A natural gas power plant outside Dallas. Photo: Samuel Corum/Anadolu Agency via Getty Images

ERCOT, the electricity grid that serves most of Texas, delivered more power on Wednesday than it ever had, only to deliver even more on Thursday, setting a new system-wide peak demand record of 73,259 megawatts. Friday’s demand is forecasted to be even higher, but the worst might not come until Monday.

Why it matters: The Texas grid is an energy-only market, which, unlike capacity markets, pays power plants only when they produce energy. This summer has been seen as a make-or-break test for this market strategy, and so far it is passing.

Background: The ERCOT market is lean, so the power plants are not typically guaranteed to make money. And because the price of natural gas has continued to stay low, some technologies, mostly coal, have had to exit the market. In just the past year, about 25% of the Texas’ coal fleet retired. This has left margins relatively tight, and more coal retirements are planned.

During peak hours, electricity prices soared into the thousands of dollars per megawatt-hour (they’re usually in the mid to upper 20s). Almost half of ERCOT’s summer peak demand comes from residential air-conditioning. This heat wave is not over, and is only getting more intense.

But ERCOT has yet to use all of its tools to keep the lights on. If reserves fall much lower than they did on Thursday, scarcity pricing starts to take effect, rising almost exponentially until the market hits the price cap of $9,000 per megawatt-hour. As reserves fall below 2,300 megawatts, all available resources are deployed. If reserves fall below 1,750 megawatts, ERCOT can, under prearranged contracts, reduce demand via voluntary load reduction and even transfer some load to other grids. If reserves fall below 1,000 megawatts, utilities are instructed to implement rotating blackouts.

The bottom line: So far, ERCOT is managing the grid well. There are more tests to come, and prices are likely to be very high over the next few days, but this is normal. Energy-only markets are designed to use power plants more efficiently, and that means that lower average prices come at the cost of higher high prices.

Joshua Rhodes is a research associate in the Webber Energy Group and the Energy Institute at the University of Texas at Austin.

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