Summer sun brings a focus to power debate

July 7, 2013
Fuel Fix
Emily Pickrell

Heating up along with the Texas summer is a debate over how to provide electricity on days in future summers when air conditioners test the limits of the state's generation capacity.

Texas grid planners have cautioned repeatedly that wiggle room in the system — what they call the reserve margin — may be enough for this summer and the next few, but could be inadequate to meet the continuing demands of a growing population.

The Texas Public Utility Commission has spent the last year discussing whether to adjust regulations to help encourage construction of more power plants.

One option under discussion is a "capacity market," which would pay generators to build and maintain some excess capacity for the hottest days or other emergencies, such as a major plant failure.

Power companies are pushing for that approach, since what they call peaker plants stand idle most of the time — generating neither electricity nor revenue.

"Right now, the potential for profit is not great enough to encourage the construction of new generation," said John Fainter, CEO of the Association of Electric Companies of Texas.

Since the early 2000s, most of Texas has operated in a competitive electricity market. Instead of the regulated monopolies that were typical for decades (and still exist in a few locations, including Austin and San Antonio), competing generators sell power wholesale to retailers, which then compete for residential and business customers.

Only the companies that own the lines and distribute the electricity, such as CenterPoint Energy in the Houston area, are still monopolies, with their rates set by regulators.

Guaranteed capacity

The capacity market that many generators advocate would be a departure from the system now in place in the state's deregulated regions. Called "energy only," the existing system pays generators only for power that consumers actually use.

As advocates envision a capacity market, retail electric companies would pay fees to the Electric Reliability Council of Texas, which manages the deregulated grid. This money would pay generators to keep a guaranteed amount of capacity available, whether or not it is used.

The capacity market proposal aims to address concerns about whether generation will be sufficient to meet growing peak demand. In May, the grid operator estimated that electricity reserves would hover just above the preferred 13.75 percent margin as early as next summer. The projected margin continues to fall, to 9.4 percent by 2018 and to 4.5 percent by 2023.

But Texas Public Utilities Commissioner Ken Anderson said the sharp drop-offs in projected reserve margins reflect the time frame generators typically use to make decisions on building future plants.

"In an energy-only market that is experiencing an increase in electric consumption, you should always be showing a shortfall four to five years out," Anderson said, noting that it takes about that long to finance and build most types of new generation. "Why would anyone build power plants unless they were sure that there would be someone to sell the power to?"

When power use approaches capacity, usually on a summer afternoon, the Electric Reliability Council of Texas issues emergency alerts urging consumers to cut back on power use. If that doesn't work, the agency can order rolling blackouts, cutting power to certain areas for short periods.

This has happened only twice since deregulation, and the most recent rolling blackout occurred not on a sweltering summer day but during unseasonably cold weather that knocked some power plants offline on Feb. 2, 2011.

But grid planners and legislators still worry about whether the Texas grid will have needed generation in the future, noting there were nine emergency alerts in 2011, most triggered by record summer temperatures.

The Public Utility Commission of Texas, which regulates electric utilities in the state and oversees the Electric Reliability Council, is holding workshops to discuss ideas for making sure Texans have enough electricity.

The utility commission already has tried to encourage construction of peak-demand plants by raising the cap on wholesale prices that generators can charge when demand approaches the system's capacity.

That cap will be $7,000 per megawatt-hour next year and $9,000 in 2015 — far higher than the price the wholesale market will bear during normal demand conditions, which typically is well under $100 per megawatt-hour.

Anderson and others say the state should give that incentive time to work before making further changes in the system.

Others contend that neither the higher caps nor payments for reserve capacity necessarily will result in power plant construction.

"Even with these huge price spikes, it is not economic to build a plant for six hours a year in August," said Campbell Faulkner, chief data analyst at OTC Global Holdings, an energy brokerage firm.

And even in a capacity market, generators might find it more attractive to build plants intended to run most of the time and meet typical demand.

'On the hook'

"Generators are more likely to build base load plants," Faulkner said. "No one wants to be on the hook for that kind of investment for peaker plants."

Peaker plants have to come online quickly, meaning that most of the ones used now are older natural gas plants that don't take as long to fire up as coal-burning plants.

Last month, NRG Energy put its SR Bertron natural gas plant near Deer Park into service as a peaker plant. Its four units were build in the 1950s.

John Ragan, president of NRG Energy's Gulf Coast Region, has said that moving to a capacity market would help make it more affordable to maintain such plants.

"Under current prices, we don't make any money with our currently generating units," Ragan said.

As plants age and maintenance costs rise, existing generation drops off the grid because the plants aren't economic, he said.

Costly to ratepayers?

A report on the state's power options, produced by the Brattle Group for the Texas Clean Energy Coalition, estimated that moving to a capacity market could cost as much as $5 billion a year for Texas ratepayers.

Anderson calculates that would raise residential rates by $25 to $50 a month.

Critics say paying for excess capacity also would add regulatory and administrative burdens to the system.

"It would be really expensive and time-consuming to implement the plans, and you don't have a basis for it being successful in helping to benefit the end-use customer," said Michael Harris, CEO of United Energy and president of the Energy Professionals Association, an organization with membership including energy brokers, retailers and consultants.

"You would have to figure out how all the retail providers will implement the capacity market, and the regulators, the grid planners, the customers would all be involved — it would affect a great number of folks. The opportunity for confusion to the end-use customer would be profound."

Other parts of the country have experimented with various forms of capacity market. The PJM market, which oversees transmission of electricity to several states in the Northeast, moved to a capacity market in 2007. Those who are skeptical that a capacity market would produce plant construction in Texas point to the PJM, where price volatility has left investors less enthusiastic about new plants.

But advocates counter that a capacity market could be fashioned to meet Texas' needs.

"The nice thing about creating a capacity market in Texas is that the whole market is in one state, with one regulator and one Legislature," NRG's Ragan said. "In the other markets, you have numerous players, all trying to figure out the best structure for each state. Some other states do not do a good job of it, but we have an opportunity to create the capacity market that would incent new generation."

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