Hot Fun in the Summertime - Texas, California Summertime Power Prices Moving in Opposite Directions

Texas and California are opposites in many ways, including their expectations for power prices in the summer ahead. Texas set single-day demand records several times last year and is anticipating more sizzling temperatures — and higher power prices — this year with demand expected to be near available supply. It’s the opposite for California, where the state’s extensive renewable buildout and higher-than-normal hydropower resources are helping keep a lid on power costs. In today’s RBN blog, we’ll examine the factors impacting Texas and California that are causing these polarizing power conditions. 

Wholesale electricity is commonly sold on the spot market, where it is bought and sold for a specific time and place and power-grid managers rely on price forecasts a few months ahead. For instance, wholesale electricity prices in Texas for August — less than two months from now — were trading above $174 per megawatt-hour (MWh) in mid-May, nearly double what they were a year ago when they traded at an average of $90.18/MWh for August 2023, according to S&P Global data. Peakload prices for August have risen further this month, with Houston trading as high as $192.52/MWh and West Texas trading as high as $215.62/MWh. In comparison, power prices for August in the California market are trading at around $80/MWh — less than half the cost in Texas. California’s projected August prices are already about 30% below August 2023.

California and Texas, the two most-populous states, have far-different approaches to power generation. In Electric Avenue, we discussed how Texas is uniquely positioned because of its power grid’s deliberate isolation from other U.S. markets. The Electric Reliability Council of Texas (ERCOT), the grid operator responsible for about 90% of the state’s electricity service, operates an energy-only wholesale market, which means that generators are only paid for the energy they provide to the grid. (In a capacity market — the dominant approach in other organized power markets — generators are also paid a fixed fee for guaranteeing their power will be available when needed.)

Texas lawmakers take pride in ERCOT’s independence, but it has posed significant challenges in recent years, partly due to unpredictable severe weather. Since the deadly electrical outages caused by Winter Storm Uri, which brought dangerously cold temperatures in February 2021 (see Terminal Frost), the Texas Legislature, the Public Utility Commission of Texas (PUCT) and ERCOT have been working to craft changes to create a more reliable power grid (see Wind of Change). But it hasn’t been easy. The state’s energy-only market and its outsized reliance on intermittently available wind and solar power have forced policymakers, regulators and ERCOT to develop a wide range of fixes aimed at maintaining a competitive atmosphere while at the same time incentivizing market players to have power available when it’s needed most.

According to data from the Energy Information Administration (EIA), the retail price of electricity in Texas has risen 20% over the last five years, and inflation remains a concern this summer. Texas has faced steeper electric costs for several years due to a wide range of factors, including a booming population that has spurred the development of new gas-fired generation and new wind and solar farms. Texas had 22 million residents in 2003, but now tops 30 million. State electricity sales have increased at an even faster rate, however, from 323 billion kilowatt-hours (kWh) in 2003 to 487 billion kWh in 2023, a 51% jump. Texas power sales have grown three times faster than the rest of the country; as a result, ERCOT has struggled to meet power demand at times. And since Texas has chosen to limit cross-border interconnections, it cannot turn to neighboring states for extra power when in-state demand soars.