ERCOT Slashes Planning Reserve Margins For Summer 2018, But Sees No Cause For Concern

January 09, 2018

ERCOT reported last week that its planning reserve margin for summer 2018 will be 9.3 percent – half of the May projection of 18.9 percent and 4 points under the 13.7 percent the Texas grid operator set for itself in 2010. But the ISO insisted there was no real cause for concern.

The decline in generating capacity, a drop estimated to be 7200 MW, is due largely to factors that include recently announced plant retirements and delays in projects beyond summer of 2018. Since the last Capacity, Demand, and Reserve (CDR) report issued in May, Vistra Energy said it would shutter about 4 GW of coal resources, while Luminant plans to close its three largest coal-fired plants.

In addition to the closures, ERCOT said that 1.143 MW of operation capacity will be placed “on extended outage or mothballed status,” and that the in-service dates for three planned gas-fired units, totaling 1,196 MW of capacity, would be pushed past this summer.

Still, ERCOT officials were confident that the revised estimates did not pose a significant problem.

“I wouldn’t call it a cause for concern,” said Warren Lasher, senior director of system planning. “The reserve margin that comes out of the CDR is a snapshot. Reserve margins are expected to fluctuate in the current market design.”

Lasher’s remarks echoed those of Bill Magness, ERCOT’s chief executive officer.

“We see these types of shifts as the ERCOT market experiences cycles of new investments, retirement of aging resources, and growing demand for power.”

Similarly, the Texas Association of Manufacturers appeared unfazed by the forecast decline.

Tony Bennett, president and chief executive officer of the group, said in a statement that “in a free energy market, price signals naturally encourage the replacement of older facilities with new, more efficient and reliable generation – and that is exactly what we’re seeing in Texas.”

The statement further argued that previous reserve margins, some of which were 20 percent or more, were “far above the level that is economically optimal.”

Underscoring its confidence that the latest CDR did not represent a potentially unmanageable problem, ERCOT engineers said the grid operator had “a number of tools available” if margins fell too steeply. These include seeking assistance from Mexico and that nation’s power providers; asking for help from reliability coordinators in other states; and requesting that consumers reduce consumption.

Bloomberg columnist Liam Denning noted that the last time ERCOT cut its projected reserve margins by anything as significant as last week’s forecast was in December 2011, “when the level of spare capacity over the following five years was cut by 4.9 percentage points, on average, relative to the May report” of that year. Denning also wrote that within a few years of the December 2011 projection, spare capacity had already begun to rise.

The drop in the reserve margin forecast did not catch ERCOT market participants by surprise, though it was somewhat deeper than expected. The market had already been predicting price volatility and scarcity pricing events this summer and perhaps beyond. But the size of the change was nonetheless significant.

As Bloomberg’s Denning pointed out, Texas wholesale power prices can rise to a cap of $9,000 per MWh, and the state hasn't seen that kind of scarcity pricing since 2011. “The sudden drop in spare capacity could generate a few windfalls next summer, particularly if it’s hotter than usual,” he wrote.

In addition to revising its reserve margin numbers, ERCOT’s December CDR also forecasted that:

• The system is expected to have more than 14,000 MW of new generation in service by 2020;
• The grid will have 77,200 MW of capacity available to meet anticipated demand of about 73,000 MW this summer;
• The reserve margin is expected to increase to 11.7 percent by summer 2019, tick up to 11.8 percent in 2020, and then slide back to 9 percent in 2022; and
• System-wide peak demand is projected to grow by an average of 1.7 percent per year overt the next 10 years.