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


Texas Ranks As One Of The Worst States For Air Pollution From Power Plants

Texas currently ranks the 10th worst state in the nation when it comes to exposing residents to toxic air pollution from coal-fired power plants, according to the latest analysis released by the Natural Resources Defense Council (NRDC).

The NRDC data show:

* Texas’ electricity sector ranks 10th in the nation for industrial toxic air pollution for the year 2010, emitting nearly 10.5 million pounds of harmful chemicals, which accounted for 25% of state pollution and about 3% of toxic pollution from all U.S. power plants.

* Texas ranks 1st (worst) among all states for industrial mercury air pollution from power plants, with 12,740 pounds emitted in 2010, which accounted for 78% of the state mercury air pollution and 19% of U.S. electricity sector mercury pollution.

The states on the “Toxic 20” list are from worst to best:

1. Kentucky

2. Ohio

3. Pennsylvania

4. Indiana

5. West Virginia

6. Florida

7. Michigan

8. North Carolina

9. Georgia

10. Texas

11. Tennessee

12. Virginia

13. South Carolina

14. Alabama

15. Missouri

16. Illinois

17. Mississippi

18. Wisconsin

19. Maryland

20. Delaware


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?



The Prospects For Nuclear Energy In The US

Nuclear Power PlantNow that the anniversary of the Three Mile Island incident is upon us, let’s take a few minutes to examine the status of our nation’s nuclear energy prospects.

The U.S. has not broken ground on a nuclear power plant since the 1970’s, though the Nuclear Regulatory Commission recently green-lighted the building of two new nuclear complexes — the twin Vogtle reactors near Augusta, Georgia, and a pair of reactors in South Carolina. With a price tag of $30 billion dollars for the two locations, and several other companies laying out hundreds of millions of dollars for the planning of other reactors that may or may not get to the groundbreaking stage, we may be witnessing the onset of a nuclear renaissance in North America.

The U.S. nuclear industry has had three substantial hurdles to get past in recent years: the unimaginably low price of natural gas, the ongoing economic recession, and last year’s Fukushima disaster.

The industry does, however, have two things going for it: the increasing demand for electricity and the worries (founded, or not) of global warming. In the recently published book "The Doomsday Machine," authors Cohen and McKillop state “Even if global warming science was not explicitly invented by the nuclear lobby, the science could hardly suit the lobby better.” Along those lines, the industry has recently begun an ad campaign aimed at improving its image by stressing the fact that nuclear power is by far the largest zero-carbon energy source in the United States.

In fact, even the Japanese incident is being pointed to as a reason to move forward with building new reactors. The nuclear power plants being built in Georgia and South Carolina will be utilizing the AP1000 model, where the letters stand for "advanced passive," because the emergency cooling will rely on readily occurring forces like gravity and evaporation, as opposed to the Fukushima model that used pumps and valves that required electricity to operate.

Westinghouse Electric, the maker of the AP1000 line, argues “If an AP1000 had been there, we wouldn’t be having this discussion today; that plant would be back on line.” Even General Electric, which designed the Fukushima reactors, claims the same for its new “passively safe” design.

The jury is still out as to whether or not these two nuclear plants are the beginning of a new trend in meeting America’s energy needs. The headwinds facing nuclear power are still present, and will need to be overcome before our nation’s nuclear power industry can assert the renaissance has begun in earnest.