Why Wholesale Electricity Pricing Peaks During Summer in Texas?
Anyone who’s seen the effect of wholesale electricity pricing in Texas during the summer knows that bill shock is a real thing. Even though the Electric Reliability Council of Texas (ERCOT) announced earlier this year that 523 megawatts had been added to the grid since last December, it still probably won’t be enough to break the historical trend of summer peaks and higher wholesale electricity prices.
The U.S. Energy Information Agency (EIA) publishes annual reports on wholesale electricity pricing. Their estimates show that in 2018 wholesale electricity pricing was higher year-over-year with spikes in the winter and summer. In 2019, prices dropped overall, except in Texas. High usage last summer during record high heat sent wholesale electricity prices in Texas soaring.
Last year the average price in ERCOT was $38 per megawatt-hour with the highest prices in August. That’s 13% higher than prices in 2018. This year has seen drops in wholesale electricity prices, but there’s still a good chance we’ll see Texas rates spike this summer. Here’s why.
Low Electricity Reserve Margins
It’s well-known in the energy world that Texas walks a fine line when it comes to meeting electricity demands in the summer. Texas has a very low electricity reserve, meaning that there isn’t much extra power stored away above what’s needed for average use.
Reserves got so low in August 2019 ERCOT had to issue energy emergency alerts. Not surprisingly, the real-time wholesale electricity prices hit their maximum allowable amount a few times that month. It seems the North American Electric Reliability Corporation’s (NERC) Summer Readiness Assessment for ERCOT was right last year. The organization predicted ERCOT would be the only energy region without enough reserves to manage demand. ERCOT’s anticipated reserve margins were the lowest in the country at just 8.5%.
NERC’s 2020 assessment finds that ERCOT is once again the only energy region without an adequate reserve to meet expected demand in the summer. The one silver lining is that the reserve margin has grown to 12.9%. However, the demand is expected to increase as well so Texas will still push the grid to its limits most likely.
Part of the reason electric prices surge when demand is high is that ERCOT has to tap into more expensive energy resources to provide enough electricity. If the grid had a greater capacity, particularly from less expensive energy sources, it could help stabilize prices during the summer peaks.
Super Hot Summer Months
There’s one very good reason for summer peaks in Texas – it’s hot. Even a mild summer season is warmer in Texas than in most areas of the country. At the start of June, temperatures are usually already in the 90s. August is typically the hottest month of the year. The temperature can reach as high as 120 degrees in some parts of southwest Texas during the summer, and it’s common to experience 100+ degree days for weeks at a time.
When demand is high wholesale electricity prices surge in the ERCOT market (90% of Texas). Summer is definitely the high usage season in Texas, so every year prices increase during this period when every air conditioner in the state is running.
Even if this summer isn’t as hot as last year, and even if ERCOT adds to the grid, there’s still another factor at play. Texas has a growing population. In fact, from mid-2018 to mid-2019 Texas had the fastest-growing population of any state. The population grew by 367,000 residents in that time period.
More people means greater energy needs. Right now the grid simply isn’t keeping pace with the rate of population growth. This alone is enough to push demand up (along with wholesale electricity prices) in the summer.
The (Summer) Problem With Variable Rate Plans
Check to see if you have a variable rate plan. Unlike fixed-rate plans, the electricity rates for a variable rate plan may fluctuate on a number of factors including things like wholesale electricity pricing, demand, and usage. Avoid the bill shock and lock in a fixed rate with a fixed term from Spark Energy! We have electricity plans in Texas that keep charges predictable no matter how hot it is outside. All you need is a zip code to find the right fixed plan for you.