3 Factors Impacting Texas Energy Supply and Demand

A year of record production and the shale revolution have contributed to low energy prices in Texas and across the nation.

Texas oil rig counts continue to decline, currently down 62 percent year-over-year. The decline in natural gas prices through 2015, with NYMEX reaching a 16-year low of $1.68/MMBtu in December, continued to push down real-time index prices for the Electric Reliability Council of Texas (ERCOT), the state’s main power supplier. Prices averaged approximately $25 per megawatt hour in 2015, a three-year low.

The steep correction in the price of both oil and natural gas will likely be an ongoing trend through 2016, but how long these low prices will last depends on several factors related to Texas energy supply and demand.

Business owners need to consider these three factors as they make decisions about their energy purchasing strategy for 2016 and beyond.

Expansion in Wind Capacity

Texas produces more wind power than any other state in the nation, enough to power 3.6 million homes, according to the American Wind Energy Association. ERCOT generated more than 10 percent of its electricity from wind in 2014. By the end of 2015, the installed wind capacity in Texas was 15 gigawatts, and it’s expected to reach 20-23 gigawatts by the end of 2016. According to ERCOT, during peak summer demand periods, one megawatt powers approximately 200 homes. ERCOT, in its Monthly Operational Overview for Dec 2015, estimates an additional 5,212 megawatts (MW) will be added in 2016 as these projects have secured financing in place while an additional 3,092 MW have not yet secured credit.

One factor that continues to drive new wind development in Texas and other states was the extension of the federal Production Tax Credit to December 2019.

The credit will have a phasing-down provision for projects beginning construction after Dec. 31, 2016.

Transmission Improvements

Several new transmission improvements are expected to improve the grid’s reliability in the coming year, but they also could have an impact on electricity bills in Texas. First, ERCOT endorsed the Houston Import Project, which will add 345 kilovolt transmission lines from the North to Houston zones to ease congestion caused by Houston-area load growth coupled with recent reductions of generation in the zone. The project is expected to be completed by summer 2018.

ERCOT is also redesigning its four main ancillaries to increase the response time of ancillary services. Ancillary services help balance the transmission system as it moves electricity from generating sources to consumers. This project is a $15 million investment that will produce an annual savings of $15 million to $20 million. Any change to ERCOT ancillaries would likely be approved in 2016 but implementation would likely not go into effect for at least another 2-3 years.

Review of Scarcity Pricing

The Public Utility Commission of Texas wants to review the Operating Reserve Demand Curve (ORDC), a market mechanism to determine scarcity pricing when reserve electricity margins reach a certain threshold for a period of time.

Within ERCOT, the total amount of real-time energy in the market and the reserves available in case of system issues used to be priced separately. Because of that separation, ERCOT could show low energy prices while also experiencing a reserve shortage, potentially leading to reliability issues. ERCOT implemented the ORDC in June 2014 as a way to combine the two prices into one by setting a value on reserves and adding it to the energy price.

PUCT is taking comments from stakeholders to look at the ORDC after 18 months in operation and determine whether adjustments need to be made to increase its responsiveness in times of scarcity. Adjustments could include changing the shape or slope of the curve by changing the level of reserves at which the calculation takes effect, the value of lost load, or the loss of load probability.

These changes could ultimately impact the price customers pay when electricity demand exceeds supply, though it remains to be seen what that impact could be.

How to Plan Ahead

It’s too soon to tell what impact these factors will have on prices. If you’re a Constellation customer, we encourage you to contact your sales or account representative to discuss your current and future energy budgets.

We offer several energy purchasing options that can help you achieve budget predictability in the current low price environment. These include Constellation’s Flexible Index Solutions (FIS) product, which allows you to buy a percentage of your load at a fixed price while purchasing the rest in the shorter term based on market-driven opportunities. Another option that’s well suited for an environment where prices are at the lower end of a long-term historical price range is Constellation’s Minimize Volatile Pricing (MVPe). MVPe is a structured, systematic plan that reduces exposure to electricity price volatility through a time-diversifying purchasing program.

Unlike basic dollar cost averaging, MVPe targets purchases made on a customer’s behalf through an algorithmic approach that ensures higher percentages of load are locked in when prices are lower compared with historical prices.

If you’re not a Constellation customer but want to learn more about how these options can help you better manage your budget throughout the market’s highs and lows, contact us today.