What Happened…A Market Review

By: Chris Amstutz

Last fall we witnessed Donald Trump accomplish the improbable by defeating Hillary Clinton in the US Presidential Election. This fall we have seen a surge in Texas power futures, and many are again left wondering, what happened? While the results of a US Presidential Election may be moderately more important (sarcasm), I assure you that such volatility in the top power consuming state should hardly go unaddressed.

First, we can address the outcome. Without any influence from the “rigged” Electoral College, Houston Hub Calendar 2018 On Peak pricing has risen.. big league. It is currently up 14.5% from the yearly low of $35.47 on July 24th to a two-year high of $40.64 on November 14th. The North Hub 2018 strip is up 26% in the same time period. The spike in these strips’ pricing has been brought on by huge premiums for the summer months. Houston Hub July and August prices are up 57.7% and 38.5% since the start of October trading. Either Texans are preparing their power-hungry Air Conditioners for a summer visit from the Heat Miser (Happy Holidays), or there are other factors at play here.

Plausible explanations for the spike are abundant. Is the rise in the calendar 2018 strip pricing yet another populist movement spurred on by the slogan of “Make Texas Great Again”? No, but parallels can be made to the election in that there is A LOT of uncertainty going forward for power prices in Texas. The first uncertainty is how bad the effects of this winters’ La Nina could be. La Nina typically brings warmer drier weather to Texas, and this could put a strain on the ERCOT grid come summer. Russian’s hacking our grid always has the potential to affect power prices, but the reality is that this rally has been brought on by scenarios that result in rolling black outs in Texas (insert alcohol consumption joke here). The expected 2018 summer generation reserve margin for ERCOT has dropped 2-3% below the targeted goal of 13.75%, due to recent coal-fired power plant closures. Texas is expected to shutter 5.1 Giga Watts worth of coal powered generation by early 2018. This generation is being replaced by wind energy, which could be problematic when there are windless high temperature days across the state. Yes, it would take near record temperatures, drought and a lack of wind generation to create this worst case scenario, but the market is pricing the possibility.

If there is anything to be learned from the 2016 Presidential Election, it is to never underestimate a risk. The ERCOT market has been presented with a plausible scenario that would skyrocket prices. For this reason, uncertainty will keep the price high. Upcoming decisions on coal plants will lessen the uncertainty but for now we are in a wait and see situation.

**The analysts at Choice Energy Services are equal opportunity political comics