ERCOT Focus: Buy Now!

By David Blair and Brendan Boyle, Transparent Energy

A lot has been made of the ERCOT market’s singular nature since the deep freeze of 2021 sent electricity prices into the stratosphere and turned “Uri” into a four-letter word. ERCOT, like the big World Series-winning state it serves, is full of extremes. Record hot summers, cold winters, and growing demand from a large and rapidly-growing population all make for headline news when energy supply and demand get out of whack.

We’re writing today because we see the chances of just such an outcome quickly approaching and want to help large energy buyers avoid a big mistake – winter is coming, and waiting to procure your load for 2024 and beyond could be extremely risky.

At the same time, we need to talk about some fundamental changes in ERCOT that will in all probability make your next buy more expensive than the last one. Knowing this beforehand will help you chart the right course for your business and make your next energy procurement an informed one.

Watch Out This Winter!

While it is hard, if not impossible, to predict what this winter has in store for Texas, we do know from past experience that it only takes a few days of well-below-normal temperatures to affect prices for an entire month or season.

So what does that have to do with you? If you are on a fixed-price contract, a sudden spike in power prices isn’t going to affect you, right? But here’s the thing: it will if you are looking to buy energy for 2024

The point here is to move NOW, while prices are relatively affordable (more on that below), before a cold winter creates price volatility and thoroughly spooks the market. If Texas does experience a cold winter, you will do much better buying now than waiting until your contract expires.

Analysis Paralysis, Sticker Shock, and a New Floor for Natural Gas Prices

Based on recent history and an objective analysis of the facts, your buying opportunity for 2024 and beyond is now, before winter. But before you buy, you may need to make an attitude adjustment, especially if you last purchased power one-to-three years ago (or longer). Yes, Texas has enjoyed great electricity prices compared to the rest of the nation and has benefitted tremendously from cheap natural gas and wind power.

But since your last buy, there has been a seismic shift in the natural gas market. Global demand for LNG has turned the U.S. into the world’s leading LNG exporter, putting upward pressure on domestic natural gas prices, and, in turn, electricity.

Simply put, there is a new floor for natural gas prices, and that floor is ‘one-story’ higher than the last time you bought. Add to that the multi-billion dollar resiliency investments made since Uri (that you by the way are paying for), and you find yourself facing a significantly more expensive power market.

How significant?

While you may not have had to think much about power prices for your business lately, if you are coming off a record or near-record low contract from 2020, 2021, or 2022, you are likely in for a rude awakening. Electricity prices may be twice as much today as when you last purchased power.

Need proof? Transparent Energy, which is in the market daily for Texas businesses across industries, has recently helped several ERCOT clients procure energy with 2024 start dates. Most were coming off contracts with electricity priced between $0.025-0.04/kWh, and the majority entered new contracts between $0.05-0.075/kWh. And that’s with the benefit of using our margin-compressing, highly competitive, reverse online auctions. You don’t need to be a math major to know these are major increases in commodity prices, sometimes 75-100%, or even more.

So What Can You Do About It?

As you can see, there are a lot of macro-economic and environmental forces stacked against you and your next power purchase. So, is there any way to make this bad medicine go down a little more easily? Here are a few tips:

• Buy Now Before Winter. Yes, the overall higher price of energy in ERCOT would give anyone pause, but delay is not your friend. Don’t let a potentially cold winter make the price you pay for future power even worse!

• Think “Risk Management” Not “Cost Savings”: If you last purchased power between 2019-2022 (or even earlier), you are NOT going to be paying less for power in a new contract. You will be paying more. Your job now is to manage risk. Make sure you are using a process – not a broker giving you a best bid from a couple of suppliers, or an incumbent’s unchallenged offer – to get into the product and term that’s right for your risk tolerance.

• Get the Best Price in the Market: Just because you won’t “save” money on a new energy contract compared to your prior one doesn’t mean you can’t optimize the rate you do pay. Make sure your procurement process attracts multiple suppliers and puts them into a transparent, real-time competition against each other to win your business. There has never been a more important time in your energy procurement history to stoke head-to-head competition for your business and use a process that gives you every advantage possible. When prices are this high, you need every advantage you can get.