ERCOT Anticipates Summer Supply Crunch Amid Unit Retirements

The recent retirement of older generating units and high peak usage owing to economic growth could tighten operating reserves in the region served by the Electric Reliability Council of Texas (ERCOT) this summer.

The grid operator said on March 1 that total resource capacity for the upcoming summer (spanning June through September 2018) is expected to be 77,658 MW, but a preliminary summer seasonal assessment of resource adequacy (SARA) report includes a 72,974 MW summer peak load forecast, which is based on normal weather conditions for years between 2002 and 2016.

“This forecast is higher than the all-time summer peak demand record of 71,110 MW set on Aug. 11, 2016,” ERCOT said. “Almost 3,800 MW in new generation resources began operating in 2017, and more than 14,000 MW of resources are planned to be in service by 2020.”

However, ERCOT expects that recent plant retirements—including of major coal baseload generators—and delays in some planned resources will constrict reserves. ERCOT said that in the fall of 2017, generators announced plans to retire or indefinitely suspend operations of more than 4 GW of generation resources by early 2018.

While ERCOT said it expects to have sufficient generation for anticipated needs over the upcoming winter and spring seasons, a December 2017-released Capacity, Demand and Reserves Report projected that the grid operator’s reserve margins could plunge to 9.3% for summer 2018—falling below the 13.75% target. Reserve margins are expected to increase to 11.7% by summer 2019 as more generation resources begin operating, ERCOT said.

In 2017, by comparison, ERCOT had a reserve margin of 16.9%. That was a significant improvement from dismal reserve margin projections from only six years ago, when
ERCOT declared several emergencies to reduce electric demand, and stricken with capacity shortages, forecast a negative margin by 2022.

The grid entity, which has neither a capacity market nor a requirement that generators build or purchase reserve capacity to meet unexpected supply shortages, has since taken a number of price-related actions to encourage investment in generation.

As of November 2017, more than 47,000 MW of new generation projects were under study, and more than 20,000 MW of new projects have interconnection agreements. These include nearly 10,000 MW of proposed gas-fired generation projects, nearly 2,000 MW of utility-scale solar, and more than 8,600 MW of wind generation projects.

The tight supply and higher prices during this summer’s peak demand will likely prompt voluntary load reductions and an increase in power sold in the market by industrial facilities. ERCOT said its wholesale market is currently designed to withstand such peaks, providing strong financial incentives for generators to be available when demand rises. The operator also adequately prepares retail electric providers to prepare for price fluctuations.

However, according to Charlie Palmer, managing director at global consulting firm Opportune LLP, how high prices could soar is unknown. “With the announcements by Vistra, the market has been expecting a tightening in ERCOT reserves. On February 27, summer 2018 prices reached $134+, the highest level in nearly six years,” he noted.

“With reserves expected to be only 9.3% assuming a normal weather pattern, what happens if we see a summer like 2011? We already have seen some new peaks set this winter and an increase in pricing volatility. I’m sure more is to come this summer. While it’s an improvement for generators, it makes it even more challenging for retailers.”

The record peak isn’t new to the grid entity that serves nearly 90% of Texas. “The ERCOT market has experienced a series of new peak demand records over the last few years as Texas’ economy continues to grow at record pace,” Bill Magness, ERCOT President & CEO, said. “We expect high peak demand will continue this summer.”

Still, the Public Utility Commission of Texas (PUC) issued a statement on March 1 saying that it continues to “closely monitor the forecast for electricity supply and demand for this coming summer.”

The regulatory body added that the supply crunch was “expected,” given that “the decisions of generation owners to retire several large coal-fired power plants has significantly reduced the excess supply of electricity that the [ERCOT] power region has enjoyed over the past five years.”

ERCOT had adequate mechanisms and tools to incentivize increases in supply or temporary reductions in demand to maintain system reliability, it noted, however. “ERCOT reports continue to show continued investment and development of natural gas, solar, and wind power plants, and the PUC remains dedicated to ensuring that market rules support the investment needed for our growing state,” it said.