Once again, it’s supposed to be a scorching hot summer in Texas, with record breaking electricity demand. And why not? Texas has 29 million people, regularly sees temperatures rise into the 90s and 100s on sweltering summer days, and is easily our largest power consumer, using 50% more electricity than California. Nearly 100% of homes in Texas use air conditioning, versus less than 60% in California. During hot summers, 50% of all power demand in Texas is to power air conditioners. Moreover, Texas’ unique position as a major energy producer and exporter means more energy usage, as the supply chains involved require lots of power: “Another sign of Permian boom: record electricity demand.” An “it takes energy to make energy” sort of thing.
Natural gas prices have been range bound, with prompt month in the $2.60 to $2.85 band since the end of January. When Friday came off the board, there were just two months on the NYMEX futures curve through Decmeber 2021 that had $3 gas, January and February 2019. So, given that not much new is coming this summer to our all-important export market, the most likely factor to push natural gas prices to the suddenly elusive $3 mark in the near-term is an extended period of crazy heat in Texas, especially if oil prices retreat and/or pipeline constraints in the Permian basin act to temporarily slow gas output. Forecasters are projecting a 60% chance of above-average temperatures in Texas.
Not surprisingly, nearly a quarter of Texas’ yearly power consumption occurs in July and August. The rest of the country that increasingly wants to utilize natural gas to supply affordable electricity, reduce greenhouse gas emissions, and backup intermittent wind/solar power should thank Texas for maintaining a diverse power portfolio. For many years now, Texas has held gas steady at being 55% of state power capacity and 50% of generation, even though the state would have been more than justified to extend its own gas usage because it produces so much. This is in contrast to non-producer Florida, for instance, which has to increasingly rely on imports to meet its soaring reliance on gas that now supplies nearly 70% of the state’s electricity. Ditto for New York and the New England states.
Heat in Texas has national implications. Texas can gobble up 6 Bcf/d in the summer for electricity. Gas for power in Texas during summer accounts for 8-9% of total U.S. gas consumption, compared to just 3-4% in winter. Over the past decade, Texas has upped its power capacity 20% to over 120,000 megawatts but most of that incremental gain has been wind. But, wind power is impaired when the weather is hotter. And with nuclear capacity flat and coal capacity declining (Luminant recently closed three coal plants that generated enough to power more than 2 million homes), an “overly hot but not so windy” summer could surge gas demand in Texas. Moreover, the expected drought conditions can increase gas consumption by limiting other more water intensive sources of power and also lowering the overall efficiency of the system, meaning that more gas is required to generate a unit of electricity.
Operating over 90% of Texas’ power grid, ERCOT says the state has enough generating capacity to meet demand and prevent rolling blackouts. Still the expected 11% reserve margin is well below ERCOT’s target of nearly 14% and the lowest in over a decade. Power prices for summer delivery more than doubled from January to April. Stay tuned.