Last year saw increased wholesale and retail prices in Texas due to low reserve margins and hot weather. This year will bring more of the same. Learn how reserve margin, weather, and operating reserves will all play a role in driving up 2019 Texas electricity rates.
Will There be Enough Electricity This Summer in Texas?
Before we get too deep into this, let’s define a term that you will hear a lot about this summer — Reserve Margin. Reserve Margin is the difference between the amount of power generation capacity that is available, versus the amount of power demand that is expected.
To ensure system reliability, ERCOT likes to maintain a 13.7% reserve margin, or 13.7% more generation capacity than they think the state will use. This allows for the impact of hotter than expected temperatures, which would spike demand.
In December 2018, ERCOT projected that reserve margin will be 8% for summer 2019. Subsequent to that report, a small Texas coal plant north of Houston announced that it would not be operational this summer, further decreasing our projected reserve margin to 7.1%.
“Certainly, with a declining reserve margin, there is a greater risk we would enter into an emergency situation,” Pete Warnken, ERCOT’s manager of resource adequacy, told reporters in a December conference call. But ultimately, “it depends on the weather. … we really just don’t know what’s going to happen.”
In 2018 we had a similar scenario. In December 2017, the projection for summer 2018 was a reserve margin of 8%. Market forces being what they are, increased demand and lower reserves led to a 25% increase in the number of instances wholesale electricity prices were higher during June to August 2018, compared to the same months of 2017. Retail energy prices began dropping by mid-August ’18, based on a milder than expected weather.
Bottom line? It’s gonna be tight. ERCOT, the Electricity Reliability Council of Texas, projects that the peak load forecast (total expected usage, at our highest level of demand) for summer 2019 is expected to be 74,853 MW. That’s even higher than the all time system-wide peak demand record of 73,473 MW set July 19, 2018 between 4 and 5 p.m.
Fears over scarcity will drive Texas electricity prices up this spring and summer.
NOTE: ERCOT’s next seasonal report on resource adequacy will be March 2019. We’ll update this post then!
Market Changes will Drive Prices Up — Impact of ORDC
In addition to tight reserve margins, a change in the market, announced January 17, 2019, will also serve to drive prices up. The loss-of-load probability used in determining the Operating Reserve Demand Curve will increase in both 2019 and 2020.
The Operating Reserves Demand Curve or ORDC is a mechanism to ensure that generators are compensated to increase supply when reserves get tighter.
First implemented in 2014, the ORDC is meant to ensure power prices accurately reflect shortage conditions. The ORDC automatically increases the price of power as reserves get tighter. This serves as a financial incentives for power generators to turn on additional generation assets.
What’s the impact of an increase in the Texas ORDC? The increase in ORDC may increase wholesale power costs by nearly $80 million over two years, according to ERCOT. The Texas Public Policy Foundation (TPPF), a conservative think tank in Austin, projects that the boost in ORDC could be several hundred of millions of dollars in increased costs. The result? TPPF projects the ORDC changes could bring a 13% increase in electricity costs, which will be passed directly on to consumers.
Since retailers know the ORDC will be higher this year, they need to plan ahead to cover this possible cost. Retailers across the state are adjusting their pricing models to incorporate this expected cost increase. ERCOT expects to implement the ORDC price changes in April ’19.
ORDC changes will drive Texas electricity prices up this summer.
How does Weather Impact TX Electric Prices?
Weather isn’t everything. But it’s a lot of things.
Commercial electricity usage is fairly predictable, based on the type of business. Residential usage is the most volatile type of usage and is tied to weather. Over 50% of the usage in the typical home is tied to heating and cooling costs. That usage peaks in the afternoon between 3pm and 7pm, when everyone arrives home from work and cranks up the air conditioning.
The chart below shows the impact that residential electricity has on the total electricity load in Texas. On a moderate day, residential electricity is only 25% of the total ERCOT load. But on a scorching hot day? That jumps to almost 50% of the total usage. That unpredictable nature of residential electricity tends to drive residential prices up during the summer months.
The National Oceanographic and Atmospheric Administration (NOAA) has yet to release its projections for summer 2019. But, 2018 was the third hottest summer on record for Austin, TX.
What is Driving Electricity Demand in Texas?
The ORDC is designed to incent investment in additional power generation resources. But, new power plant resources take time, money and permitting.
In the meantime, three things are driving electricity demand in Texas:
- Power Production. You’ve heard the saying, “it takes money to make money?” Well, it takes power to make power. Significant oil and gas development in far West Texas continue to drive electricity demand.
- Population Growth. According to the US Census, more people moved to Texas than any other state between July 1, 2017 and July 1, 2018. In that time period, we gained 380,000 people, equivalent to the City of Cleveland, OH. All those people add to our power usage.
- Business Growth. Texas is ranked #1 in job growth by Forbes magazine. Over 10% of US Manufacturing occurs in Texas. Businesses need power.
High demand for a limited resource will drive Texas electricity prices up this summer.
Getting Power Where it’s Needed — Transmission Costs
Transmission is the cost of getting power from the power plants to electrical substations located near population centers (i.e. getting the power where people need it). Along the way, some electricity is lost, known as transmission losses or marginal line losses. The further power has to travel to get to the population center, the higher the line losses.
