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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Capacity Crisis In Texas Electricity May Be Overblown

The debate about the possibility of a capacity market for electricity in Texas may have just changed.  An updated model for forecasting future electricity demand in the state has been put forth by ERCOT.  The new numbers substantially reduce the growth projections for electricity demand in Texas over the coming years.

In recent years there has been a great deal of hand wringing concerning the ability of the Texas electricity grid to keep up with future demand growth.  This has led to the “capacity market” proposal that would see an overhaul of the state’s deregulated electricity market.  It would lead to higher electricity rates and guaranteed capacity payments to producers of electricity in the state.

The impetus behind the proposed changes is the prediction that the state’s reserve margin for electricity would fall below acceptable limits.  The state targets a reserve margin of 13.75%; meaning that the state’s actual electricity capacity would exceed the expected peak demand by that amount. This is intended to insure against unexpected events that could lead to potential power outages such as unusual weather events or power plant failures.

The state’s most recent projection from May of last year showed the reserve margin falling below target by next year and continuing a downward trend to the single digits over the next few years.  When the new growth projections are plugged in to the May 2013 projection, a different story emerges.  The reserve margin sits at 16.69% in 2015, and grows to 17.88% in 2017 before trending lower again.

Year   Reserve Margin
2014      16.75%
2015      16.69%
2016      17.23%
2017      17.88%
2018      16.35%
2019      13.61%
2020      12.27%

Revised reserve margins based on new methodology.
Source: Energy Choice Matters

ERCOT’s new forecast methodology loosens the correlation between economic growth and increased electricity demand.  This is in response to the fact that recent projections have missed the mark by overestimating the amount of growth in electricity demand in relation to the economic growth the state has experienced.

According to ERCOT, “While peak demand growth has slowed to about 1 percent annually, the economic forecasts and non-farm employment statistics used in recent load forecasts have resulted in growth forecast estimates of 2 to 3 percent in the two- to three-year outlook.”

Although the old model projects a total demand growth of just over 8% in the next 3 years, the new method results in a demand growth projection of just over 4%.  This is a significant difference in a grid the size of the one in Texas.

The proposed new methodology is still subject to a final approval but it’s already been enough to shake up the debate on a capacity market in Texas.  As it stands, the state’s 3 member PUC committee seems to be leaning toward the adoption of a capacity market in some form while Commissioner Ken Anderson stands alone on the committee as a staunch critic of a capacity market.

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Texas Electricity Capacity Sufficient To Meet Fall Demand

In its latest seasonal assessment of the state’s grid, the Electric Reliability Council of Texas (ERCOT) says that the state’s available generation capacity should be more than sufficient to meet anticipated demand for electricity in the fall and winter seasons.

ERCOTS seasonal assessment predicts a peak demand of 47,000 MW in the fall of 2013 while available generation is expected to be 74,000 MW.  This creates a comfortable margin even in the event of unexpected losses in generation or weather related spikes in demand.  The picture for the winter of 2013 / 2014 is similar with comfortable margins projected.

Officials and the public have watched the state’s capacity situation closely for the past few years after several scares in 2011 that lead to the threat of rolling blackouts for much of the state.  Ongoing drought conditions within the state have also created concern for the electricity supply.  Fresh water for cooling is a requirement for many methods of generating electricity.

Despite occasional warnings about potential tight electricity supply, Texas has not had a real power crisis since 2011.  ERCOT predictions of electricity usage have been too high recently with Texans using less power than anticipated.  This has left some to wonder if the capacity crisis in Texas has been somewhat overblown.

Among the proposals to address potential future shortfalls in electricity capacity is a plan to transition Texas to a ‘capacity market‘.  Consumers and consumer groups are not onboard with a transition to a capacity market.  Such a change would result in effectively higher electricity rates as new fees are attached to electric bills to prefund the construction of new power plants.  The state’s electricity generators are generally in favor of a capacity market because it would reduce their risk of building new capacity by paying them up front to build new plants.   Under the current system producers only get paid when they sell their electricity in the market.


