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Electricity prices briefly surged past a $9,000 a megawatt-hour price cap in Texas as extreme heat sent power demand skyrocketing and forced the state's grid operator to declare an emergency.

As temperatures in Dallas climbed to 103 degrees Fahrenheit, the Electric Reliability Council of Texas issued an emergency alert, calling on all power plants to ramp up and asking customers to conserve.

At one point on Tuesday afternoon, the region had just 2,121 megawatts left in power reserves, less than 3% of total demand on the system.

The prospect of supply shortages sent wholesale electricity prices surging past $9,000 a megawatt-hour for several minutes, triggering a limit set by Ercot to avoid runaway prices during extreme events. They remained near the cap at around 5 p.m. local time as demand began leveling off and the region's supply margins widened.

Power contracts traded on the Intercontinental Exchange were similarly headed for record settlements, said David Hoy, an electricity trader at Dynasty Power. "It's almost guaranteed now," he said.

The unprecedented rally highlights how fragile Texas power markets — and to a lesser extent, markets across the U.S. — have become as giant, conventional power plants retire, squeezed out by cheap natural gas and renewable energy resources. Texas's grid operator has been warning for months that plant shutdowns and increasing electricity demand has left it with slim supply margins.

"We are seeing the coal fleet retirement hasn't been replaced with a lot of large gas plants," said Campbell Faulkner, chief data analyst for commodities broker OTC Global Holdings. "We are changing the generation mix and that is what this is caused by."

Electricity demand hit an all-time high of 74,531 megawatts as people blasted their air conditioners on Monday afternoon and totaled 74,310 megawatts at 4:34 p.m. local time Tuesday, according to Ercot.

Temperatures were forecast to peak at 103 degrees in Dallas before cooling off Tuesday evening and falling back below 100 degrees on Wednesday. The National Weather Service has issued a heat advisory until 8 p.m. local time.

"Extreme heat across the Ercot region will continue to result in high loads," Ercot said in a statement. "We may set another new record today."

This week's price spikes also underscore how dependent the region's power grid has become on wind farms, which now make up about a quarter of the generation capacity in Texas. Lackluster breezes contributed to the higher prices, said Flannan Hehir, a power analyst at energy data provider Genscape.

Wind power generation in the region has plunged for three straight days, grid data compiled by Bloomberg show.

Power generators with plants in Texas rallied on Tuesday. Vistra Energy Corp. gained 2.4%, and NRG Energy Inc. rose 1.9%.

"We would expect Vistra to have enough capacity to meet the high load and profit from the spike in prices," Citigroup Inc. analysts led by Praful Mehta said in a research note.

 

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