ERCOT electricity prices vary more with changes in wind power than with electricity demand - EIA

In the Short-Term Energy Outlook Supplement released on October 4, the US Energy Information Administration (EIA) analysed how variability in electricity demand and wind generation affects hourly electricity prices in Texas’s wholesale power market under summer peak-day conditions, when summer electricity demand is highest. The Electric Reliability Council of Texas (ERCOT)—which runs the wholesale power market in Texas—has had significant peak-load growth in recent years (16% between 2011 and 2022) and significantly increased its wind generation (from 9% of the electricity generation mix in 2011 to 24% in 2021). EIA found that both high levels of electricity demand and low wind availability can significantly raise wholesale prices in ERCOT, supported by its market design. When combined, these factors can lead to especially sharp price spikes during summer peak-day conditions.

Data source: U.S. Energy Information Administration, Sources of Price Volatility in the ERCOT Market

EIA evaluated four cases in Sources of Price Volatility in the ERCOT Market:

Base case, which assumes a normal summer peak day in Texas

High Peak case, which assumes a hotter-than-normal summer day, resulting in higher electricity demand

Low Wind case, which assumes a normal summer peak day with very low wind generation

Extreme case, which assumes a hotter-than-normal summer day and very low wind generation

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

Although this pattern is present in all four cases, the range of prices in the afternoon varies because of differences in weather (temperature, wind, or both). In EIA’s Base case, the highest hourly electricity price reaches USD 90 per MWh. In its High Peak case, which assumes a hotter-than-normal summer day, the peak price increases to USD 105/MWh. A much larger price increase occurs when wind levels drop. In the Low Wind case, the peak price jumps to USD 709/MWh, and in the Extreme case, the peak hourly electricity price rises to USD 2,905/MWh.

The wide range of simulated peak prices in EIA’s cases (USD 90/MWh to USD 2,905/MWh) reflects ERCOT’s wholesale market design. Wholesale electricity prices include a unique electricity price adder. The price adder captures the value of the grid’s resource supply, so market conditions cause the price adder to vary:

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 occurs in EIA’s Base case and High Peak case; resources are plentiful, and the electricity price adder is less than USD 1/MWh.

Very low wind generation in the Low Wind case and Extreme case, however, reduces supply. Without sufficient supply, a system emergency will more likely trigger rolling blackouts. In the ERCOT market, reduced grid reliability becomes an electricity price adder. In the Extreme case, the electricity price adder reaches USD 2,304/MWh, accounting for 79% of the total wholesale electricity price.

Through this price adder, ERCOT signals to market participants the benefit of new resource investment.

You can find more information in EIA’s full analysis, Sources of Price Volatility in the ERCOT Market.

Principal contributor: Debra Warady

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