Now, you can probably guess that there are more transmission line losses sending electricity from a wind generation asset in West Texas to, say, Dallas, compared to a power plant just 20 miles from downtown. To encourage development of wind energy in the western part of Texas, regulators spread the cost of these transmission losses equally among market participants.
In January 2019, the Public Utility Commission of Texas rejected a request from major power companies asking the state to assign transmission losses based on the distance the power travels. This would have lowered transmission costs for natural gas powered plants that are located closer to population centers. It would have increased transmission costs for wind and solar assets located in West Texas.
Net effect on pricing: none.
Natural Gas is King; Renewable is Growing
Natural gas is expected to generate over 50% of Texas electricity in 2019. Because of this, natural gas prices drive Texas electricity prices. The EIA Short Term Energy Outlook projects that natural gas prices will fall after the winter, on strong supply. However, if weather increases electricity demand this summer, demand for natural gas to power these plants will increase. That will drive natural gas prices up accordingly.
Renewable energy resources are expected to grow in 2019, generating 25% of Texas power needs between wind and solar resources. Power must be consumed when it’s generated, which has made wind resources less dependable and curtailed production. Investment in transmission lines have helped reduce that issue. Utility scale batteries have dropped in price in the last 2 years, and will play an increasing role in helping Texas tap into these renewable resources. Batteries can store the power as it’s generated, then release it to the grid when power prices spike.
Demand Response — Doing Your Part for the Grid
Based on the low reserve margin this summer, ERCOT is likely to activate their Emergency Response Service, which relies heavily on demand response. In a demand response program, commercial customers receive an incentive for reducing their usage. They do this by powering down certain assets or switching their operations to back-up generators.
Residential customers can also take part in demand response and receive a bill credit for reducing their usage. TriEagle, Direct Energy, Reliant Energy and Just Energy all have demand response programs that reward consumer participation. Many of these programs require a wifi smart thermostat that your electricity provider will adjust automatically. There are also a number of electricity plans available that include electricity plus added extras, like a Nest or Ecobee thermostat, or a smart home device that helps you control your home lighting and temperature.
ERCOT may ask the general public to reduce consumption by issuing an Energy Emergency Alert via broadcast media. The ERCOT Energy Emergency Alert System has several levels: –
- Conservation Alert — ERCOT may call upon consumers to take steps to conserve power. Users can help by turning their thermostats up 2-5 degrees between 3 and 7 p.m.
- Power Watch: Conservation Needed — ERCOT calls on all available power supplies, and some demand response resources
- Power Warning: Conservation Critical; Risk of Rotating Outages — Power operators shut down large commercial/industrial resources that have agreed to be interrupted in the case of an emergency
- Power Emergency: Rotating Outages in Progress; Conservation Critical — If demand response is not sufficient to decrease load, ERCOT moves to a Power Emergency and instructs utilities to reduce demand by dropping load through rotating outages (i.e. rolling blackouts) to help prevent the risk of a statewide blackout. The last time ERCOT declared a power emergency was February 2011.
Want to learn ways to conserve? Check out our article with tips to conserve electricity!
Longer Term Contracts May Offer Best Value
ERCOT has released its projections of peak load and generation assets for the next 5 years. As noted above, reserve margin is expected to be low in 2019. However, ERCOT expects additional generation assets to be built in upcoming years. This will increase the reserve margin for 2020 – 2022.
Retail Electricity Providers may be able to buy power cheaper for future years than they can for current years.
For residential customers, that makes longer term plans like 36 or 60 months more affordable. For small commercial customers, there are even plans that have a built in declining rate, so you pay a lower price for energy 2 or 3 years in the future.
Avoid Market-Based Rates this Summer
A word of warning! We recommend fixed rate plans for all our customers, to protect from the bill shock of a variable rate plan. If your contract has expired, you are likely being served on a variable rate plan. These plans are based on market prices (and, frankly, based on how much money the retailer wants to make.) Rates can change every month, usually with no limits as to their variability.
You should also watch out for index rates that are tied to the market clearing price of energy or the locational marginal price of energy. These rates reflect the price for energy on the open market. Consumers who “ride the wave” paying wholesale grid prices (for a monthly fee) may enjoy lower prices in the winter, but could experience a blow out during the summer months. If you are not a gambler, it’s not worth the risk.
Lock in Fixed Rates — We Can Help You Shop!
Your best bet for Texas electricity is to lock in a fixed rate plan to protect you against rising energy prices. You can typically shop 60 days prior to your contract expiration, and select a start date that matches your contract’s expiration date. ElectricityPlans makes it easy to shop among top providers, with a selection of plans that we recommend.
We review all plans to make sure we understand them, and highlight whether a plan has a base charge, credit or penalties for usage, or tiered rates. We also offer free weekends and free nights plans from the major retailers, or prepaid plans if you want no credit check electricity. Whatever you are looking for…we can help you shop.
Not sure what plan is right for you? Our free PlanScan service will shop for you! We’ll evaluate your usage and make a customer recommendation for your home, all at no charge.