This week saw some incredible temperatures in the Southwestern portion of the U.S. With high temperatures, one would expect to see high power prices. But those prices failed to materialize.
To understand why this happened, we'll look at the way power is managed in the Southwest and examine the disparities among local prices and other economic inefficiencies in the system. We'll see how the resultant low prices are pinching merchant power generators and benefiting operators of power transmission lines. We'll name the publicly traded companies involved, and we'll use a recent day's energy-usage patterns as an example.
Managing power for the Southwest is the Southwest Power Pool (SPP). This regional transmission organization (RTO) is a one-stop shop that manages bulk power in all or part of nine states: Arkansas, Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, Oklahoma and North Texas.
SPP's members include 12 cooperative utilities, 15 public utilities, 10 investor-owned utilities, six independent power producers and seven transmission line companies. A surprising number of big names are operating in this RTO, including subsidiaries of Duke Energy (DUK), Exelon (EXC), NextEra Energy (NEE) and many others.
SPP's market size is surprisingly large. Its daily load currently swings between 30,000 megawatts and 48,000 megawatts. In contrast, ISO-New England ranges between 14,000 megawatts and 24,000 megawatts for its six-state region. New York State's NY ISO ranges between 17,000 megawatts and 25,000 megawatts. California ISO ranges between 23,000 megawatts and 40,000 megawatts. And the granddaddy of all independent system operators, the PJM Interconnection, which serves all or parts of 13 states and the District of Columbia, can leap above 150,000 megawatts.
But size does not always matter. What does matter is the RTO's fleet of power plants and their connecting transmission lines. This week, SPP reports that these plants are using about 48% coal, 46% natural gas and 4.4% nuclear at midday. They are also reporting very little renewables.
SPP's price patterns for Tuesday, Aug. 2, were a bit of a surprise. Normally, grids expect to experience their lowest prices in the back hours of 2 a.m. to 5 a.m. But the lowest average price for SPP occurred between 9 a.m. and 11 a.m., with average prices dropping below $30 per megawatt-hour during that period. In fact, for 10 hours during this incredibly hot day, average prices were below $40 per megawatt-hour. After 3 p.m., prices lifted above $40 per megawatt-hour and stayed there until 5 a.m. The highest average price of the day was only $63.11 per megawatt-hour.
Another surprise was that SPP's average prices were not correlated to average demand. According to SPP's load forecast, system-wide demand bottoms out at 5 a.m. and peaks at 4 p.m. local time, yet average prices bottomed several hours later.
One of the problems may be in the averaging of prices and demand. When we get down to the details, it appears that SPP's generators are seeing different prices. Local prices seem to be highly dependent on where the generator is located within the system. For example, on Aug. 2, at 6 p.m., some generators sold power in the system at $475.45 per megawatt-hour, while others got much less or were turned away.
Price disparities within a RTO suggest constraints on the transmission lines. The greater the price disparity becomes, the bigger the physical constraint. And apparently, at around 6 p.m., there was a huge physical constraint that caused the RTO to search for huge amounts of bulk power at one end of the grid and dump massive amounts of power on the other end. It was so lopsided that in some areas of SPP that generators were penalized $38.09 per megawatt-hour if any of their power found its way onto the grid.
In any event, the average prices during this peak period of the year are underwhelming for merchant generators. While most participants will profit from these prices, low prices will discourage new entrants, including new natural gas generators. It does not matter if it is simple or combined cycle; the generator's earning will be meager, because it will always be sitting on or near the margin.
The winners in SPP are the power marketers and transmission line owners. The publicly traded power marketers are subsidiaries of companies such as Cargill, Constellation Energy Group (CEG), Duke Energy, Edison International (EIX), El Paso (EP), NRG Energy (NRG), Royal Dutch Shell (RDS.A) and Williams (WMB).
The transmission line owners include American Electric Power (AEP), ITC Holdings (ITC) and Westar Energy (WR).
The other winners are the consumers in the nine-state region that makes up the SPP. When lower average wholesale power prices appear, lower retail prices are not far behind.