With Texas’ weather event of February 2021 in the recent past, preparation for the summer season continues. ERCOT’s preliminary Seasonal Assessment of Resource Adequacy (SARA) planning report for the peak summer electricity demand (2021) was modified (relative to prior planning periods) to include additional “extreme” scenarios when evaluating reserve capacity. For reliability, during peak periods all generation resources available need to show up, as it will not be the same without them.

Per the SARA report, there are 86,907 MW of resources anticipated to meet the summer 2021 estimated peak load of 77,244 MW. This equates to a reserve margin of 12.5% (9,663 MW). There are five other scenarios presented in the resource adequacy report, three of which would result in shortfalls of generation capacity and deployment of demand response programs and emergency actions. The dashed red line in the graph below represents a projected additional 5,000 MW of demand that could result from a statewide heat wave.

With the influx of industry and individuals from other states, growth in peak demand will continue increasing at a rate of 1,000 MW per year (historical) or more. ERCOT is pursuing the goal of increasing reserve capacity to 15%, and as peak demand continues to increase this obviously magnifies the absolute amount of spare capacity required over time. The answer to what type of capacity is being added to meet the current reserve margin requirement and any expanded thresholds is critical.

Importantly, an incremental 10,000 MW of wind power and 20,000 MW of solar power are planned by the end of 2023. Additionally, battery storage of 2,500 MW is planned in an effort to enhance the reliability of intermittent generation. With respect to gas generation, less than 2,000 MW is planned in the next two years. The momentum of renewable implementation in Texas is evident in ERCOT’s planning documents.

To supplement the unpredictable and variable nature or renewable generation resources, Warren Buffet’s Berkshire Hathaway recently proposed a project to add 10,000 MW of gas generation. This addition to the ERCOT grid was offered at a cost of $8 billion, and at a guaranteed return of over 9% paid for by rate increases on both residential and commercial consumer bills. 

Given that wind generation receives federal subsidies of $15 to $18/MWh, and ERCOT being an “energy only” market, gas generation sources are becoming riskier investment opportunities relative to renewable sources. As of today, the Berkshire Hathaway proposal has not been accepted, and as noted above, the rate of renewable generation growth is undeniably favored. 

To demonstrate a point, if ERCOT was structured as a “capacity only” market, the economics decidedly favor gas generation based on the expected peak capacity and scenario analysis in the SARA summer 2021 report (see below). Using the figures in ERCOT’s resource report, wind generation capacity (MW) can cost 6.5 to 23.5 times the cost of gas generation.

What the above analysis does not contemplate, is the actual cost of a generation capacity shortfall on the overall economy in Texas. It is virtually impossible to accurately quantify the full economic and non-economic loss incurred during extended power outages. The Lone Star State may end up being the experiment the rest of the world must learn from when making a race towards fully decarbonizing. 

If weather cooperates, and the forecasted demand is accurate, the reserve capacity should be sufficient to provide stability to the ERCOT grid for this summer. However, the ERCOT transition to renewable energy, as it is planned and proceeding at this point, does not add a significant amount of gas generation capacity to keep pace with peak demand growth.  As a result, there is a material risk of repeating February 2021 events at a minimum locally.

High retail fuel prices and still firming CME cracks spreads for both diesel and gasoline signal the demand driven nature of upward momentum in crude this week. Unsurprisingly, rolling prompt month gasoline and diesel crack spreads made new multi-month and multi-year highs respectively this week, as USGC refiners continue to struggle with their post freeze operational recovery. US demand recovery is simply coming faster than the completion of needed refinery work. Wide crack spreads have significant implications for crude over the next two to three months as they will provide even more momentum to the normal seasonal surge in US refinery activity from April.