However, ERCOT’s latest report, released earlier this month, prompted a sell-off in both. Because, after several years of declines in the reserve margin, ERCOT sees the buffer stabilizing and widening out again.
Next year doesn’t look like a problem for generators, as the margin is expected to remain tight (plus ERCOT has revamped its scarcity-pricing mechanism in a favorable way). Beyond that, however, a bigger reserve makes summer windfalls less likely. Virtually all of the new capacity is wind and, especially, solar power. With no fuel cost, these sources depress power prices when they run and can take away the punch-bowl of scarcity pricing.
ERCOT tends to overestimate the amount of new capacity that will actually get built. But one interesting wrinkle in the latest report shows there is another way in which renewable sources loosen the market: rising efficiency.
When ERCOT makes its projections, it estimates how much each type of power source will actually run. It just tweaked these up for solar and wind versus where they were in May. We’re only talking a few percentage points: 5 for coastal wind, about 3.5 for inland wind and 2 for solar. Through 2024, they provide an extra 1.5 gigawatts of summer peak capacity on average. That may not sound like much in a roughly 75-80 gigawatt market. But it plays an outsize role in boosting those projected reserve margins versus where they stood in May.
ERCOT adjusts its capacity factors based on historical observations, and performance has been improving for wind turbines and solar farms. BloombergNEF calculates the capacity factors for wind and solar power in Texas during the peakiest hours of the summer. Inland wind-power efficiency, in particular, has been on the rise for years.
This makes sense: Newer, bigger turbines are more efficient and, as new projects go up, they will use the latest technology.
In a report published in October, BloombergNEF’s analysts estimate that just an extra 1 gigawatt of solar capacity online this August would have sucked $2.8 billion of wholesale revenue out of the market. Shutdowns of older plants can shift those odds back (as Vistra showed with big coal-plant closures announced in 2017), but that comes at the expense of market share.
This is the vise that is tightening slowly on Texas’ wholesale power market. Generators should enjoy another good run next summer, weather permitting. But the addition of new wind turbines and solar farms will keep shifting the odds away from them.
To contact the author of this story: Liam Denning at email@example.com
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Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal’s Heard on the Street column and wrote for the Financial Times’ Lex column. He was also an investment banker.