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New Forecasts Could Change Texas Electricity Debate

The long running, often contentious debate over the future of the Texas electricity market is about to enter a new phase as both sides of the argument await a key report expected to be released by ERCOT this week.   The debate, now several years old, concerns the potential restructuring of the Texas electricity market to address capacity concerns.

As the state’s economy and population continue to grow, more and more demands are being put on the state’s electric grid.  As the populous demands more electricity, producers are struggling to build out new capacity to meet that demand.  This has resulted in a reserve margin that is too close for comfort for many.  The reserve margin is essentially the amount of extra capacity that can be held in reserve to meet unexpected spikes in demand or the unexpected loss of power plants due to weather or mechanical failure.

Past reports by ERCOT have showed increasingly bleak forecasts with anticipated new capacity not being enough to keep up the anticipated growth in demand.  This has led to a proposal for a so-called “capacity market” for electricity in Texas.  Under a capacity market, producers are paid extra money to have extra capacity available even if that electricity isn’t ultimately used by the grid.  Many people see this as corporate welfare paid by the Texas electricity consumer to power producers.  Not, surprisingly, most of the state’s largest power consumers are opposed to the idea of a capacity market.

Flawed Forecasts

The debate has be further complicated by the unreliability of the forecast models used by the state’s electricity planners in the past.  Forecasts in recent years have greatly overestimated the increase in electricity demand that has accompanied the economic and population growth of Texas.  The new report about to be released by ERCOT uses a revised methodology for forecasting future demand growth.  The new methodology loosens the correlation between economic growth and the growth in electricity demand.  The result should show a better picture with regard to the state’s reserve margin in the coming years.

These new numbers have the potential to turn the debate, leaving proponents of a capacity market in Texas with less ominous data to back their arguments.  This could, in turn, be good news for electricity rates in Texas.  Cheap electricity rates have been blamed for creating the condition where power producers are unable or unwilling to build new power plants to handle future demand.   A capacity market would be specifically designed to inflate electricity rates in order to make it more attractive for energy companies to build power plants in Texas.

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