers should be aware that if there are higher prices this summer, forward prices for 2020 and beyond will likely rise because in general, it will take 24 to 36 months to build new gas-fired (non-intermittent) generation in ERCOT. New renewable generation, which is intermittent in nature, can be built in a shorter time frame but ERCOT cannot alter its output.
Before we examine the results of the preliminary 2019 Summer SARA report, let’s recap what is driving reserve margins lower and why we might see a spike in prices, even though this did not occur last summer.
Reserve margins declined from 2017 (16.9%) to 2018 (9.3%) after the retirement of three large coal plants. With two more coal plants retiring over the winter and ERCOT removing several proposed gas plants from its project queue, the reserve margin for summer 2019 narrowed further to 7.4% for summer 2019.
ERCOT is facing a declining reserve margin of little to no new generation past 2021, yet it is expecting growth in load as the graph below illustrates. While reserve margins were 9.3% last summer, wind production was robust and summer temperatures were only warm enough to stress ERCOT conditions in the third week of July. On July 19th, when ERCOT set a new independent system operator (ISO) record load of 73.3 GW, wind production was ~800 MW higher than on the peak day for July 28th, 2017. Solar production was also 400 MW higher year-over-year.
Forecasting Reserve Capacity Under Four Scenarios
ERCOT’s Preliminary Summer 2019 SARA forecasts ERCOT’s generation reserve capacity will be tight under several scenarios this summer. ERCOT lists Total Resources at 78,154 MW, while ERCOT is forecasting summer Peak Demand will reach 74,853 MW, based on average weather conditions at the time of summer peak hours for the years 2003-2017. This would leave only 3,301 MW of Reserve Capacity vs. 6,000 MW last summer as depicted in the graph below.
In its Summer SARA, ERCOT examines the range of potential risks under four specific peak-condition scenarios. Under all four scenarios, available capacity reserves are reduced to negative levels. This would imply repeated index prices at $9,000/MWh as the price cap would be triggered when reserve margins drop below 2,000 MW.
- In the first scenario, ERCOT examined what the available capacity would be under peak conditions for both previously planned maintenance or “unforced” and unplanned or “forced” outages for the historical averages of 2016-2018 summer seasons. Unforced outages were 381 MW, and forced outages were 3,845 MW for total outages of 4,226 MW. When applied against the above listed Reserve Capacity of 3,301 MW, reserves decline to (925) MW under Typical Generation Outages.
- The second scenario considers extreme outages, which looks at historical forced outages and then assumes a 90% confidence interval. In looking at a historical distribution of outages, the 90th percentile would assume the far end (top 10%) scenario of a bell-shaped distribution curve. ERCOT estimated extreme outages would add an additional 2,665 MW of outages to the 4,226 MW identified above for a total of 6,891 MW of outages. This would result in a negative capacity of -3,590 MW after all outages.
- The third scenario examines extreme low wind output under peak load conditions. ERCOT looked at wind output during the 100 highest net load hours (load minus wind output) over the 2015-2018 summer seasons. Total wind output was less than 960 MW under these scenarios. In a low wind scenario, ERCOT effectively removes 3,959 MW of historical wind production during peak periods and reduces total capacity by 8,165 MW. This reduces reserve capacity to a negative level of -4,884 MW.
- Finally, the fourth scenario considered was extreme peak load under typical generation outages. This scenario considers 2011 weather, particularly when ERCOT was under extreme drought conditions. The fourth scenario forecasts summer load to reach 78,156 MW, which would add an additional 3,303 MW to load. Total available reserves would decline by 7,529 MW to -4,228 MW.
Range of Potential Risks Under ERCOT Summer 2019 SARA
The Final Summer SARA will be released on April 30th and so the above figures could change slightly but are not expected to change materially.
What Does this Mean for Customers?
As we approach summer 2019, customers should be aware that the probability of higher index real-time index prices as reserve margins of generation tighten and load continues to grow. If this summer sees higher real-time prices, it could raise forward prices for 2020 and beyond.
Tighter reserve margins of below 4,000 MW will lead to higher real-time Settlement Point prices via the increased Operational Reserve Demand Curve (ORDC) charges, which we will discuss in a following blog post. The ORDC curve was formulated to place a price in the “energy-only” market that is ERCOT on a scarcity of reserves.
Higher real-time prices this summer would likely increase forward prices for a through 2022 or even longer, until enough new generation is in ERCOT’s planning queue and under construction. This would raise the forward price of power for customers on retail contract expiring past summer 2019 from already higher prices levels than at the end of August 2018.
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Guest Author: Keith Poli, Principal, Commodities Management Group
Keith has been providing energy market intelligence and strategic analysis to Constellation’s commercial and industrial customers for nearly seven years. As a member of the Commodities Management Group, Keith specializes in various regions for both the gas and power markets including Texas and California. Prior to Constellation, Keith has had over a decade of experience purchasing and trading commodities. As a member of the Commodities Management Group, Keith seeks to deliver market insight, innovative deal structures, and execution strategies for our customers to enable them to make better energy decisions.