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Texas needs aggressive measures to ensure electricity supply, report says

06/01/2012 11:33 PM

06/01/2012 11:46 PM

Even measures that would triple the state's price cap on electricity during times of peak demand won't be enough to ensure adequate power to meet Texas' steadily increasing appetite, a new report says.

The Brattle Group, hired by Texas' biggest power grid to recommend ways to encourage generators to expand supply in the face of relatively low prices, instead offered a number of options Friday, some of which would be the biggest changes since the state largely deregulated electricity markets more than a decade ago.

In recent months, the Electric Reliability Council of Texas has warned that the state could run dangerously short of power as soon as 2014, and it commissioned Brattle's report as part of its efforts to address the issue. ERCOT oversees the network of power plants and lines that serve about 85 percent of Texans, including most in Dallas-Fort Worth.

Texas is not the only deregulated electricity market to confront the issue. The lowest natural gas prices in a decade have kept wholesale electricity prices low in other markets as well.

"This issue is what we call in the business the 'missing money problem,'" Shmuel Oren, an engineering professor at the University of California, Berkeley, told Bloomberg News. Oren helped advise Texas on deregulating its market.

"Prices of electricity are not high enough to pay for the fuel and also cover the investment in generation capacity," he said. "Business people are looking at this and they're deciding it is not a profitable business."

According to Brattle's report, the most efficient way for ERCOT to maintain a comfortable reserve of electricity supply is a system that encourages generators to build new supply by letting them bid for power several years in the future. That system, called a forward capacity market, is used in several other deregulated markets.

Other options Brattle recommended for ensuring adequate supply include allowing higher prices during peak demand periods, arranging "backstop" measures for curtailing use by certain users during emergencies, and encouraging other ways to reduce demand during peak periods.

The report drew mixed reviews.

Trip Doggett, CEO of ERCOT, said that while ERCOT and the Public Utility Commission have made several moves to maintain adequate capacity, "this report highlights that there is more work to be done."

PUC Chairwoman Donna Nelson said it "confirms that we are moving in the right direction."

The PUC has already prepared to raise the state's wholesale power price cap Aug. 1 to $4,500 per megawatt-hour, up 50 percent from the current ceiling of $3,000.

In comparison, wholesale peak power prices in ERCOT's north zone, which includes Dallas-Fort Worth, averaged $61.55 per megawatt-hour last year, according to the Federal Energy Regulatory Commission. A megawatt-hour can power about 200 Texas homes during a blazing August heat wave.

The PUC has also discussed raising the price cap as high as $9,000 per megawatt-hour, a measure the Brattle report endorsed even as it said that such a move alone would likely not be enough.

The prospect of higher prices does not sit well with consumer and municipal advocates.

Geoffrey Gay, general counsel for the Texas Coalition for Affordable Power, said his group of more than 160 cities and other public entities is "disappointed that it does not include any in-depth consideration of potential costs to homes and businesses. Texans do not like writing blank checks, but in essence this is what will happen if one of Brattle's policy options is chosen without further analysis."

The Sierra Club said the Brattle report should have looked more at cutting demand and boosting renewable sources of energy.

"Today's Brattle Group report provides some important information about market prices, investments and generation, but it fails to adequately look at low-cost solutions that are already on the books," Cyrus Reed, conservation director of the group's Lone Star Chapter in Austin, said in a statement. Those measures, he said, "are ways we can ensure the lights stay on while reducing the cost to working Texas families."

Brattle's recommendation of a forward capacity market is at odds with the state's "energy only" deregulated market. Generators in the deregulated ERCOT market are now paid only for the energy they sell. That means that price alone drives their decisions whether to build additional supply.

But Brattle concludes that because unusually low natural gas prices have kept down wholesale electricity prices, "ERCOT'S current energy-only market is not likely to support sufficient investment to meet" its goal of a 13.75 percent reserve in excess of projected peak demand. It also suggests examining whether that reserve margin could reasonably be set at a lower level.

Brattle said that grid operators in the Northeast and Midwest have used the forward capacity market and that Texas could learn from their experiences if it adopts that model.

While a forward capacity market would represent "the most significant change" to Texas' energy-only market, it is also "likely the most efficient way" to meet a desired reserve level, is relatively transparent to the various market participants and is likely to attract competition.

Jim Fuquay, 817-390-7552

Twitter: @jimfuquay

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