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Observers differ on reasons for ERCOT forward volatility

By: Mark Watson |

Texas summer on-peak wholesale electricity prices for July and August have whipped up and down since May 31, and industry observers offer differing opinions about why.

As of about 12:30 p.m. CDT Tuesday, the Electric Reliability Council of Texas North Hub on-peak July-August had a bid of $82/MWh and an offer of $120/MWh on IntercontinentalExchange, for a midpoint about 10.6% less than the $113/MWh assessed June 5, which itself was up 18% from the May 31 assessment.

“Temperatures aren’t as high as some of the models were suggesting, and ERCOT [real-time] continues to not clear high,” said an energy broker who asked for his name not to be used.

Peter Nance, an ICF International electricity market analyst, said, “I suspect it’s primarily liquidity constraints,” but added that he had no direct knowledge of whether that is the case.

A power trader who asked not to be identified because he was not authorized to speak to the media, said, “This market needed a Xanex last week — hype buying and short covering on the first real heat event, and cowboys running stops on weak shorts — a classic short squeeze.”

Jeff Nottingham, an energy economist and executive vice president at Verdigris Energy, an energy management company based in the Dallas area, attributed last week’s run-up on July-August forwards to temporary fears about hot temperatures.

“This week will tell us a lot, because we are going to see how the market handles it,” Nottingham said Monday, adding that North Texas is expecting temperatures to top 100 degrees. “If we don’t see high [real-time] locational marginal prices this week, we may see [forwards] crash back down to where they were before. … If we see a blowout on spot prices, it’s going to encourage generators to keep prices up.”

As of about 12:30 p.m. CDT, the LMPs at ERCOT’s four hubs had not topped $40/MWh, up from a low for the day of about $22/MWh.