Big users in Texas oppose major change to stretched power market

August 8, 2013
Eileen O'Grady

The 50 biggest power users in Texas have come out against market changes that will lead to increased wholesale prices that some generators say are needed if one of the fastest-growing U.S. states is to avert looming shortages and rolling blackouts.

Texas' utility regulators have been working for three years to address a shrinking electric reserve but have run into resistance from a group representing the state's largest oil, chemical and steel companies, Texas Industrial Electric Consumers.

TIEC has opposed higher price caps and other changes approved by the Public Utility Commission and is fighting moves toward a capacity market, which would pay power plants to make power available in future years, or reward users who cut consumption. Capacity markets are common in other regions, such as the Midwest and the Northeast.

"We don't want to create so many inefficiencies in the market that the distortions become hard to manage," Phillip Oldham, an attorney who represents the industrial group, said at a July PUC meeting.

TIEC argues that the current energy-only framework – in which power plants are paid only when they produce power – has worked well and will continue to work in the future.

But the Texas electric grid agency has warned that the power supply is not keeping pace with rising electric demand as the state's population and job base grows. The Texas economy grew 4.8 percent in 2012, well above the national average.

The power reserve margin is shrinking, especially during hot summer months when people keep air conditioners running.

Construction is underway on natural gas-fired projects and plant expansions totaling 3,000 megawatts to be completed in 2014 and 2015. But that won't be enough to avoid rolling blackouts more than once a decade, the grid operator says.


Some companies, including the state's second-largest generator, NRG Energy, are waiting to see what market changes the commission approves before committing to new plants to serve the $29 billion power market.

"The economy is continuing to grow. People want to do business here. (But) I think the possibility of having a less-than-reliable electric system could have an impact on that," said John Ragan, president of NRG's Gulf Coast region.

Power plant developers have been asking for new rules since at least 2010, when they raised concerns that tight financial markets had stalled new power plant projects.

The issue was put on a fast-track in 2011, when a winter freeze led to rolling outages and a prolonged statewide heat wave and drought pushed the power grid to the brink.

But two years later the debate is largely still bogged down.

At issue is not only the price of power, but how often prices can rise as supply tightens.

The average price for wholesale power in Texas in 2012 dropped 47 percent to $28 per megawatt-hour as a milder summer and cheaper gas depressed prices from the previous year.

The independent market monitor for the Electric Reliability Council of Texas (ERCOT), the state's primary grid, said estimated revenue for a new combined cycle, gas-fired plant in 2012 was about $42 per kilowatt-year, far below the $105-$135 per kilowatt-year needed to support new investment.

The same trend was true for coal and nuclear plants.

Funding the money gap will raise wholesale power prices by billions, so the question has created more market turmoil than any other debate in the state's decade-old deregulated market.

Heavy consumers, including refiners like Exxon Mobil, Valero and chemical companies like Dow, which normally account for 50 percent of power use, could end up shouldering most of the price increase.

While a half dozen solutions are being eyed to encourage new generation, market players generally fall into two groups: those who favor altering the existing "energy-only" market and those who want a capacity market.

The PUC has taken several steps to improve wholesale power prices, such as raising the price cap for power in times of scarcity by 66 percent, to $5,000 this summer. That will rise to $9,000 by 2015.

But mild weather in 2012 and so far this summer have muted any effect. Even news that the state entered the summer with the slimmest reserve margin in a decade failed to boost forward power prices.


The commission, with just two members instead of the normal three, appears deadlocked on resource adequacy, unable to agree on the best way to encourage new investment while avoiding a huge increase in power prices.

A long-term solution will likely have to wait for a third PUC commissioner, whom Gov. Rick Perry could name at any time.

NRG's Ragan argues that cheaper gas and additional renewable power in Texas have altered the market from its early days. He and some generators, like Calpine Corp, believe a capacity market is needed, while others say the current market design can be fixed to send better price signals that will lead to more new power plants.

Meanwhile, grid operator ERCOT has been reluctant to make decisions that could complicate the options the PUC is weighing.

ERCOT directors delayed voting last month on a recommendation to increase the amount of surplus power the grid needs as a cushion during hot weather. Several ERCOT committees, with TIEC participation, debated the merits of raising the "planning reserve margin" to 16 percent from 13.75 percent for months before a recommendation came to the board.

State Senator Tony Fraser wrote a letter to ERCOT before the vote saying a higher reserve requirement "could not help but serve the interests of those advocating for a capacity market."

While admitting that the margin figure was "directly related to ongoing proceedings at the PUC on resource adequacy," ERCOT Chairman Craven Crowell told the board the vote should be delayed so as not to "complicate the work of the policymakers."

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