Texas State Senator Pressures ERCOT to Leave Reserve Margins Unchanged

Texas State Senator Troy Fraser, a central Texas Republican, warns that an increase in reserve margin would be seen as a backhanded attempt to bring about a capacity market in Texas.  The Electric Reliability Council of Texas (ERCOT) had been considering a move to raise the state’s reserve margin from the current 13.75% to 16.1%.

The reserve margin is the excess capacity maintained within the state’s grid as insurance against unexpected loss in supply or an unexpected spike in electricity demand such as might occur during extreme weather events.

The scorching summer of 2011 was an example of just such an event.  The unprecedented heat wave put a great deal of pressure on the Texas electricity grid and threatened the state’s electric users with rolling blackouts.

Fraser’s argument against the raised reserve margin is twofold.   He argues that 2011 was an outlier in terms of Texas weather and that any analysis that uses 2011 data to set the future target reserve margin would be overly aggressive.

In his letter to ERCOT he writes:

“Both electric end users and I have expressed a desire to exclude extreme years when computing future reserve margins.”

His second, and perhaps primary, argument is that the contemplated raise in the reserve margin would strengthen the case for the controversial proposal to introduce a capacity market in Texas.  Under a capacity market, ratepayers would pay power producers to build power plants regardless of whether the resulting power is ever sold.  It’s a move that would inevitably result in higher electricity rates in the state.

In his words:

“With the makeup of the ERCOT Board heavily weighted in the electric industry’s favor, any vote to drastically increase the reserve margin appears to be self-serving and could increase electric costs for all consumers.”

In the end, ERCOT chose to leave the reserve margin unchanged as of now.  Deciding instead to wait and see how the policy debate between the PUC and the Texas legislature plays out.

If a capacity market is eventually instituted in Texas, it would be a drastic change for the nation’s largest deregulated electricity market.  Under Texas’ current “energy only” model, producers are only paid for the electricity they sell to the market.

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Feds Not Optimistic About Texas Electricity Capacity

The Electric Reliability Counsel of Texas (ERCOT) is feeling a little better about Texas’ chances of having enough electricity to meet demand this summer and in 2014.  The North American Electric Reliability Corp (NERC) is not so sure.  NERC is the federal authority responsible for the reliability of the country’s electricity grids.

ERCOT has issued a number of warnings in recent years about potentially not having enough electricity supply to meet demand during peak periods; warning last summer that blackouts or calls for emergency conservation could occur if there was a sudden spike in demand our unexpected loss of power generating capacity.

At issue is the so called reserve margin.  The reserve margin is the safety cushion between expected peak demand for electricity and the supply that the electricity grid is able to provide at full strength.  Having an adequate reserve margin insures against blackouts in the event of weather related spikes in electricity demand such as summer heat waves.  It also helps in the event that there is a loss in power production as sometimes happens as a result of bad weather. 

13.75% is considered an adequate reserve margin for the Texas electric grid.  NERC anticipates that Texas will have a 12.88% reserve margin (pdf) this summer.  That equates to 6,780 MW of power.  ERCOT officials, however, are saying that they are comfortable that the state will make it through the summer without any significant issues based on their projections of a relatively mild summer.

Texas, which operates its own grid independent from the major continental US grids, is deregulated and relies on free market dynamics to ensure that there is enough electricity to meet demand and that electricity prices reflect market balance.   In this model, independently owned power producers sell their electricity to retail electricity providers in a wholesale market.

Cheap electricity in Texas for the past few years, while great for the consumer, has made it tough for power generators to invest in more capacity.  This has resulted in the current tight margin between supply and demand for electricity and has lead some to (unsuccessfully) try to push the state into a capacity market model for electricity.  ERCOT indicates that new natural gas power plants expected to come online in 2014 along with an improved demand response program will improve the situation going forward.