AEC Market Education Module #2
Natural Gas & ERCOT Electricity Prices
What actually moves the price of electricity in Texas
ERCOT's own market monitor names two main drivers of wholesale power prices: the price of natural gas and the number of hours the grid runs short on reserves. Most market commentary focuses on the first one. The second one increasingly matters more.
Every hour of every day, generators across Texas send ERCOT an offer telling ERCOT how much they need to be paid to run for the next hour. ERCOT lines those offers up cheapest to most expensive, then turns plants on in that order until there is enough power to cover demand. The last plant called is the marginal plant, and its offer becomes the clearing price. Every generator running gets paid that same clearing price, regardless of what their own offer was.
For most of ERCOT's deregulated history, the marginal plant has been a gas-fired generator. Wind and solar are cheap to run when they show up, but they only show up when the weather cooperates. Nuclear and coal run nearly flat out and don't have much room to flex up or down on short notice. Demand swings every hour. Gas plants fill the gap. There are roughly 130 gas-fired generators across Texas, built to ramp up and down hour by hour.
Because gas plants have usually been the unit setting the price, the price of natural gas has usually set the price of wholesale power. In a normal market, a one-dollar move in gas (per MMBtu) translates to roughly a seven-to-ten-dollar move in wholesale power (per MWh). That multiplier is the math of how efficiently a gas plant turns fuel into electricity.
That second driver is doing more of the work than it used to. As wind and solar capacity has grown, gas plants get pushed off the margin in more hours of the year. The gap they used to fill is now filled by zero-marginal-cost renewables when the weather cooperates, holding prices below what gas alone would predict. When the weather doesn't cooperate, or when summer load surges past available supply, ERCOT's reserve scarcity adders kick in and stack dollars per MWh on top of whatever gas plants offered. Gas prices and power prices still move in roughly the same direction most of the time, but the relationship has loosened year by year, and individual months can pull apart sharply.
Three places where natural gas is priced
When someone says "gas is at four dollars," the natural follow-up is: where? Three pricing points matter for any commercial power buyer in Texas, and they don't always trade at the same number on the same day.
How well gas has actually predicted ERCOT power prices
A useful way to see whether the market is gas-driven or scarcity-driven in any given year: divide ERCOT's annual average wholesale price by the annual average price of Henry Hub gas. The resulting number tells you how many dollars of power one dollar of gas converted to that year. Traders call this the implied heat rate, but the math is just a ratio.
In a market where gas plants are setting the price most hours and there's no unusual scarcity, the ratio sits in the nine-to-eleven range. That's the engineering reality of how efficiently a typical fleet of gas plants burns fuel. When the ratio sits in that band, gas prices are doing most of the work and watching the gas curve gives you a reliable read on where power is heading. When the ratio climbs into the high teens or beyond, something else is in the driver's seat.
| Year | ERCOT $/MWh | Gas $/MMBtu | Ratio |
|---|---|---|---|
| 2014 | $40.64 | $4.32 | |
| 2015 | $26.77 | $2.57 | |
| 2016 | $24.62 | $2.45 | |
| 2017 | $28.25 | $2.98 | |
| 2018 | $35.63 | $3.22 | |
| 2019 | $47.06 | $2.47 | |
| 2020 | $25.73 | $1.99 | |
| 2021 excl. Uri |
$40.73 | $3.62 | |
| 2022 | $74.92 | $5.84 | |
| 2023 | $65.13 | $2.22 | |
| 2024 | $31.91 | $1.90 |
From 2014 through 2018, the ratio sat in the nine-to-eleven band every year. Gas was setting power prices, the relationship was clean, and watching Henry Hub told you most of what you needed to know about ERCOT power. Then 2019 broke the pattern. Gas averaged $2.47 (a cycle low) but ERCOT power averaged $47.06. The ratio jumped to 19.0. Nothing about gas explained it. What did explain it was a tight summer with thin reserves, where ERCOT's scarcity adders priced reserve risk into the energy price across many afternoon hours.
