Wood Mackenzie’s unique hedging strategies protect ERCOT clients from arctic blast -- EnergyChoiceMatters.com

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Wood Mackenzie’s unique hedging strategies protect ERCOT clients from arctic blast

February 22, 2021

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Wood Mackenzie’s unique hedging strategies protect ERCOT clients from arctic blast

Written by Thomas Pagnotta, Senior Portfolio Manager, Wood Mackenzie

The US central and southern plains experienced some of the coldest temperatures on record this past weekend, sending shockwaves through the Mid-Continent and Southern natural gas markets as spot prices reached as high as $1,250.00/mmbtu, (OnekOK). Prior to that day, the average settlement price for that same market in 2021 was $1.84/mmbtu. While that is the most extreme example, there were 25 other markets that traded over $100/mmbtu and another 37 that traded above $50/mmbtu over the course of the weekend.

The average Henry Hub settlement price over the past 10 years was $3.05 mmbtu - with the highest settle falling at $5.557/mmbtu in February 2014. To put it simply, volatility of this magnitude has never been witnessed before.

There were several underlying factors that attributed to this price explosion, but the main driver was the south, and primarily Texas' inadequate infrastructure for such a cold front.

According to ERCOT, roughly 45% of Texas' power generation is from natural gas-fired power plants. When this extreme cold hit Texas, the liquid inside the wells, pipes, and valves of natural gas equipment froze, rendering them useless. This left power plants to rely on wind, solar, nuclear and what's left of the coal generation to cover the gap. The wind turbines built for the southern climate froze, and the solar (accounting for only 1.1% of the generation) was ineffective, leaving coal and nuclear generation as the only power sources left to generate roughly 40% of the power necessary on the highest demand day in decades.

This power shortage caused blackouts leading to more shut-ins at production facilities. With producers shutting down, local natural gas prices rose, which drove up the northern and midwestern markets accordingly as many used historically cheap production gas to supplement local storage withdrawals. The northern and midwestern markets, while used to cold temperatures, were experiencing the coldest temperatures recorded so far in what has been an otherwise mild winter leading up to this point. This demand surge and new supply shortage shot prices through the roof.

At a very high level, supply problems in the south compounded and sent tidal waves through the north. The aftermath of this event will be felt for years to come and will likely change or at least begin the conversation around supply infrastructure makeup in the future.

While unforeseen anomalies like this can't be precisely predicted, proper planning can help to mitigate these risks. Wood Mackenzie’s energy management clients were spared the worst of this through forward looking storage management and conservative bidweek planning. Additionally, having a team with more than 30 years of experience dealing with both pockets of extreme weather and pricing allowed our team to navigate the market armed with first-hand knowledge of LDC Cashout, OFO, and penalty procedures enabling them to make critical decisions in the rapidly changing spot market. Any Marketers affected by these market conditions were transparently alerted and aided in accounting for these costs going forward.

Leverage our energy management expertise and keep your company ahead, especially during unforeseen market events. If you’re interested in learning more about our services, connecting with our experts or would like to request a demo, please click here.

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