Trump Promises Lower Electricity Prices. Why Do ERCOT Traders Expect Them to Rise?
President-elect Donald Trump has promised to cut electricity prices in half within 18 months of taking office. But electricity forwards in ERCOT, which represent how traders value the future price of electricity, have gone up since election day. What explains the disparity? And what are the implications for renewables?
Prior to election day, annual electricity forwards in ERCOT for the four years of the upcoming administration traded in the mid-$40s/MWh. Since election day, those forwards have risen by 13%, on average. Interestingly, the increase is less pronounced once the next administration ends, starting in 2029.
To understand why the market expects higher electricity prices despite Trump’s promise to lower them, we asked several originators in our network to share their understanding of current market dynamics.
Forward markets are complex and account for many variables on both the supply and demand side. The demand side is driven by fundamentals such as economic activity, weather patterns, and population growth. Electricity supply, meanwhile, is influenced by the availability of various generation sources, including fossil fuels, renewables, and nuclear, among others. The ability to deliver supply to where it is needed – transmission and distribution – is also an important factor. And regulatory variables can influence both demand and supply.
Demand Side Factors
Load growth predictions form the foundation of the market’s expectation of higher electricity prices. Last spring, ERCOT increased its peak load forecast for 2030 by more than 60%, from 90 GW to 148 GW. This was a massive revision; it was ERCOT saying that Texas needs to add more capacity than that of the entire country of Italy (~50 GW).
ERCOT cited several reasons for its higher forecast. To power the nascent AI revolution, technology companies are building power-intensive data centers throughout the country and especially in Texas. Trump’s re-election has also sent crypto currencies like bitcoin to new heights, many of which are mined in Texas-based facilities that require massive amounts of electricity. The EIA predicts that demand from such large-scale computing facilities will increase 60% in ERCOT this year alone.
While many originators in our network think ERCOT load growth forecasts are overblown, there is consensus that ERCOT will see greater demand for electricity over time. “Even if only half of the forecasted load growth comes to fruition, it would still be an extremely bullish view overall,” said one originator.
Supply Side Factors
There is uncertainty that sufficient supply can be added to ERCOT to match this growing demand. In December, ERCOT COO Woody Rickerson made this view clear. “I don’t have a positive sense that we have enough generation on the books to serve the load that’s expected,” he said.
Texas has been attempting to attract more thermal generation with the Texas Energy Fund (TEF), which offers a low-interest loan and grant program of up to $7.2 billion for dispatchable generation. Last summer, the Public Utility Commission of Texas selected 17 gas-fired projects to potentially participate in the program, but it is not guaranteed how many of these projects will come on-line and when. “A lot of the movement in forward curves is based on TEF projects getting delayed,” said one originator. “There’s just a ton of uncertainty about these projects, including whether they’ll even be built,” said another.
The rise of LNG is also part of the supply story, as more natural gas exported as LNG could mean less natural gas available to generate electricity. Since its first LNG exports in 2016, the U.S. has become the world’s leading LNG exporter. In January of last year, President Biden paused the authorization of additional LNG export licenses, but President-elect Trump has promised to reverse that decision upon taking office.
While newly approved LNG projects are unlikely to come on-line this decade, the existing LNG project pipeline suggests a significant increase in liquification capacity during Trump’s term. According to the EIA, North America’s LNG export capacity is on track to more than double between 2024 and 2028, from 11.4 billion cubic feet per day (Bcf/d) in 2023 to 24.4 Bcf/d in 2028.
The uptick in LNG capacity is “something that everyone on the natural gas desk is looking at, and it’s definitely pushing up the electricity forwards,” said an ERCOT portfolio manager.
Supply concerns extend beyond thermal generation. The vast majority - 83% - of ERCOT interconnection queue requests are for solar or battery storage resources. The incoming President’s plan to impose tariffs on Chinese, Mexican, and Canadian imports could increase the cost of such projects. Trump has vowed to impose tariffs of 10% on global imports into the U.S. along with a 60% tariff on Chinese goods. He has also said he would impose a 25% tariff on Canadian and Mexican imports.
According to a developer in our network, these tariff policies could not only increase project costs - potentially undoing the benefits of lower interest rates - but also delay project timelines. “These tariffs are going to make things more expensive until there is adequate domestic supply, and they are also going to slow things down,” she said. “It’s going to be really uncertain to price projects until people understand the cost associated with their supply-chains.”
Where does this leave renewables?
Higher expected electricity prices have a profound effect on the renewables market. According to RenewaFi’s composites, the value of ERCOT solar and wind are up 8-9% since election day. The value of ERCOT BESS is up even more, about 12%.
These higher valuations could make more and more projects attractive to offtakers, but only if rising project costs do not outstrip these gains. Concerns about tariffs are already leading some wind and solar developers to increase their cost models. It remains to be seen whether developers will be able to build projects that are “in-the-money” in the new macro-economic environment brought by Trump’s second term.
On both the demand and supply side, there is much uncertainty regarding the future of pricing in ERCOT. While the incoming administration will look to lower electricity prices, the market appears to be betting on the opposite. At the very least, Trump’s goal of cutting electricity prices in half seems unlikely to be realized any time soon.