Energy Insider Blog

As we head into this summer, concerns about resource adequacy (tight operating reserves) continue to plague the ERCOT market.  From an energy risk management perspective, end users exposed to Real-Time (RT) or Day-Ahead (DA) prices, should consider locking a Heat Rate Product or a Fixed Price product. Even though heat rates rallied after this release, we recommend end users to be hedged at a minimum in July and August to avoid exposures with either of these products. The reward of not being hedged during these months is not worth the risk. 

According to the summer 2013 Final Seasonal Assessment of Resource Adequacy Report (SARA) issued by the Electric Reliability Council of Texas (ERCOT) on May 1, 2013, there is a “significant chance that ERCOT will need to declare an Energy Emergency Alert (EEA) during the summer of 2013 and issue corresponding public appeals for conservation.”  In addition,  if record breaking weather conditions or a higher than normal number of forced generation outages occur during a period of high demand, ERCOT will likely need to call on demand side resources participating in:

1. A pilot program for weather sensitive demand.

2. Demand Response

   1. Load Acting As Resource (LAAR);

   2. Emergency Response Service (ERS);

If these measures are insufficient to balance demand and supply, ERCOT would ultimately resort to rotating outages to maintain grid reliability.

Comparison to ERCOT Outlook issued in March

The following chart compares ERCOT’s SARA summer outlook from March to the final outlook issued in May using the base case scenario.

Sources: ERCOT SARA March 1, 2013 and May 1, 2013 available at www.ercot.com

The chart highlights a couple of points of interest:

• While it is a positive sign that the reserve margin (available resources minus projected peak demand divided by projected peak demand) improved in the May SARA report, the projected reserve margin for this summer is well below ERCOT’s target reserve margin of 13.75%. What makes the 8.85% more concerning is that in 2011 ERCOT projected a 17.5% reserve margin for the 2011 summer, but unforced outages and record breaking temperatures stressed the grid several times to the brink of implementing rolling blackouts.

• Both Anticipated Demand and Total Resources increased in the May report.  The increase in demand is driven by projections of a hotter summer used in the May SARA report while the increase in Total Resources is attributable to available capacity, planned units with summer in-service dates, and the mothballed units returned to service, such as Monticello and SR Bertron.

In summary, comparing these 2 outlooks suggests that tight conditions are to be expected, but the latest SARA report shows that ERCOT’s ability to meet demand this summer is a little better than the previous SARA report issued on Mach 1, 2013 Furthermore, this summer will still present challenges if the weather is hotter than normal, if there is an above forced outage rate, or if drought conditions force a reduction in the available generation capacity.

What End Users Should Consider for summer 2013

Given ERCOT’s admission that there will be a need for energy conservation and the possibility of rotating outages, the question is what consumers should do to implement an energy risk management policy for this summer.

• Lock in hedges as close to 100% of projected load as possible. End users without a hedge in place for the summer should seriously consider taking steps to hedge such positions.  With the projections of a hotter summer in the May SARA report and increased price caps in the RT and DA markets to $5,000/MWh effective June 1^st, any exposure to the RT or DA prices should be limited.  If ERCOT experiences a summer like 2011, the price of energy could spike to $5/kWh for over fifty 15 minute intervals.  Even if the price cap is hit only half as many times in 2011, such outcome could blow up an energy budget for the entire year.

• Reduce demand and consumption.  End users with on-site generation should consider having this generation available and running during times of peak demand.  This will reduce the exposure to DA or RT prices as well as potentially reducing or avoiding Transmission and Transmission Cost Recovery Factor (TCRF) charges by lowering end users contribution to the 4 coincident peaks (4CP).  These are annual costs within the regulated utility charges.

• Look for opportunities to be paid for reducing consumption.  Several retailers are offering voluntary economic demand response programs where a fixed price customer can voluntarily reduce consumption and be paid the liquidation of the hedge for the reduced consumption.  In addition, we recommend you contact your energy advisor to explore which demand response program best fits your organization.

Conclusion

ERCOT expects a tight summer as it balances supply and demand to maintain the integrity of the system as a whole.  Energy risk management and procurement strategies will look at a variety of options to mitigate exposure. Below you will find average RT prices for the summer of 2011 and 2012:

Expecting summer prices to be as low as they were in 2012 could be a very risky proposition. In 2011, RT prices during the summer were $53/MWh higher as demand was much lower during 2012’s summer due to rain and mild weather during these two months. In short the reward does not justify the risk.