Power reserves and rates were at the center of a recent report and Public Utility Commission vote, respectively.
The Electric Reliability Council of Texas released the Brattle Group’s report on economic incentives needed to encourage investment in new power plants and the PUC of Texas voted to raise the maximum price wholesale power providers can charge for a megawatt of electricity.
The Brattle Group, a Massachusetts-based consulting firm hired by ERCOT to assess the state’s energy market, released a report in May that supports what many analysts have been saying: The state will face a shortage of electricity in coming years unless supply increases (by building more power plants) or demand decreases (by using less electricity), or a combination of both.
Simply put, the state’s power plants should be able to generate 13.75 percent more electricity than is needed on a given day, in case something happens, such as a large power plant shutting down for mechanical reasons. Right now, even if all the power plants are working at peak capacity, high temperatures such as those we experienced last summer and have already had this summer can cause demand to exceed supply, which could force rolling power outages. The reserve margin is a supposed to reduce the chance of that happening.
If something isn’t done soon, ERCOT estimates the state will not have enough electric generating capacity to meet the target reserve margin of 13.75 percent in 2014.
According to the report, there are a number of factors that have led to this situation. About half of the electricity in Texas is generated at natural gas-fired power plants. An abundant supply of natural gas has reduced its price, which has lowered the price of electricity. Power plants aren’t making as much money as they did when natural gas prices were higher. So, even though demand for electricity will increase, companies aren’t building new power plants because they might not get the desired return on their investment.
That is, unless something is done to increase the price they can charge for electricity.
Enter the Public Utility Commission.
In an effort to provide financial incentives for companies to invest in new power plants, the PUC voted last month to increase the maximum price wholesale electric providers can charge, from $3,000 to $4,500 per megawatt. (One megawatt of electricity is enough to power about 200 homes on a hot summer afternoon.)
Commissioners Donna Nelson and Rolando Pablos voted for the increase. Though he supports a cap increase as a long-term solution, Commissioner Kenneth Anderson abstained from voting, citing concerns about the timing of the increase, which will go into effect Aug. 1.
Proponents of the price-cap increase say it will enable power plant owners to make more money, thereby giving them an incentive to build new, much-needed power plants to meet the needs of the state’s growing population.
Opponents say the increase will result in higher electric rates and/or won’t do enough to encourage investment in new power plants. Some opponents argue the PUC should have increased the cap more. Others say it will immediately hurt low-income Texans, while any potential new power plants will take at least 18 months, and more likely several years, to build.
Who is right?
Well, it’s too early to tell. This is a complex issue that the state’s regulators, legislature and industry stakeholders should work together to resolve.
One of the factors that make this such a complex issue is the role weather plays in Texas’ electric market. On most days power plants generate enough electricity to meet consumer demand and wholesale power prices stay below the market price cap.
But extreme temperatures can cause Texans to turn their thermostats up or down, thereby increasing demand. They can also cause the state’s power plants to work harder, which could cause plants to break down, thereby reducing supply. When that happens, demand for electricity nears or exceeds supply and prices increase.
This occurred in February 2011, when unusually cold temperatures caused several power plants across the state to shut down, and again last summer, when record-setting heat caused demand to soar and prices to max out several times.
However, it’s important to remember that the number of days that the maximum price is reached is relatively few per year, and then only for a few hours per day.
Bluebonnet’s members will not see an immediate impact on their rates when the wholesale price cap increase takes effect Aug. 1. The co-op has power purchase agreements with the Lower Colorado River Authority and CPS Energy, San Antonio’s city-owned utility. Both wholesale providers are in very good positions to meet the energy needs of our members for years to come.
We will continue to monitor developments in the state’s energy market and regulatory changes at the state and federal level in order to provide our members with competitively priced, safe and reliable electricity.