Texas power prices signal grid stress in another long, hot summer

A surge in Texas power prices for August suggests another summer of heavy electricity demand — and potential grid strain — to meet air conditioning needs.

Traders start looking at prices months in advance to gauge the outlook for demand.

Already in mid-April, August power prices for Dallas soared to $168.70 a megawatt-hour, which was the highest level in five years for this time of the year, according to Bloomberg Fair value data. Prices were still hovering around that level on Friday, an 82% premium versus a year earlier.

The state’s grid operator warned the same day of possible deficient power reserves from April 29 through May 1.

The Texas grid repeatedly has suffered from tight electricity supplies in the past two years as extreme weather and surging power demand stress aging infrastructure. As the state becomes more reliant on renewable energy that hinges on the whims of the sun and the air, there’s a rising concern about potential electric scarcity as solar power plunges at dusk. At those times — often when demand is still very strong — natural gas-fired plants and batteries need to ramp up quickly to keep the power flowing.

“That’s a lot of scarcity priced in,” Terry Embury, head of trading and marketing operations at AES Corp.’s clean energy unit, said at the Gulf Coast Power Association conference in Houston earlier this month. “Uncertainty is always a driver,” and for now these prices appear to be stable and fairly factors in the summer risk, he said.

Power usage on the state grid rose to all-time highs nearly two dozen times in the previous two summers combined and is expected to rise even further this summer, according to the Electric Reliability Council of Texas, or Ercot, the state’s grid operator.

“If we get a summer like last summer, I think we are underpriced,” said Luis Luego, head of Ercot trading at Mercuria Energy America, at the same conference where power prices in the state were a trending topic.