2023 was the clearest decoupling on the chart. Henry Hub gas dropped from $5.84 in 2022 to $2.22 in 2023, a 62% decline. ERCOT prices over the same period dropped only about 13%, from $74.92 per MWh to $65.13. The ratio more than doubled, from 12.8 to 29.3. The IMM's 2024 State of the Market report attributes most of that distortion to ERCOT's deployment of the ECRS ancillary service, which launched in mid-2023 and (in the IMM's words) created "artificial shortages" that drove prices well above what gas alone would have predicted.
2024 was a partial reset. Mild summer weather, fourteen gigawatts of new capacity additions (mostly solar and battery storage), and adjustments to ECRS deployment practices brought the ratio back down to 16.8. But that's still well above the historical nine-to-eleven band. The IMM notes that 2024's implied heat rate ran roughly 30% higher than 2020 and 2022, and "noticeably higher than would be expected based on the marginal heat rate of the natural gas power plants in the ERCOT market." The decoupling is structural, not a one-year anomaly.
None of this means gas is no longer relevant. Henry Hub still anchors the floor. If gas were to drop another dollar across the whole forward curve, ERCOT power would drop with it, just by less than the rule of thumb would predict. But for the past several years, the gas price alone has not been a reliable read on where ERCOT power is heading. The ratio is the better tell. When it sits in the nine-to-eleven band, watch gas. When it climbs into the high teens, watch the ERCOT-specific drivers covered in section 5.
Why a sharp move in spot gas doesn't move your renewal quote by the same amount
A common point of confusion when commercial buyers are watching the gas market: gas drops 12% on a Thursday storage report, the customer's renewal quote on Friday only comes back 2% lower, and the customer wants to know what happened. Two things happened, and they happen every time.
Two filters separate the headline from the renewal. The first is the difference between spot and forward. The 12% drop you saw on the news was the spot or front-month price, the price of gas being delivered right now or in the next few weeks. Your 24-month deal is not priced from spot. It's priced from 24 separate forward prices, one for each month of delivery, blended together. A weekly storage report mostly affects this month and next month. The August 2027 forward price barely moves on a single weekly report, because August 2027's gas is priced on forecasts of next summer's weather, demand, and production, not on today's storage number.
Even if the front month dropped a full 12%, that's one of 24 numbers being blended. If the back end of the curve held steady, the blended price might fall four or five percent. Long-term contracts dampen short-term moves. That dampening is the whole point of fixed-rate pricing: predictability instead of chasing every weekly tick of the market. Seasonality is also already baked in. Winter strip prices in the forward curve are always higher than shoulder-season prices because cold weather drives heating demand. A drop in summer gas doesn't move winter gas much, and next January's price is anchored to next January's expected demand, not today's storage report.
The second filter is everything in your bill that isn't gas. A typical all-in fixed rate is roughly 50 to 60 percent energy commodity. The other 40 to 50 percent is capacity, ancillary services, line losses, transmission and distribution charges, ERCOT and TDU fees, REP margin, and broker compensation. None of those move when gas drops. So a 12% drop in gas, applied to the half of your bill that's actually energy, becomes a six percent drop on that piece, which becomes a three percent drop on the all-in number. That's the math, every time.
One more practical point: when the REP priced your deal, they locked in their wholesale gas hedge at that moment. The price they quoted you is anchored to that hedge. If gas drops the next day, the REP isn't going to hand the savings back. If gas rises the next day, you're protected. The hedge timing matters more than any single day's headline.
None of this means watching gas is a waste of time. It means the spot price by itself is the wrong number to compare against your renewal quote. A 24-month deal is a blend of 24 future months. When gas does move sustainably across the whole forward curve, those moves do show up in renewal quotes over time. Single-day spot moves on a weekly storage report rarely do.
What's pushing ERCOT power above what gas would predict
When the ratio in section 3 climbs into the high teens, scarcity pricing and ERCOT-specific market mechanics are doing the work. Four forces explain most of it. Together they describe why ERCOT forwards have stayed elevated even as gas has eased.
What this means if you're buying electricity in Texas
A few practical conclusions follow from everything above. They're worth keeping in mind any time you talk to a broker, read a market update, or get a renewal quote.