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New York Power Plant Could Go From Coal To Natural Gas

A troubled coal burning power plant in western New York could get a new life as a natural gas burning power plant.   The facility in Dunkirk should be refitted to burn natural gas according to a study commissioned by the plant’s owners, NRG.

According to NRG the conversion, which would cost about a half billion dollars would result in a 5% reduction in western New York electricity rates.  Across the entire state ratepayers could see a 2% reduction in electricity costs as a result of the plant being repurposed. 

According to the report, the switch would reduce the state’s dependence on higher cost electricity and eliminate the need for a proposed $2.2 billion project to import power from Quebec to New York City.

The New York power market is beginning to experience a taste of what Texas has been dealing with for a while.  An oversupply of natural gas has brought about cheap electricity rates making it more difficult for energy producers to make money; especially with coal burning power plants.  The power plant in Dunkirk faces shutdown in 2015 if NRG doesn’t take drastic steps such as the conversion to natural gas.

Once practically the only game in town for electricity, coal is rapidly loosing its position to natural gas.  The EPA has aggressively gone after coal in recent years with new rules that have added substantially to the cost of coal energy.  The combination of free market dynamics and regulatory overhead for coal has shifted the economic equation in favor of natural gas.

The study suggests that New York rate payer will save an estimated $142 million per year as a result of the lower wholesale electricity prices.  If the decision is made to pursue the conversation, it could also mean a jobs boost to the region.  According to the company, such a project would result in about 1,200 new jobs.

Will Texas Switch To A Capacity Market For Electricity?

Texas electricity officials are considering a switch to a “capacity market” as a way to solve the state’s pending supply and demand imbalance.  Under a capacity market, producers of electricity are paid just to build power plants and make the supply available to the grid. 

This would be a change from the current system where electricity producers are paid only when they sell the electricity they generate.  The price the producers receive for their electricity is mostly a function of the available supply and demand for electricity in the real-time marketplace. 

When electricity becomes scarce relative to the current demand, prices spike to many times higher than normal.  It is the prices paid during these brief moments of scarcity that make up most of the profit realized by electricity producers. 

In other words, the current system creates an environment where producers are most profitable when the grid is running right on the edge of having enough power to meet demand. 

The state likes to have excess capacity (called reserve margin) as a safety cushion in case demand jumps or supply is unexpectedly lost.  The problem with this is that building power plants requires a lot of money.  Power producers don’t like to invest large sums of money to build power plants that might set idle and not generate revenue.

Under the capacity market plan the retail electric companies would pay a fee to the Electric Reliability Council of Texas (ERCOT) which would use the money collected to pay generators for building new plants that would add to the reserve margin.   Though on paper the extra fees are paid by the retail electric providers, the money would ultimately come from end users who would pay higher electricity bills to fund the scheme.

Not surprisingly, the idea of a capacity market is backed wholeheartedly by Texas’ two largest producers of electricity; NRG and Luminant. The politics of the situation are made sticker by the fact that the largest generators of electricity in Texas are part of corporate families that also include the largest electricity retailers in the state.  Luminant for example, is owned by the same company that also owns TXU.  Critics contend that this would give such companies an unfair advantage in a capacity market structure.  

Pro & Cons of a Capacity Market in Texas

Pro: Capacity – If the scheme works as proposed it would help alleviate the capacity concerns in Texas.  That is, in fact, exactly what it is designed to do.  It would seek to anticipate future demand for electricity and essentially prefund the future construction of power plants to meet the need.

Pro: Higher electricity rates – While to the consumer higher rates in a con not a pro, the desired outcome for planners is higher rates.  Like the recent increase in the wholesale electricity rate cap, a capacity market would be another way of moving money from consumers to electricity producers.  Many people believe this is necessary in order to incentivize new investment in power plants and ensure enough capacity in the future.  Once you buy this premise, everything else is just a matter of finding the least painful and politically viable way to move money from the consumer to the producer.

Con: Less Competition – Retail electric providers are still feeling the sting of the recent move to increase the cap on wholesale electric rates.  It’s reasonable for them to fear that a move to a capacity market would squeeze them further, increase volatility in the market and increase their costs of hedging in the financial markets.  There is also the concern that it would impart an unfair advantage to the large retail providers who are affiliated with power producers.  All of this could result in fewer electric companies in the market place and less choice to Texas consumers.

Con: Higher Rates – While planners may feel the need for Texans to pay more for their electricity in one form or another, consumers are, understandably, not happy with that notion.   A report by one consulting group predicted that the base rates of electricity could fall in a capacity market.  However, the fixed fees paid to fund the capacity market would more than offset the decrease in base rate.  This would result in a slightly increased total cost of electricity for consumers.

See Also: Nation’s Largest Power Producer Continues To Say No On New Texas Power Plants
See Also: Prepaid electricity

 

Nation’s Largest Power Producer Continues To Say No On New Texas Power Plants

NRG Energy, one of the largest producers of electricity in Texas, will become the largest power producer in the country once it completes the $1.7 billion acquisition of GenOn Energy. 

Yet, NRG’s growth ambitions still don’t include any plans to build new power plants in Texas.  Sighting low wholesale electricity rates in Texas, NRG CEO David Crane reiterated that the company is in no hurry to invest any more capital in the Texas market.

“We stand ready at our sites to build more as soon as pricing tells us it’s time to build. The pricing point hasn’t been there yet,” Crane said earlier this week.

This further illustrates the irony of low electric prices in Texas.  While cheap electricity has been great for consumers in the short term, producers and electricity providers are struggling to make money with rates so low.   The resulting disconnect between supply and the growing demand for electricity threatens to being an end to the recent run of low electricity rates in Texas.

The NRG and GenOn merger is an all stock deal and is expected to be completed in 2013 pending shareholder approval.  The combined company will own over 47,000 megawatts in electric generation capacity spanning the continental U.S.reaching from California to New York and, of course,Texas.

NRG is one of the largest employers in the Houston area; employing around 1,400 people.

See Also: Houston Electricity Providers
See Also: Are TXU Rates The Most Expensive Electricity Rates In Texas?