ERCOT Price Spikes

July 12, 2016


Last week, fear of increased heat across Texas pushed ERCOT North’s August peak contract price to $89.90 per MWh, an increase of $17.03 per MWh in a single day. That same contract had traded as low as $49.78 at the end of February and as high as $110.24 per MWh in June 2014. Fears of price spikes are reasonable. On August 13 last year, prices hit $102 per MWh in the day-ahead market and nearly $478 per MWh in the real-time market. It may seem absurd, but the varied prices often associated with ERCOT are largely by design.

Price spikes in Texas are built into the system to incentivize the availability of generation when it is needed. Whereas independent system operators in the Midwest, Mid-Atlantic, and Northeast utilize intricate capacity markets that pay generators to be ready to generate in case the system needs them, ERCOT has no such market and allows prices to move more purely by market forces. That is, generators in Texas are only paid when they actually generate electricity, though some exceptions exist for generators integral to grid stability. If system outages or exceedingly high demand occurs from excessive cold or heat, prices will rise in tandem. For its part, Texas’ average electricity prices typically fall well below other parts of the country, and the region has not witnessed rolling blackouts like other parts of the United States. Both of these are commendable considering the region’s population and economy have been among the fastest growing in the United States. Nevertheless, for customers that have not secured electricity during those hot summer months when wind power is minimal and demand requirements are at their highest, average prices and a lack of blackouts may be little consolation.

Another aspect driving the volatility in Texas electricity pricing is its generation mix. While the state generates from a diverse set of fuel inputs, many of them are not dispatchable or have volatile pricing. In 2015, Texas as a whole received 53 percent of its electricity from natural gas, 27 percent from coal, 10 percent from wind, and 9 percent from nuclear generation.  With the coal and nuclear units tied up in base-load generation, the state relies on natural gas for any incremental generation during times of peak demand (wind is not reliable for auxiliary generation). Once the more efficient combined cycle units are running, the system increasingly relies on less and less efficient simple cycle turbines, thus pushing the price ever higher and causing prices to rise drastically.

At the end of the day, ERCOT’s market rules and fuel mix deliver some of the cheapest electricity in the United States, but the impetus remains on the customer to buy power strategically and utilize electricity wisely during those hot summer days.