A recent article posted in the New York Times highlighted an interesting trend in the utility industry in Texas: free power. That’s right, at a time when electric utilities’ profits are being squeezed due to increased efficiency, low fuel prices, and renewables, some utilities in Texas have decided to give their power away for free. However, there is a catch. The free power is only available at night. This is due to 1) the abundance of wind power being generated in the Lone Star State and 2) the fact that the nighttime hours tend to be when the wind blows the hardest. Because of the relative isolation of Texas from other parts of the US grid (ERCOT is the ISO for Texas), all that wind power has to be consumed someplace and locally is the only option.
Texas currently has around 16 GW of installed wind capacity. That number is expected to grow by about 30% by 2017 with an additional 5 GW of turbines in the pipeline. The EIA recently noted that wind generation on the ERCOT system broke instantaneous peaks in both September and October with turbines running at an overall capacity factor of 75%-80%. Those records are likely to be short lived as new capacity and transmission capabilities continue to enable utilities to source sizable amounts of load from wind.
The chart below shows the dynamics between wind, coal, and gas in Texas. Natural gas has continued to note robust generation while coal has taken a steady decline. Through August of this summer, coal represented only 29% of the generation stack in Texas, down from 40% in 2011. Gas, on the other hand, has represented over half of generation, sitting at 52%. Wind now has a lock on 10% of the stack, a meaningful percentage when you consider all three now account for roughly 90% of generation.
On November 9th, at a utility conference in Austin, ERCOT stated that the EPA Clean Power Plan would effectively shut 4.7 GW of coal fired generation. Currently, coal fired capacity in Texas sits at roughly 24 GW, meaning 5 GW of lost generation is not an insignificant number. With 5 GW of wind expected to come online over the next few years and with wind in Texas capable of running at high capacity factors, it is not unforeseeable that wind power will continue to make large strides in the generation stack further pressuring coal but also limiting short term growth in natural gas power burn.
For the broader market, this trend has potential ramifications. Prior to the collapse in crude prices, or at the start of the downfall, the outlook for gross gas production in Texas was quite robust. In October of 2014, it looked as if Texas would produce 30.7 Bcf/d of gross gas in 2016, 6 Bcf/d more than what the current drilling fleet is capable of producing. It isn’t a secret that the US gas market has been and continues to be long supply, but there is hope in the market that demand will accelerate over the next few years with new LNG export terminals and petrochemical facilities, but wind is continuing to carve into the niche once occupied by natural gas.
To hear our complete 5 year production outlook for both gas and oil, be sure to join our complimentary webinar tomorrow, November 11th.
