Energy Supply and Demand in Texas: ERCOT CDR Report

Twice a year, ERCOT releases a Capacity, Demand and Reserves Report (CDR) to examine the reserve margins of generation supply that will be available to ERCOT over the next ten years. Below is a summary of a few key takeaways from the December ERCOT report and how these factors could impact energy supply and demand in Texas.

1. ERCOT is required to track new power builds and expansions as well as forecast load growth in the region. These calculations provide ERCOT with an estimate of available reserve margins and whether they are above or below the North American Reliability Council’s (NERC) guideline. The results of the latest December CDR show that reserve margins have increased since May. However, calculations may be over-projected based on eligible planned units that have been submitted to ERCOT, but not yet necessarily finalized with project financing. This opens the possibility that ERCOT’s CDR reserve margin could potentially be overstated if those units aren’t built.

2. The chart below illustrates the changes in the ERCOT CDR Report from May to December. 6,250 MW have been added to the queue of available resources since the May update. Of the new resources to be made available, summer 2016 capacity will only be 3,600 MW, due to a lower capacity factor of wind in the summer months (the most productive time for wind is in the winter). This additional capacity also included 1,600 MW of new gas and 1,150 MW of new solar capacity. Reserve margins peak in 2018 at 25.7 percent, up from 21.4 percent in the May CDR Report. ERCOT also reduced its annual load growth in the outer years to just over 1 percent annually.

3. When factoring in these new generation projects and lower load growth, it would appear ERCOT reserve margin for the next several years is adequate to meet the NERC guidelines of 13.75 percent. There is close to 4,000 MW of projects (majority of which are gas units) that have not received financing and construction has not yet begun. The current low forward power prices in ERCOT, largely driven by NYMEX gas prices, have reduced the expected returns on new generation builds. If new gas units aren’t built as described above, ERCOT’s reserve margins could be closer to the May CDR Report.

4. The Environmental Protection Agency’s (EPA) Regional Haze Program Final Rule was released on December 8. The rule requires states to develop air quality protection plans to reduce pollution that may cause visibility impairment. It was released after the December CDR so future reports could show tighter reserve margins.

Current forward power strips are near life of contract lows. However, a variety of factors could impact prices in 2016, from lower overall gas production (Texas production has declined from 21 Bcf/d to 19 Bcf/d), a warmer than normal summer or higher than expected gas fired generation demand as gas continues to displace coal.

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