Blog July 27, 2020

Summer is usually an interesting time of year for ERCOT as pricing volatility is on the horizon. ERCOT has massive of amounts of solar coming up within the next few years according to the interconnection queue, and this year's pricing volatility is expected to be amplified by the new pricing dynamics involved with the road to 20GW of solar.

So what is the status of planned solar resources? How are prices performing? And what’s the outlook for August?

Read on for a summary of key themes from the summer so far.

Delays to solar projects

According to ERCOT’s original Summer Seasonal Assessment of Resource Adequacy report, released on May 13, 2020, “planned solar resources” totaled 1,496 MW. When the new Generation Interconnection Requests report was released in June, solar projects with a summer commercial operating date dropped by ~300 MW to 1,283MW. This drop can be explained by a few solar farms that went commercial since the original GIS report was released. So far, Oberon IA (150 MWs) went commercial on June 2, and Prospero Solar (300 MWs) went commercial on June30. Additionally, there were minor delays to projected operating dates for both Fowler Ranch and Rambler Solar. Fowler Ranch was initially expected to go live on July 10, but was delayed to August 8, while Rambler was moved from July 1 to August 14. These delays could mean lower-than-projected capacity for the next month and would add to the risk for supply scarcity.

Figure 1: New ERCOT Solar Builds Source: Genscape CongestionIQ
Figure 1: New ERCOT Solar Builds Source: Genscape CongestionIQ

Strong load levels and the need for weaker wind

Typically, the most compelling aspect of ERCOT summer is extreme load levels, with demand expected to break new records each year. Thus far, load levels have been strong relative to previous years, but pricing has remained weak by ERCOT standards, as strong wind generation and a healthy supply stack have mitigated risks for supply scarcity.

Initially, our July load peak projection was 73.5 GW, but peak load has already surpassed that mark with a new July record set at 74 GW. However, prices were at a mere US$25 for that hour due to wind production over 10.5 GW, and the day’s average on-peak price settled at US$18 with no contribution from scarcity price adders. Last year still holds the current ERCOT load record at 74.5GW on August 12, 2019. Despite similar peaks, last year’s pricing settled much higher at US$602.06. Our original forecast for a 74.8 GW August 2020 load peak at the time of our Summer Outlook is now revised down to 74.5GW, though a return to more normal summer wind curves coupled with generator reliability concerns will continue to drive risk for pricing to mimic the strength of last year.

August forward curves

Based on August forwards, it seems as though market confidence in strong summer pricing has decreased. Not only has wind generation been steady, but generation on outage totals have been within a normal range, averaging around 5.6 GW. This has helped the supply stack remain healthy and compared to last year we’re seeing an increase in available summer generation, which has translated into cheap pricing. At the beginning of summer, prices were trading around US$155 for the North Hub August Peak. Since then, pricing has plummeted all the way down to US$107 within the second week of July.

Regardless of recent pricing weakness, we believe that pricing is going to begin to climb. As mentioned previously, wind strength is projected to return to typical levels after being abnormally high this last month. Our Congestion Revenue Rights report expects to see wind dip back down to ~9GW during the off peaks, with a trough around 4.5GW. This is projected to tighten the supply stack significantly during August and result in pricing similar to last year.

Figure 2: August Forward prices Source: CME
Figure 2: August Forward prices Source: CME

The disappearance of Far West congestion

Within the past few years, increased oil and gas activity has resulted in an enormous amount of load growth. Figure 3 below shows that even with consistent temperatures, load in the Far West has continued to climb year-over-year. This expansive load growth has helped drive strong congestion in the Far West, especially around Pecos and Odessa. Additionally, the new solar builds previously mentioned (Oberon and Prospero Solar) were anticipated to put pressure on congestion in the Far West. However, transmission in the Far West has increased in transfer capacity and stability. Recently, Odessa-Wolf Switch-Moss Switch 345 kV was energized on June 15 and has killed off congestion around Odessa. Upgraded transmission between Andrews County and No Trees Switch was also energized earlier this year in April and have ended the Dollarhide-No Trees Switch congestion. We expect these upgrades to outweigh the congestion impacts from new solar builds planned through the rest of the summer, resulting in minimal upside to West LZ pricing.

Figure 3: Far West Load Growth Source: ERCOT
Figure 3: Far West Load Growth Source: ERCOT

What’s the outlook for August?

Although much less volatility has been observed this summer relative to 2019, there is still hope for August. Temperatures for August will be warmer than average and will result in the continuation of load strength through the summer. Wind generation is projected to decline into August after observing stronger than average levels for July and should push load net wind levels up for the next month. With planned resources being pushed back to a later commercial operating date, the supply stack will tighten even more than anticipated, and could cause higher sensitivity relative to July. ERCOT has implemented mechanisms such as the Loss of Load Probability Curve shift in order to reach stronger pricing levels. Due to ERCOT's energy-only market structure, summer volatility remains the key signal for new generation investment. This summer's (and the following few years') prices will prove to be exceedingly important in shaping the future of the market as renewable generation continues to flood the grid.

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