It’s always an interesting discussion with non-technical people involved in contracting for power supply. Energy contracting is oftentimes the responsibility of personnel who are not familiar with the price dynamics of the power markets. The conversation will typically start with “we use a lot of electricity…..we should see a great price”. While that may be true, it’s not necessarily the magnitude of usage that drives the price, but the consistency and level of demand. What’s the difference between demand and usage? Power demand is the amount being drawn from the grid at any point in time; usage is the aggregate of demand across time. A consistent or flat demand profile, meaning a higher load factor, will command a better price than that associated with a low load factor. So why is that?
A brutal cold start of the year has been followed by moderate temperatures across the country. Natural gas prices have risen significantly since early January 2014, as inventories were being depleted at a faster than normal rate due to higher than normal heating demand. Nevertheless, record production and tepid demand after the spring months triggered a massive selloff in mid-June 2014, with the front month losing more than 20 percent to date. Early concerns of tight supply conditions ahead of the next heating season have eased due to weekly record or near-record injections. Electricity prices have also plunged not only because of the recent drop in natural gas prices, but also because of a drop in heat rates. In Texas, peak load had not been this low in June and July since 2010. Low electricity demand has depressed spot and forward heat rates.
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On Friday, February 28, ERCOT published its 2014 Capacity, Demand and Reserves (CDR) report. Resource adequacy has been at the forefront of ERCOT’s electricity policy debate. Forecasting future demand is critical for planning purposes to determine how much generation will be needed in future years to meet peak demand. Resource adequacy concerns have prompted the PUCT to approve mechanisms that increase the duration and frequency of scarcity pricing signals in ERCOT to support adequate generation development in the state. One measure, that has also encouraged some Commercial and Industrial customers to take advantage of higher prices through prices response (load shedding and Distributed Generation (DG) dispatch), is the October 2012 decision to increase the system-wide offer cap to the following levels, effective on the dates below:
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