Texas ERCOT Heat Rates: The Gas-to-Power Correlation Dictating 2026 Costs
Natural gas is the ultimate floor for Texas commercial electricity costs. Because dispatchable natural gas plants act as the marginal clearing unit for the ERCOT grid, wholesale power prices remain highly tethered to the "implied heat rate." For 2026, as the Henry Hub natural gas forward curve steepens due to LNG exports, commercial electricity buyers must prepare for corresponding upward pressure on their retail ERCOT rates.
Executive Procurement Impact
- →The Foundation Commodity: You cannot effectively forecast ERCOT commercial electricity rates without tracking natural gas prices. A $1.00/MMBtu increase in natural gas roughly translates to a $7 to $10/MWh increase in wholesale power.
- →Heat Rate Market Mechanics: When solar drops off at sunset during the Texas summer, natural gas peaker plants fire up. If gas is more expensive, the electricity they sell into the Real-Time market spikes the Locational Marginal Price (LMP).
- →Heat Rate Call Options: Highly sophisticated industrial buyers and data centers use financial heat rate call options to hedge against grid volatility during peak summer scarcity events.
The ERCOT Merit Order Illusion
Texas generates more zero-marginal-cost renewable energy (wind and solar) than any other state. When the sun is shining and the wind is blowing, wholesale electricity prices frequently drop to zero or even negative.
However, grid operators dispatch units in a "merit order" based on cost, starting with the cheapest (renewables, nuclear) and moving to the most expensive until demand is met. The last plant dispatched to meet the final megawatt of demand sets the clearing price for the entire market—this is the marginal unit.
In ERCOT, that marginal unit is almost always a dispatchable natural gas combined-cycle or combustion turbine (peaker) plant. Therefore, despite the massive volume of solar on the grid, the price of natural gas dictates the price of Texas electricity.
Decoding the "Implied Heat Rate"
The financial relationship between the two commodities is measured by the "implied heat rate."
Implied Heat Rate = Wholesale Electricity Price ($/MWh) ÷ Natural Gas Price ($/MMBtu)
A typical efficient natural gas plant needs a heat rate of about 7.0 to break even (meaning it requires 7 MMBtu of gas to produce 1 MWh of electricity). If electricity is trading at $50/MWh and gas is at $2.50/MMBtu, the implied heat rate is 20. This "rich" heat rate indicates high profit margins for power generators (often occurring during summer scarcity).
| Scenario (ERCOT Summer) | Gas Price ($/MMBtu) | Implied Heat Rate | Resulting Power ($/MWh) |
|---|---|---|---|
| Mild Day (Spring) | $2.50 | 10.0 | $25.00 |
| High Heat, High Gas | $4.00 | 15.0 | $60.00 |
| Scarcity Event (Sunset Risk) | $3.00 | 100.0+ | $300.00+ |
The 2026/2027 Threat to Buyers
The immediate threat to Texas commercial electricity buyers is the forecasted surge in natural gas forward curves driven by LNG exports.
If the national Henry Hub price (and localized Houston Ship Channel / Katy prices) rises from $2.50 to $4.00, the baseline operating cost for ERCOT's 45%+ gas fleet increases proportionally. Even if Texas avoids grid emergencies and extreme "scarcity" heat rates, the mathematical reality is that wholesale power prices will drift higher alongside the commodity floor.
When retail electricity suppliers (REPs) calculate 12-to-36 month fixed price contracts for commercial businesses, they factor in both the natural gas forward curve and the forecasted heat right. Securing a fixed-rate electricity contract in Texas is, fundamentally, an implicit hedge on natural gas.
Source: Electric Reliability Council of Texas (ERCOT) Market Information.
Hedge Your ERCOT Power Today
Rising natural gas prices will elevate Texas commercial electricity rates. Lock in your retail power agreement before the market fully prices in the late-2026 natural gas contango.