Energy Insider Blog

ERCOT PRELIMINARY SUMMER RESOURCE ADEQUACY ASSESSMENT

On March 1, Electric Reliability Council of Texas (ERCOT) issued its preliminary assessment of Resource Adequacy for summer 2013.  According to the published numbers reserve margins (excess capacity over projected peak demand) will be 8.4%, well below that of last summer.  The report suggested that it is very likely that ERCOT will need to declare Emergency Energy Alerts (EEAs).  Depending on which level of EEA is declared, ERCOT will take the following corresponding actions until supply and demand are brought back in to balance:

• EEA Level 1 POWER WATCH (Reserves 2,300MW)- Calls for public conservation, dispatch of all available units, and import of power from other grids (roughly 500 MW of capacity). This has no direct impact on consumers;

• EEA Level 2 POWER WARNING (Reserves <1,750MW)- Deploy demand response programs (curtail customers who have entered into a contract with ERCOT to shed load at times of peak demand) and shift load to other grids where possible; and

• EEA Level 3 POWER EMERGENCY (Reserves <1,750MW)- Rotating outages until grid stability is restored. 

While ERCOT rarely resorts to Level 3 EEAs, this Summer’s outlook creates concerns that there could be rotating outages.

The following chart compares the results of ERCOT’s projections of demand and resources available during the summers of 2011-2013 (source: summer 2011, 2012, and 2013 Seasonal Assessment of Resource Adequacy (SARA) for the ERCOT region). 

This chart shows that ERCOT’s reserve margins have fallen considerably since 2011 and currently is well below the target reserve margin of 13.75%.  Summer reserve margins have dropped for the following reasons: power plant retirements, lack of new generation, and very high population growth, which has boosted electricity demand in ERCOT.

While the chart is based on normalized weather conditions, if Texas experiences extreme heat similar to that of 2011, the odds that ERCOT will declare EEA level 1 and 2 increase significantly.  Hot weather boosts demand as air conditioners are cranked up. Conversely, at high ambient air temperature mass flow rate of air decreases, which results in reduced output from power plants.  In other words, hot weather squeezes both sides of the equation, increasing demand and reducing available supply.

Potential Exposures and Energy Risk Management

We have seen a steady increase in forward ERCOT heat rates since 2011; however, since January 2013 heat rates have, edged higher due to uncertainty and fear driven by tight conditions which are expected to continue through 2016. In Texas, the greatest risk of not meeting demand is concentrated during the summer months when demand peaks. Therefore, having a sound energy risk management strategy is necessary to avoid unexpected increases in energy spend.

A prudent hedging strategy ensures that proper hedges are in place to limit or eliminate exposure to Real-Time (RT) or Day-Ahead (DA) Market spot pricing.  The importance of this step was vividly illustrated in 2011, where power prices spiked to the cap of $3,000/MWH ($3/kWh) over 50 times, usually during peak power consumption periods.  On June 1, 2013 the system wide offer cap will be increased from $4,500/MWh to $5,000/MWh and ultimately to $9,000 MWh in 2015. Therefore, exposure to RT or DA prices will increase significantly.

• Energy consumption management
• Understanding of your current electricity contract and settlement provisions
• Evaluate participation in demand response programs
• ERCOT- LaaR
• ERCOT- ERS
• Utility Programs- 4CP

Current market conditions require end users to protect against current and future spikes in energy costs. Not having an energy risk management strategy in place can be a very costly proposition. Contact your energy advisor or Acclaim representative to discuss how current market conditions may affect your business and what steps you can take to protect against the above mentioned conditions.
Conclusion
Summer 2013 has the potential to create reliability challenges once again in the ERCOT region and with the PUCT’s decision to raise price caps to attract additional generation resources, the potential economic consequences of failing to properly manage your energy needs could be dire.

Read the full report on ERCOT Summer Adequacy.  

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