What's up with ERCOT? A brief history and future outlook

This past year has been a notable one for ERCOT. From industry media to trading floors, all eyes were fixated on how ERCOT, the nation’s first independent system operator (ISO), handled historically tight reserve margins during a classic Texas summer heat wave. Get the inside scoop on what all the fuss is about.


ERCOT summer volatility garnered perhaps the most attention in power markets in 2018.


From industry media to trading floors, all eyes were fixated on how ERCOT, the nation’s first independent system operator (ISO), handled historically tight reserve margins during a classic Texas summer heat wave. Energy markets did not completely disappoint, with day-ahead energy prices clearing over $1,500 on many hours, despite real-time dispatch not dipping deep enough into reserves to trigger the widely-feared $9,000 Operating Reserve Demand Curve (ORDC) price.


Having escaped the summer with no real threat to reliability, the system appeared well-equipped to handle its growing peak demand – until an even lower projected reserve margin of 8.1% was announced for summer 2019.


Despite healthy supply growth in the form of renewable wind and solar generation, the sheer gains in predominately industrial demand due to prolific oil/gas drilling operations in west Texas have provided enough pace to keep the reserve stack tight during periods of high demand.


The immediate future of ERCOT depends on the balance between growing renewables and demand, which is expected to increase between 1,600 MW and 2,000 MW annually for at least the next six years. From 2019-2020, demand gains are balanced by an anticipated boom in renewable generation in the size of 2,000 MWs for solar and 1,700 MWs for wind. While growth of renewables is slated to slow down dramatically the following year, overall supply is aided by an additional 1,600 MW of combined-cycle (CC) natural gas generation. These are the first major thermal baseload generation additions on the horizon. As a result, the reserve margins are expected to grow into the 2020s, as high as 12.2% in 2021.

*ERCOT’s Capacity, Demand and Reserves Report – December 2018


Danger returns in 2022 when significant supply additions run dry, yet demand continues to grow at a clip of 1,600 MWs a year. Reserve margins squeeze by more than 2% a year with an expectation of a low 7.5% reserve margin in 2023.


While summer 2019 is bound to be another nail-biter, there will be some relief in the in the 2-3 year window as new renewable and thermal generators begin commercial operation. Beyond that point, however, as we look into the mid-2020s continued industrial demand growth in the state of Texas will keep immense pressure on reserve margins which will test historic lows once again.


Operating in ERCOT? Check out our Hedge Execution, Portfolio Management, and Book Valuation services to ensure your strategy is properly aligned with current & future market conditions to lock in profitability.


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