ERCOT late last week warned of a potential power emergency starting Monday evening through Wednesday. The electrical grid operator said there may be a shortfall of power reserves, and that it was adjusting planned power plant outages to shore up supply for the anticipated shortage.
Energy analyst Matt Smith spoke with the Standard about what prompted the warning, and what we can expect from the energy market heading into the summer months. Listen to the interview above or read the transcript below.
This transcript has been edited for clarity:
Texas Standard: So this ERCOT warning’s not a huge surprise, although it does seem to be coming rather early here. We’re not even out of April yet. They warned of possible deficient power reserves from today through May 1. What seems to have prompted this? Seems like it’s rather unusual to be hearing about a power shortage in spring, no?
Matt Smith: It is, but there’s no need to panic.
So what it is, is the initial kernel of strong demand starting to come through because of hotter temperatures. So warmer conditions coming through. But this is happening at a time when you’ve got supply sources that have been scheduled for maintenance. So they’re kind of taking a breather to get all geared up to meet the peak of summer demand. And so it’s a combination of this slight increase in demand and the weakness on the supply side.
You tend to see this maintenance on these supply sources during the “shoulder months” – in spring and in fall – to be ready for stronger demand in summer and winter. But as you can see on ERCOT’s website, demand is set to hover well below available capacity, so there shouldn’t be any issue.
One thing though, just additionally here, is that you have forward power prices so you can bet on these prices into the future. And forward Texas power prices for August are already surging. So some are pricing in or speculating on the power grid being potentially under threat as we hit the peak of summer demand. So starting to ramp up from here.
Texas Standard: I was just going to ask about the longer term. I mean, you have some investors obviously betting that we’re going to see price spikes by August. What about ERCOT? Have you heard anything about their projections for rising demand through the summer?
Smith: Well, obviously they’re expecting strong demand to be coming through. We’re likely hitting records again.
The bigger picture, though, is that even sort of by 2030, grid demand for ERCOT is expected to have to double from 2020 levels to meet rising demand across the state. And so while you have the population increase coming through, demand growth in Texas is expected to come from a whole plethora of different sources.
So including artificial intelligence, data centers, industrial demand, the oil and gas sector, a burgeoning hydrogen economy, electric vehicles… you name it is going to be adding to demand. So, that’s a longer term challenge for ERCOT.
Texas Standard: Yeah. Well, absolutely. And something else to consider: I don’t know how this factors in, but I know we’ve been hearing a lot about hurricane season and that it’s shaping up to be a doozy, apparently. Do you think that’s going to have an impact?
Smith: So, I don’t want to scaremonger, but you’ve had the University of Pennsylvania that has come out and is predicting a record number of storms, and they’ve described this hurricane season as hyper active, which isn’t kind of the adjective you want to hear about the hurricane season.
So they’re predicting between 27 to 39 named tropical storms. That’s the most in their 15 year history. And to put that in context, that’s double the number of typical storms that we see. We normally see an average of 14 named storms with about half of those developing to hurricanes.
The other concern is the University of Pennsylvania is not predicting this in isolation. You have Colorado State University, well renowned for their projections, calling for a rough hurricane season as well. They’re not calling for as high as the University of Pennsylvania, but they’re calling for 23. So again, that’s a significantly higher number than the usual 14.
So all in all, not looking great.
Texas Standard: How does hurricane season affect power supply and demand?
Smith: Oh, gosh. Well, it really depends on where the hurricane will hit.
So we’ll have activity ramping up in late August to peak around September 10, when we’re almost guaranteed to have a named storm in the Atlantic. And then it typically drops after that.
But, in terms how we see these storms impacting the power, demand and supply side of things, it really depends on where it hits. It can knock out the refineries, which means lower demand, but it can hit power stations, etc.
And so the the big takeaway is it causes a huge amount of unknowns. And so that’s just a big concern going forward.
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