How Low Gas Prices and Growth in Wind Output in Texas Is Impacting Prices

Texas has long held the dominant position in wind generation in the U.S. It reached 15,764 MW of installed capacity in 2015 and doubled its wind capacity since 2009. One MW powers approximately 200 homes in Texas in the summer months but close to 800 homes in the winter months. To put that into perspective, that’s more than double the energy generated by the state with the second-highest wind generation, Iowa. 

The growth in wind output has changed the way the Energy Reliability Council of Texas (ERCOT) dispatches gas-fired generation units and can impact off-peak pricing, hour ending 10 p.m. to 6 a.m. In fact, ERCOT has experienced a greater frequency of negative prices so far in 2016 than in previous years. According to spokesman Robbie Searcy, who commented in the Bloomberg News, ERCOT experienced one major hub trading below $0/MWh for 50 hours in November 2015 and again this March around the shoulder months of winter. Negative prices occur when there is an excess of power generated, which forces utility companies to pay grid operators to take power off their hands. This is more common in the shoulder months but is a trend that will continue as wind capacity is added in ERCOT.

The Growth in Texas Wind Generation Capacity

The chart below illustrates the build out in wind capacity in ERCOT, which has doubled since 2008. ERCOT’s build out of wind will continue in 2016, with another 5,074 MW likely to come online in 2016 as these projects have committed financially binding agreements between the resource owner and the Transmission Service Providers (TSP). Additional planned projects (in green below) do not have financially binding agreements with the TSP, but could enter into agreements with the TSP and get built. Wind has its highest performance generally in winter months, and this was true in 2016. On Feb. 18, ERCOT wind generation set a record generation level of 14,023 MW and on March 23, wind set a new record grid penetration of 48.28 percent in one off-peak hour.

Source: ERCOT

More Wind Has Contributed to Lower Off-Peak Prices

The growth in wind generation is having an impact on the real-time market in ERCOT, as wind tends to be the strongest during overnight hours. In ERCOT, off-peak hours are 10 p.m. to 6 a.m. As the chart below illustrates, off-peak averages in ERCOT have been in decline. North Zone and West Zone RTSPP illustrate the trend since spring of 2014, which shows the decline in prices as wind output has continued to expand in Texas. As the trend line for West Zone prices illustrates, there has been a decline from prices averaging in the $28-$31/MWh range in spring of 2014 to $18-$21 MHW in spring of 2015 and $11-$14/MWh for January-April 2016.

Falling gas prices, growth in wind capacity from 12.4 GW in 2014 to 15.76 GW in 2016 and a mild winter in 2015 and 2016 all contributed to lower real-time prices.

Source: ERCOT

Why isn’t the per MWh cost of wind generation impacted in the same way conventional generation is? Prices can go negative because during off-peak hours, the amount of available generation can exceed the demand at that point in time (measured in 15 minute intervals). Unless wind speeds are high enough to require operators to lock the wind blades, output will not be curtailed and traditional generation can be asked to go to minimum generation levels or shut down.

Despite the impact of negative prices in off-peak hours when supply is exceeding demand, wind generation is able to remain profitable because it’s eligible to receive government incentives for output produced. The Federal Production Tax Credit (PTC) was extended by Congress in December 2015 as part of the Fiscal Year Omnibus Appropriations bill for another five years through 2021. Therefore, a wind generator will receive not only payment for the power produced, but a tax credit for each MW generated that equates to $21.50/MWh.

What Can Customers Do?

Customers can benefit from low off-peak real time Settlement Point Prices (SPP) by utilizing Constellation’s Flexible Index Solutions. This allows customers to take advantage of market opportunities as they arise and gives them the flexibility to adjust their energy purchasing strategy accordingly as market prices rise and fall. Customers can fix all or a portion of their load for on-peak prices to mitigate the risk of volatility while benefiting from index pricing for off-peak load.

To learn more about how Flexible Index Solutions and other energy purchasing strategies can give you price certainty when you need it and flexibility when you want it, contact us today.

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