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Wind speeds play a big part in setting ERCOT wholesale power prices

The wide range of simulated peak prices reflects ERCOT’s wholesale market design.

High electricity demand coupled with low wind availability can significantly raise wholesale prices in the Electric Reliability Council of Texas (ERCOT) grid, supported by its market design. These factors can lead to price spikes during summer peak-day conditions.

Those findings come from the Energy Department’s Energy Information Administration (EIA). It analyzed how variability in electricity demand and wind generation affects hourly electricity prices in Texas’s wholesale power market under summer peak-day conditions. 

EIA said that ERCOT has had both significant peak-load growth in recent years (16% between 2011 and 2022) and increases in its wind generation (from 9% of the electricity generation mix in 2011 to 24% in 2021). 

The analysis shows that electricity prices in ERCOT during the summer follow a typical daily pattern. In the morning, electricity demand is relatively low, as are prices. As the day continues, economic activity and temperatures rise, resulting in higher electricity demand and prices.

Credit: EIA

This pattern was seen across four scenarios that EIA studied. However, the range of prices in the afternoon varied widely due to differences in weather (temperature, wind, or both). 

In EIA’s base case, the highest hourly electricity price reached $90/MWh. In what it labeled its high peak case, which assumed a hotter-than-normal summer day, the peak price rose to $105/MWh. 

But a much larger price increase occurred when wind levels drop. In what it labeled the low wind case, peak price climbed to $709/MWh. In its extreme case, the peak hourly electricity price rose to $2,905/MWh.

EIA said that the range of simulated peak prices reflects ERCOT’s wholesale market design. Wholesale electricity prices in ERCOT include an electricity price adder. This adder captures the value of the grid’s resource supply, so market conditions cause the price adder to vary in two different ways. 

First, when the system has enough resources to meet demand and to respond in an emergency, additional resources provide minimal grid benefits and, therefore, have a low value. This condition was seen in EIA’s base case and high peak cases; resources were plentiful in those scenarios, and the electricity price adder was less than $1/MWh.

Second, low wind generation in the low wind case and extreme cases reduced supply. As a result, a system emergency was more likely to trigger rolling blackouts. In the ERCOT market, reduced grid reliability becomes an electricity price adder. So, in the extreme case that EIA studied, the electricity price adder reached $2,304/MWh, accounting for more than three-quarters of the total wholesale electricity price.

EIA said that through this price adder, ERCOT signals to market participants the benefit of new resource investment.

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