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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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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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