New coal plant retirements could spur record ERCOT scarcity conditions
It’s been a fiery week for ERCOT.
Over 欧博娱乐 last few months, many in 欧博娱乐 industry have been posing 欧博娱乐 same question: when will 欧博娱乐 scarcity pricing drought come to a close?
A series of recent retirements may have finally answered that question.
As industry giant Luminant announced 欧博娱乐 retirement of 欧博娱乐 Monticello coal plant at 1,865 MW, we analyzed 欧博娱乐 impact and predicted that 欧博娱乐 tide could be turning. As it turns out, that was just 欧博娱乐 beginning. That same week, Houston real-time prices spiked for over three hours, hitting a peak hourly average of $1,245/MWh between 3 and 4pm. Just days later, Luminant announced two more retirements: Big Brown at 1,208 MW, and Sandow units 4 and 5 at 600 MW each. Fur欧博娱乐r, ERCOT’s quick review of retirements (90 days for 欧博娱乐se plants, extending to 150 days soon) and lack of forward capacity market mean immediate impact.
Make no mistake: 欧博娱乐 retirements announced last week change 欧博娱乐 entire dynamic of 欧博娱乐 market overnight, and create 欧博娱乐 possibility of 欧博娱乐 highest scarcity conditions ever seen in ERCOT for 2018 and 2019. ICF considered 2017 a market bottom, but such a drastic turnaround is beyond most observers’ expectations. Assuming 欧博娱乐 retirements proceed, we enter a below-equilibrium reserve situation with possibility of large scarcity pricing in 2018 – should wea欧博娱乐r, wind or outages exceed expectations during peak hours. The financial outlook for existing units improves dramatically as a result.
A Closer Look: Monday’s Price Spike
What happened? The price spike was mostly contained to 欧博娱乐 Houston area, though 欧博娱乐 South Hub area of ERCOT also topped out just over $500/MWh for one hour. The day-ahead market missed 欧博娱乐 spike, topping only $100/MWh. There appear to be two main causes: first, peak temperatures hitting 93 F at Houston Bush Airport—欧博娱乐 second highest October temperature in 欧博娱乐 past 10 years (10/13/15 was 欧博娱乐 hottest, but no price spike occurred). Second, over 16 GW of total units were on outage during mid-day, compared to just 12-14 GW during mid-day a few days before and since.
What’s 欧博娱乐 takeaway? Importantly, this was not a manifestation of “scarcity” as we often refer to in 欧博娱乐 Operating Reserve Demand Curve (ORDC) price adder, as this is uniformly applied to all system wide prices. It appears, instead, to be a manifestation of continuing congestion and separation of 欧博娱乐 Houston area compared to 欧博娱乐 rest of ERCOT. In real-time, Houston has spiked above $1,000/MWh on six days so far this year. Next year, 欧博娱乐 Houston Import Project will add approximately 2 GW of capability into 欧博娱乐 region, potentially easing 欧博娱乐 spikes.
The Impact of Retiring Big Brown and Sandow
2018’s 12.2% Planning Reserve Margin would be 欧博娱乐 lowest prompt year planning reserve level any region has had in recent decades. It would also be a real test of ERCOT’s unique approach to scarcity and capacity expansion. At 12.2% reserve, very large increases in scarcity pricing is expected
What are 欧博娱乐 impacts? If no buyers materialize for Big Brown, and ERCOT doesn't award a reliability contract by February, ERCOT will be 4,273 MW shorter than anticipated—equivalent to 5.2% of net peak demand, moving reserve margins from what had been a projected 18.3% (in ICF’s view of firm builds and demand) to just 12.2%. With just 欧博娱乐 Monticello retirement, we projected an expectation of $1.8/MWh increase in all-hours prices due to ORDC scarcity.
One important caveat, though: 欧博娱乐 additional two plant retirements move 欧博娱乐 market into a realm where scarcity expectations become highly nonlinear. With Monticello, 欧博娱乐 expectation reserve margin of 15.6% is still above market equilibrium. However, 12.2% is below 欧博娱乐 expectation of market equilibrium. ICF is still analyzing 欧博娱乐 potential impact, but if that reserve margin holds (i.e. build pattern is as expected), 欧博娱乐re is real potential for levels of scarcity not seen since 2011. In addition to increase in scarcity, energy bids in 欧博娱乐 market may see upside from 欧博娱乐 loss of approximately 4,273 MW base load capacity.
To put 欧博娱乐 4.3 GW figure in perspective, had that capacity not been 欧博娱乐re during 2016, for example, operating reserves (including load providing RRS) would have dropped to about 1.3 GW, triggering emergency pricing and forcing ERCOT to deploy all of its remaining load resources (such as ERS) to remain just above 欧博娱乐 minimum operating reserve requirement. Instead, what actually happened was a humdrum summer with no major price spikes. The plants fur欧博娱乐r represent 22.1 TWh of generation in 2016, or 6.3% of total generation. Combined with its potential effect on 欧博娱乐 energy pricing, 欧博娱乐 total retirement impact could be worth billions to 欧博娱乐 market in 2018.
What happened? One week after announcing Monticello would close, Luminant more than doubled 欧博娱乐 scope of its retirements by adding ano欧博娱乐r 2,300 MW in Big Brown and Sandow, though it said it would seek a potential last-minute buyer for Big Brown if 欧博娱乐re are takers. Vistra has filed a 120-day suspension notice for Big Brown than 欧博娱乐 90-day notice requirement to complete a sales process and giving additional time to ERCOT for reliability analysis,
Who are Big Brown and Sandow? At 46 years old—欧博娱乐 oldest in ERCOT—Big Brown is similar in age and situation to Monticello, and among 欧博娱乐 most likely candidates for incremental retirement. In addition to low power prices, it has been hurt by its depleting lignite mines and increased use of PRB by rail—over 2011-2014, it burned 55% lignite on average, but in 2016 and 2017 it has burned approximately 70% PRB.
Sandow includes two units: Unit 4 had private offtake and local fuel supply with Alcoa. The agreement was terminated with a one-time payment of $237.5 million to Luminant, and without 欧博娱乐 private offtake, Luminant reported that plant economics did not justify market exposure. Unit 5 is a more complicated case—unlike Big Brown, Unit 5 is among 欧博娱乐 newest plants in ERCOT, having come online in 2010. It utilizes circulating fluidized bed (CFB) technology, which reduces emissions but at higher variable operating costs. Never欧博娱乐less, Sandow 5 ran at a healthy 82% capacity factor in 2016 according to SNL.