In 2019, Texas electricity rates were somewhat flat compared to the year before. If you were on a fixed-rate contract in 2019, then you were a bit lucky! But those who were on a wholesale index rate or a variable rate had to dig deep into their pockets as the rates skyrocketed in mid-August when the Electricity Reliability Council of Texas (ERCOT) reached a historic usage level.
However, in 2020, things are beginning to look up! Early this year, the manager of the state’s electricity grid announced that this summer, the state will have higher electricity generating capacity compared to last summer, when a heatwave forced businesses and consumers to conserve energy as supplies became extremely tight. The news from ERCOT that 523 megawatts capacity has been added – mainly from natural gas, new solar, and wind-powered generators – has already caused a drop in electricity prices.
So what should we expect going forward?
Although there has been a sense of reprieve recently, there are signs that market forces might temporarily push up retail energy prices, and therefore long term contracts might be the best option to choose. It is predicted that variable prices could increase as high as 15 to 16 cents per kilowatt-hour or even higher. According to ERCOT, electricity consumers should expect an increase in electricity prices as the state’s electricity grid is strained during the summer period.
Reserve Margin Focus
I’m sure you are asking yourself, what is reserve margin? Well, reserve margin is simply the difference between the expected power demand and the power generation capacity. To achieve system reliability, ERCOT always strives to maintain a reserve margin of around 13.7%. This helps maintain a consistent electric supply even during the hotter season when the demand goes up.
According to ERCOT May 2020 projections, the summer reserve margin was placed at 12.7% which is lower than the targeted amount.
How Reserve Margin Forecast Affecte TX Electricity Prices
Electricity prices are usually determined by Retail Electric Providers (REPs). Although the projected 2020 reserve margin gives them some encouragement, they routinely keep an eye on the wholesale prices. They do this to avoid a repeat of the blow-out in pricing experienced in the summer of 2019 where ERCOT recorded the highest peak electricity usage of 74,666Mwh. Wholesale prices also went up during the same period retailing at $9,000 per megawatt-hour.
The peak usage for summer 2020 was projected to be 75,200 Mwh. Just like any other commodity, anticipation for shortages usually pushes prices higher. This is one of the reasons why Retail Electricity Providers frequently monitors the reserve margins. The margin estimate is an indicator of what the summer will be like.
Following 2019 small reserve margins and market blowout, this year’s ERCOT power is selling at a higher price.
A positive reserve margin projection is a good thing and is likely to cause a drop in electricity prices. However, most Retail energy providers are more interested in making money now more than ever before. The COVID-19 pandemic has had a negative financial effect on residential and commercial customers, and therefore REPs are factoring in the risks when calculating their pricing.
Impact of the Weather on Electricity Pricing
As stated earlier, when calculating reserve margin, two things are considered—the amount of electricity needed and the amount of electricity that can be generated. ERCOT’s estimate of demand and supply is dependent on the weather. Although commercial energy usage is pretty predictable and is not significantly affected by the weather, domestic energy usage is quite the opposite. You see, during winter and summer periods, residential electricity consumption increases because more energy is required for either cooling (summer) or heating (winter).
Early reserve margin projections, usually assume the normal weather patterns which are not always accurate as it can easily change just like it happened last August.
Why You Should Consider a Long-term Electricity Contract
In the short-term, things don’t appear rosy, but past 2020, the supply projections look optimistic and that’s all the reason why you should consider a long-term contract. Based on the modern online power generation resources, the reserve margin for 2021–2022 is projected to rise above the targeted margin of 13.7%. It is estimated to be around 17.2% and 19.7% in 2021 and 2022 respectively.
This 2021–2022 reserve margin means that Retail Energy Providers can start offering wholesale electricity contracts for 2021 -2022 at a relatively lower price. REPs are also coming up with odd term contracts such as the 14 and 18 months contracts that expire in 2020. This allows them to fit in 2021 less expensive winter and spring months.
Currently, long-term contracts of 24 to 36 months are cheaper than short term contracts of 12 or fewer months. Additionally, contracts beginning September 2020 (post-summer) should be less expensive than previous months.
Conclusion
One of the common questions you should ask yourself when choosing or switching electricity providers is, “what will be the electricity rates 3, 6, or 9 months down the line?” This is a difficult question because the rates are almost always changing. If you are thinking short-term, it is almost impossible to determine what they’ll be. However, if you are thinking long-term, things become a little clearer.
Additionally, if you keenly observe electricity consumption rates, you will notice the increase in energy consumption during winter and spring. The electricity prices are not far behind in that, there is almost always an increase in electricity price towards the end of spring in anticipation of increased energy demands in the summer. The same also occurs during late autumn and early winter periods.
That said, you should not rely on the trends and projected reserve margins. Note that “the past is not necessarily a predictor of the future.” Just because electricity prices have been on the increase does not mean it will continue to go up. However, all signs show that retail electricity prices will continue to go up as natural gas prices are expected to rise. Also, a potential rise in temperature can push up electricity demands which in turn will lead to an increase in residential energy prices.
