By Tom Kleckner

HOUSTON — While sharing her organization’s report on the state of the ERCOT market in 2017 last week, Potomac Economics’ Beth Garza was naturally asked her forecast of this summer’s energy prices.

“My title is not market predictor. It’s market monitor,” Garza, director of ERCOT’s Independent Market Monitor, reminded her luncheon audience June 21. “I get to watch and opine. I’m sorry to disappoint you.”

Speaking to those gathered at the Gulf Coast Power Association’s lunch in Houston, Garza shared highlights from the State of the Market report. Energy insiders listened attentively as she reviewed 2017 data — and even more so on the rare occasions Garza looked ahead to 2018.

Garza said reserve margins will be tighter this summer than last year, primarily because of the retirement of 4.2 GW of coal generation over the last 12 months. That dropped ERCOT’s planning reserve margin from 18.9% to 9.3% — since increased to 11% — and raised fears of potential shortages during a long, hot summer. (See ERCOT Gains Additional Capacity to Meet Summer Demand.) On Friday, as the system flirted with June’s demand record of 67.8 GW, the ISO still had more than 3.5 GW of operating reserves.

“We had an interesting test of the system in May,” Garza said, referring to the multiple demand records ERCOT set for the month in the face of above-normal temperatures. “But as others have said, a hot May does not necessarily portend a hot summer.”

Statewide temperatures have dropped since then, thanks to recent torrential rains. That has also dampened forward prices, which have settled at about $150/MWh after soaring above $250/MWh in May.

“Is that a reaction to the rain and the temperatures?” Garza asked. “We got through May, but the rest of June has not been severe.”

Garza allowed herself some prognostication in addressing the forward prices.

“I can look at future prices and infer an estimate of how many hours of real-time prices at the 9,000/MWh cap we’ll see,” she said, noting ERCOT saw only 3.5 hours of prices above $1,000/MWh last year. Garza recalled a straw poll of attendees at the recent GCPA spring conference, with expectations of five to 10 hours at the $9,000/MWh cap this year.

“That’s what the future pricing seems to indicate, but that’s based on a $200 price. I haven’t done the math on $150 prices,” Garza said. “If we have 2 GW of wind generation on peak, it’ll be a high-priced day. If we have 10 GW of wind generation on peak, it’ll be a moderately priced day.”

Garza also put in a plug for the addition of real-time co-optimization in the market, one of six recommendations the Monitor has made in each of its last few reports and one of several market improvements being considered by the Public Utility Commission of Texas. (See “Monitor Says Wholesale Market ‘Performed Competitively’ in 2017,” ERCOT Briefs.)

“It’s the key missing link in our market,” she said. “Our market is dependent on pricing during significant scarcity intervals. My fear is that as we get to where we see tight reserve margins, the likelihood of scarcity events and high prices increase, because of the ineffective allocation of reserves. If they were allocated differently [through real-time co-optimization], we wouldn’t see those high prices.”