Texas electricity rates are expected to go up in 2018 as the state’s electricity grid experiences growing pains. 2018 will see the closing of a number of coal fueled power plants. Coal has been giving way to cheaper electricity fuel sources for a number of years.
The growth in wind power and natural gas fueled power will offset the loss in coal over time but for the summer of 2018, expected record demand for electricity will converge with power plant closures to put a squeeze on wholesale electricity rates. This, in turn, will cause the retail electricity prices paid by most Texas consumers to increase. The rise in wholesale rates could be particularly dangerous for consumers who have electricity plans that are tied directly to the wholesale price of electricity.
The rise in prices could be felt more in areas like Houston. Houston electricity rates tend to be higher that rates in the Dallas / Fort Worth area. Average summer temperatures also tend to be higher in the southern part of the state.
Reserves to fall below comfort level
The state of Texas typically targets a reserve margin of 13.75%. This means that the available supply of electricity should exceed the projected peak demand for electricity by at least that amount. This give a cushion for unforeseen spikes in demand or lose of capacity such as could be experienced during a large storm.
The most recent projections by ERCOT put the reserve margin during the summer of 2018 at 9.3%. This number is expected to climb to 11.7% by the summer of 2019 as newer power plants come on line.
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Continuing a 3 year trend, 2016 saw renewable energy account for the majority of new electricity generation capacity in the United States. The lion’s share of these additions came in the form of wind and solar power.
As is often the case, renewable energy generation peaked in the spring on a nationwide basis. The spring typically sees a peak in hydroelectric power in the western part of the U.S. as rain and snowmelt drives hydro power. The Western United States also contributed the majority of the country’s solar power with 77% of total U.S. solar generation. In Texas, the state’s massive installed wind base continued to churn out electricity for the Texas electricity grid which is separate from the other major U.S. electricity grids.
While 2016 also saw a large increase in solar power, most new solar capacity comes from small scale solar photovoltaic rather than large scale utility generation. As of October of 2016 the U.S had a total of 12.6 GW of small-scale solar power installed.
Wholesale Electricity Rates Continue to Fall
Despite the fact that new capacity generation is coming largely from renewable energy sources, it is cheap natural gas that continues to put downward pressure on electricity rates. Monthly wholesale prices for 2016 were lower than 2015; driven largely by lower natural gas prices. The cost of natural gas delivered to power generators was 17% lower for the first 10 months of 2016.
Low rates for natural gas also contributed to an increased reliance on natural gas for electricity generation. 2016 saw, first the first time, natural gas surpass coal for electricity nationwide. Although, in Texas this has been the case for a number of years.
Plunging oil prices may have hit some energy companies hard and have some oil-producing nations worried about their budget deficits, but it has been a boon to the average American consumer as electricity rates have dropped 1% nationwide to an average of 12.4 cents per kilowatt hour, the first nationwide decline in energy prices in decades.
As developed nations move away from burning dirty coal for energy as a result of the efforts to meet international greenhouse emission caps, cleaner burning natural gas plants and alternative energy sources (wind, sun, geothermal, etc) are filling in the gaps. Natural gas is now the major source of fuel for energy producing plants, and a 28% drop in the price of natural gas for energy producers over the first half of the year has translated into big gains for consumers nationwide.
However, the replacement of coal burning plants with plants that use natural gas and a plunging price in hydrocarbons is not the entire story. Solar and wind energy in particular continue to become more efficient with advancing technologies, and are taking an increasing share of national, and international, energy production. This year the United Kingdom produced more energy from solar panels than from burning coal, and marked the first day since 1882 that no energy was produced from the burning of coal across the entire nation.
The state of Texas has enjoyed an even greater drop in consumer electricity prices, down 6% to 11 cents per kilowatt hour, thanks to easy access to plentiful supplies of cheap natural gas and a deregulated market. The deregulated market has allowed producers to adjust their prices sooner to reflect the lower cost of natural gas, and then pass these savings on to the consumer.
New England, which has a similar share to Texas of energy produced by natural gas, saw a similar decline in electricity rates over the year. However, the biggest decline of 12% was observed in the state of Hawaii, which uses oil for the vast majority of its energy production. The steep decline in the price of oil helped to bring electricity rates down substantially, albeit from a position that was far above the national average as a result of the state’s remote location and the difficulties that its geography causes for the installation of energy infrastructure.
A decade ago the idea of exporting natural gas from the U.S. would have been unthinkable. Now energy companies are lobbying federal regulators hard to get permission to sell cheap U.S. natural gas to overseas markets. A facility in Freeport, Texas becomes one of the first to receive conditional approval from the Energy Department to begin exporting liquefied natural gas (LNG).
The controversial practice of natural gas fracking has lead to a paradigm shift in U.S energy policy. New drilling techniques have resulted in a surge in natural gas production in the U.S. But energy producers have become so good at extracting natural gas from the ground they are no longer able to get a premium price for their product in the U.S.
The supply of natural gas relative to the demand makes it a much less precious community than in yeas past. Prices have fallen dramatically. The solution according to many is to begin exporting U.S natural gas to foreign markets where natural gas trades at much higher prices.
There are major political and financial hurtles that have to be cleared, however, before exporting can begin. Exporting natural gas requires approval from the Energy Department. The Department must determine that the project is in the best interest of the country. In total there are around 20 applications pending to begin exporting.
Exporting natural gas is a capital intensive undertaking. In order to ship natural gas it must be cooled to liquid form (liquefied natural gas) and loaded onto large vessels for shipping. This necessitates infrastructure and large facilities; all of which means lots of money.
The Freeport facility can likely be up and running sooner than other projects because, ironically, it was originally built by Dow Chemical and several other partners as a LNG import facility. This was at a time when natural gas prices were much higher and there were concerns about having enough natural gas in the U.S to meet domestic demand. A consortium of investors will now be retooling the facility to ship LNG out of the country.
To the Texas consumer, this development is a mixed bag. Energy is a large part of the Texas economy. What is good for the energy industry is generally good for the state. However, once natural gas exports begin, it will almost certainly mean higher prices. Since Texas electricity rates a driven in large part by the price of natural gas, electric rates will almost certainly go up. This would first be reflected in the wholesale electricity market and ultimately be passed on to consumers by electricity providers.
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