The past several months there have been a number of discussions about Texas’s power generation shortage over several related topics. Talks about the demand response programs, whether there will be rolling blackouts, the effect of the new Market Cap Increase, and how electricity rates will be effected are all part of the discussion. Recently, however, I saw some behavior on the ERCOT real-time market pricing page that had me asking whether or not ERCOT is ready for the summer heat for different reasons
In the past, outside of a few hiccups, ERCOT has demonstrated an almost uncanny ability to properly forecast and supply the right amount of energy generation to meet the demanded Texas electricity. However, on Sunday and again Monday (4/29/2013), there were some odd pricing spikes on days with minimal demand and mild weather. Usually price spikes like the ones we saw happen on consecutive days of oppressive heat, or with plant failures of some sort (often inclement weather related). But these recent occurrences happened on days with max loads of 39 and 44k mega watts, respectively. The Texas electricity grid can handle loads of well over 70k mega watts. On a normal day, pricing is between $20-50 a unit. And if I say the average price per unit is $35, then for more than 3 hours Monday the price per unit averaged out around $175, which is five times the normal cost of electricity per unit.
So what caused these price spikes? I sent an email to Dan Jones, the independent market monitor, who acts as a third party to make sure ERCOT and the grid are operating as designed. I asked him if there were any plant outages or any other reason for the blowout pricing on Sunday and Monday. And while there weren’t any huge, unexpected plants offline, his responses did make sense. He cited a number of factors, such as some transmission congestion, higher than expected demand compared to historical demand, lower than expected wind energy output, and he reminded me that it isn’t as if plants are churning out energy in advance just in case they are needed, as that would be a huge waste. So there wasn’t a specific reason, it was a combination of factors. And while I’d argue that allowing that to happen for more than 3 hours is unacceptable neglect on the part of ERCOT in failing to get more generation online during the peak demand period on a mild day, Mr. Jones’s reasoning for how it happened is logical and makes perfect sense.
He did bring up on thing in his email I did find interesting, however. At one point, he stated that while prices were higher than normal, he isn’t sure that he would label the price points as a “blowout.” And Mr. Jones isn’t alone in that thinking. I asked around for several other people that work in the marketplace, and none of them seemed to consider a price move of “only” 5x the normal rates to be that big of a deal, and certainly not critical. I wonder if consumers who had their prices inflated 5x normal for hours on end would be as oblivious or indifferent when they received their bills at the end of the month? I’m thinking not.
After asking around, I’m disturbed and concerned by the what I fear is complete tone deafness of the entire ERCOT landscape when it comes to consumer bottom lines. Whether or not engineers or beancounters can comprehend (or care to comprehend) the end-user experience, but price spikes of “just” 5x trickle down to customers and have tangible results. And no one looking at the business of Texas electricity and thinking regular spikes like Sunday and Monday aren’t a big deal would be correct in their thought process. Price moves reverberate through price curves after the fact and they trickle down to the customers. If something similar happens a couple more times before it even gets really hot, that will absolutely affect customer bills sooner rather than later. Of course, that is a good reason to lock in your rates now, particularly with natural gas prices looking to keep rising, but that is a different conversation altogether.
Of course, none of that answers my earlier question of how ERCOT could let that kind of price spike go on for over three hours. If they’re letting things like this slip through the cracks in mild weather, what does that portend for the summer months? When temperatures are in the 90’s and 100’s and the grid is pushing around 70k mega watts of demand, we could be looking at price spikes of 140x normal pricing come June (thanks to the increased market cap), instead of just the 5x we just experienced yesterday.