December 2018

Texas Electricity Market Update

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ERCOT Market

Energy markets are currently very volatile compared to the past couple of years.  The recent hot summer combined with the loss of a number of coal-fired power plants in early 2018 moved ERCOT market prices higher this past summer.  Now early cold weather and a short-term jump in natural gas prices have sustained these higher energy prices into the fall. 

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Market Drivers

It is important to remember that natural gas prices have a significant impact on on-peak ERCOT energy prices which can also serve to impact forward energy contract prices.  Recent natural gas price increases are being driven in large part by early cold weather increasing demand during a typically down period as well as storage inventories of natural gas being lower this year than in recent previous years.  The natural gas futures markets suggest this recent increase in natural gas prices is expected to be short term in nature.  While natural gas futures prices for the winter are currently over $4 per MMBtu, prices for late spring 2019 are already trading under $3 per MMBtu (see chart below).  ERCOT electricity prices will typically be impacted by this trend.
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Looking Forward

ERCOT anticipates a significant increase in new generation additions (mainly wind and solar) to offset the 2018 loss of coal capacity.  It is possible, however, that while new generation will be added in 2019, the majority of this increased generation will probably come on-line after 2019.  For this reason, ERCOT energy prices may see some strength through the first half of 2019.  In addition, the current long term forecast is calling for warmer than normal weather over most of Texas for majority of 2019.  This may result in a strong demand for electricity load for the year and consequently some degree of price support.  Market opportunities will probably emerge from time to time and it will be important to watch the market if you need to contract for energy supplies.

As with our last update, TCAP still feels it is a better at this time to wait for future opportunities as they emerge versus contracting forward with a fear-based strategy.  If you need to contract now, consider a shorter-term contract with plans to re-contract when conditions improve.  As always, TCAP is happy to discuss our views on the market and contracting.  Please feel free to reach out to us.

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