Dive Brief:
- Texas power markets are narrowly balanced with peak power prices rising to $9,000/MWh, Calpine officials said during the company's quarterly earnings call with analysts last week.
- The economic reserve margin in the Electric Reliability Council of Texas (ERCOT) market has been falling over the past several years and could reach about 10% next year.
- Calpine, the largest generator in ERCOT, would stand to benefit significantly from thin reserve margins, Platts reports.
Dive Insight:
The ERCOT market is "balanced on a razor’s edge," Calpine Chief Commercial Officer Steve Pruett said last week. Margins have been slipping from over 14% in 2011, and could hover just above 10% next year.
"Although a mild summer in Texas could result in weak liquidations, a heat wave, a dry low wind day and/or system operating issues could quickly push the market to insufficient resources," Pruett said.
Pruett said that while drilling has slowed in the area, the petrochemical and liquefied natural gas build out along the Gulf Coast continues and the Texas economy is much more diversified today than in years past. "Despite the delicate market balance over the course of the past year, Texas spark spreads have declined significantly," he said. A "spark spread" is the profit margin that natural gas-fired power plants get from selling megawatt-hours of electricity.
That decline is partially due to lower natural gas prices. Last summer's mild weather, which has been followed by weak winter liquidation so far this year "have led to lack of fear in the market," Pruett said. "In just the last month alone, sparks for the upcoming summer have declined more than $10/MWh reflecting low expectations of scarcity pricing in the forwards." That dynamic underappreciates the relative tightness in the market, he said.
"Certainly, we continue to believe that the forward prices are insufficient to economically incentivize new build without a contract or a significant cost advantage," Pruett added.
