On May 5th, Texas saw significant strength in MCPE prices for the first time in months. In the recent past, the heat rate and fixed price market has traded much lower so that spreads between power and gas were as low as the have been in ten years. Fuel adjusted, the spark spread (a measure of profitability of a generating plant at a given heat rate and gas price) are as low as we’ve seen dating back to the start of deregulation in 2001when natural gas prices were at $1.00 – wow.

The wholesale market saw May as a month where temperature heat indexes would play a factor in spot price strength as ground moisture is very high right now with the rains Texas has had recently. Weather patterns indicate Texas will be a hot place for the majority of the month, so expect ERCOT heat rates to be up today (and therefore fixed electric rates) in response to yesterday’s real time market action and further expected heat in Texas.

As opposed to generating costs and weather, let’s look at fuel costs. We see a downside to natural gas no lower than around $3.82 – $3.85/MMBtu due to coal fired plants switching to natural gas when prices get low enough. This acts to greatly increase the demand on gas and creates an effective floor. Next day gas prices are trading flat to the screen even when there is no apparent demand in the Northeastern quadrant of the U.S. where the majority of demand resides. We feel that this is partially due to Texas heat and coal switching just described.

For all these reasons, we strongly recommend buying Fixed Price for 12-24 months to capture these low heat rate and natural gas values, and we like the capture of heat rate values in the back 12 months of a 36 month term as well.

Please comment on this article if you have any questions or need any more detail. We are happy to elaborate or provide more detail.

This article was researched and developed by Brandon Schwertner of Mp2 Energy.