November 4, 2019 - 9:03 AM EST
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Electricity prices up 43 percent this year, reflecting new price adders

Nov. 04-- Nov. 4--Power generators hit pay dirt this summer when hot weather in August triggered surcharges approved earlier this year by Texas regulators, sending wholesale electricity prices soaring more than 40 percent, with the higher costs likely to be passed onto households and businesses.

Wholesale power prices in Texas averaged about $50 per megawatt hour during the first eight months of the year, up 43 percent from $35 per megawatt hour during the same period in 2018, according to Potomac Economics, a Virginia consulting firm that serves as the independent market monitor for the state's grid manager the Electric Reliability Council of Texas.

The jump comes when natural gas prices are 15 percent lower than they were a year ago, Beth Garza, who leads the independent market monitor's office, told the ERCOT board in October. Lower natural gas prices reduce overall electricity prices because gas-fired power plants provide more than half the state's generation capacity.

But not this year. State regulators agreed in January to increase the amount generators could charge during times of peak demand. The surcharges, known as price adders, were triggered over several days in August when temperatures climbed into the triple digits and power demand hit new records. In August alone average prices were $162 per megawatt hour compared to $38 per megawatt hour in August 2018.

The state's biggest power generators aren't saying how much the new price adders contributed to their bottom lines, but the Chicago energy company Exelon, which owns three natural gas plants and 11 wind farms in Texas, estimated last year that the price adders would likely yield an extras $4 billion for generators. Higher wholesale prices eventually filter down to retail prices paid by households and businesses.

Price bet

The power companies' hedging activity -- the practice of selling futures contracts to lock in prices to minimize the risk of declines -- shows expected to capitalize on the higher prices. The more generators hedge, the greater the likelihood they expect prices to fall.

But when they hedge less, companies bet prices will increase and plan to sell more in spot markets to take advantage of higher prices. And that's what several of the biggest generators in Texas appeared to do this summer.

Manan Ahuja, manager of North America power analytics for S Global Platts, pointed to Exelon as one of several examples. The company said in a second quarter presentation that its power production was 86 to 89 percent hedged in the ERCOT market this year compared to 98 to 101 percent the previous year.

But Exelon wasn't able to reap the benefits of it strategy because of plant outages in Texas during high-priced hours that caused them to miss out on the biggest price spikes, company executives reported during a recent earnings call. Other companies, however, did. NRG, which reports third quarter earnings Friday, could provide a glimpse of how much the price adders benefited generators.

Both NRG and Exelon declined to comment.

Led by NRG, the biggest electricity seller in Texas, and Calpine, the nation's biggest generator of electricity from natural gas, power companies said they needed the price adders to guarantee higher revenues that would allow them to build more plants to meet the state's growing demand for electricity. Regulators approved the extra charges as Texas was heading into summer with the tightest power supplies on record, the result of high demand, the shutdown of coal-fired power plants and the cancellation of planned projects.

The grid manager twice called for voluntary energy conservation in mid-August as power reserves dwindled. Prices were so high in August that this was the first year since 2011 that a new gas plant could recover its annual investment cost by the short-term pricing surge in August, according to one energy analyst.

But so far, the price adders don't appear to have spurred new power plant construction, including natural gas plants that provide reliability when the wind and solar power isn't available. Companies won't likely invest millions of dollars -- and banks won't provide the financing either -- to build new natural gas plants when high prices last for just a few hours a year.

Solar factor

"The concern is that these high prices are only temporary," said Michael Pickens, an analyst who covers the Texas power market for IHS Markit, a London-based information and analysis firm.

Bankers are also concerned that new utility-scaled solar projects poised to begin operations in the next year or two will further depress electricity prices, said Pickens. Solar farms, unlike wind farms, tend to produce the most power during peak demand periods -- hot, sunny summer afternoons.

The Public Utility Commission said the new pricing mechanisms worked as intended.

"As our state's population and economy keep growing," said commission spokesman Andrew Barlow, "it is expected that such pricing will attract investment in the generation needed to meet future demand."

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Source: Tribune Regional (November 4, 2019 - 9:03 AM EST)

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