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June 7th, 2012

Is Texas Facing a Summer Of Power Shortages?

by Andrew Price, President & COO

Everyone knows that everything is bigger in Texas, and electricity consumption is no exception. The Electric Reliability Council of Texas (ERCOT) – the organization responsible for operating the bulk electricity grid in Texas - is forecasting a peak summer demand of 67,492 MW this summer. To put this in perspective, the Independent System Operator of New England (ISO-NE) is forecasting a peak demand of 27,440 MW for the five New England States.   

Texas and New England have very different power market structures. In Texas, power plants only make money when they are generating and selling electricity or related ancillary services. In contrast, electricity markets in New England, mid-Atlantic, and the Midwest have “capacity” markets that pay power plants for installed generating capacity. Capacity payments are made to both old and new power plants that are available to operate, whether they actually generate electricity or not. Depending on your perspective, capacity payments are either an unearned windfall or a critical price signal to developers to bring additional resources to the market.

In Texas, which has no capacity market, generators rely on very high electricity rates during peak times to cover expenses above and beyond their marginal cost to generate the next MWh.  Texas has capped wholesale electricity rates at $3,000 per MWh or $3.00 per kWh. This is enormously expensive when you consider that for much of the year, wholesale electricity rates are closer to $0.04 per kWh. A new study from the Brattle Group, however, recommends that ERCOT increase the hourly price cap to $9,000 per MWh ($9.00 per kWh). In theory the higher hourly rate cap would incentivize the development of new power plants. Given that extreme heat of last summer and ERCOT’s forecast for a 2,500 MW shortfall in generating capacity by 2014, increasing the rate cap is getting a lot of attention.

Consumer advocates in Texas are fighting against a higher rate cap. They point out that generators are not obligated to build new generating capacity – and those that do not will enjoy a windfall during periods of extreme electricity demand when electric rates can spike to the level of the cap. Similar arguments have been made in New England and other parts of the country against capacity payments.

Proponents argue that setting the proper price signals (either by allowing very high hourly rates or providing a capacity payment) will provide the correct incentives while allowing free market competition to provide the needed resources at least cost.

If temperatures spike in Texas this summer, rolling blackouts are only one unplanned transmission line or power plant outage away from becoming a reality. While New England is expecting to have adequate resources to meet peak electricity demand this summer, disruptions in liquefied natural gas deliveries used at the Mystic Power Plant in Boston, could cause localized issues in the Boston area during a prolonged heat wave. 

The question regulators and politicians are struggling with in all markets is the same: What level of reliability are consumers willing and able to pay for?   

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