Texas Electricity Price Outlook for 2013-2016
by Joe Quenet on 04/08/13
Going into the 2013 summer season, electricity prices in Texas have the potential for some considerable upside movement. While fixed prices for forward electricity still remain low based on long-term history, they are higher than a year ago as the futures price of natural gas, the primary fuel source in power generation, has risen over 100% from last April’s low.
Although year-over-year savings may not be available, it's important to consider the huge upside risk of the spot market now that the ERCOT offer cap has been raised to $5,000/MWh beginning on June 1, 2013 ($7,000 on June 1, 2014 and $9,000 on June 1, 2015). Remember, it was just two summers ago during the 2011 July heat wave that the ERCOT market hit its cap of $3,000/MWh for approximately 20 hours. With tight emergency reserves and the risk of higher than anticipated summer temps, there is always the possibility that the market could reach the new $5,000/Mwh cap, resulting in much higher future prices as generators rush to price in the increased risks of future spikes.
In considering longer term contracts, although prices for 2014, 2015 and 2016 are higher those offered today, they may still be worth considering. While 2012 may have been a market low, there is no going back. It’s our opinion that the impacts of the changes in natural gas production (due to reduced rig counts), a shrinking storage surplus (due to a colder winter in the Northern US) and lost coal generation (due to both economics and EPA regulations) support higher prices for the long-term.
