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State weighs blackout risk and electricity prices

By: Laylan Copelin |

The state’s utility commissioners are considering revamping how electricity is bought and sold in the wholesale market, trying to balance increasing the risk of rolling blackouts against “sticker shock,” as its consultants put it, if they get it wrong.

The three commissioners appear split over whether to tweak the nation’s lone energy-only market, which pays only when a power company sells electricity, or shift some of the risk of building power plants to consumers by making so-called capacity payments to entice new investment to the state.

Either choice probably means higher wholesale prices as the Public Utility Commission debates how best to keep on the lights — and Texans’ air conditioners — during the peak hours of summer demand for power. Shortages are forecast for as early as 2015, although weather and the economy can affect those educated guesses.

The Brattle Group, the state’s consultants, says the status quo is no longer an option: Given today’s low natural gas prices, cheap but intermittent wind power and tight credit, the private sector isn’t convinced it can build profitable power plants at the current wholesale prices for electricity.

As an interim step, the commissioners are expected to vote Thursday on whether to raise the cap on wholesale prices, effective next summer, on the heels of a 50 percent increase that kicked in Aug. 1. The cap limits how high wholesale prices can spike during the hours of peak demand, usually on summer afternoons when air conditioning is driving up power usage.

The larger issue, however, is what to do with the state’s competitive wholesale market. The threat of rolling blackouts — controlled, rotating outages to keep the grid functioning — became a concern in the summer of 2011, as a record heat wave and drought tested the limits of the state’s electricity grid. Texas suffered one rolling blackout in February 2011, due to a harsh winter storm, and narrowly avoided others during the summer.

Officials bought time by ordering older, mothballed plants back in service and by making operational changes to the electricity grid.

But the consultants are now saying the commissioners must take more radical steps by the end of the year to head off the predicted shortages in summer 2015.

One proposal under consideration is sidelining power generation, to be used only in emergencies but in effect driving up prices by removing generation from the daily market, while creating financial incentives for homeowners and businesses to reduce electricity usage during times of peak demand.

At the other extreme, the state might begin paying the industry to build power plants with capacity payments — the most significant change in the wholesale market in years.

All of the approaches are about raising revenue for generators that, in one way or the other, would be paid by customers.

The hope is that higher wholesale electricity prices — or the capacity payments — would encourage investment in new generation — as well as encouraging customers to begin conserving power during hours of peak demand.

Industrial customers already take advantage of shutting off power — and being paid to do so — during peak demand. But the utility commission would have to create incentives for residences and small commercial businesses, which account for 70 percent of the peak demand, to adopt new technologies that would make them the fail-safe against shortages.

Creating that demand response, as it is called, could take time.

The Environmental Defense Fund, a proponent of the demand response approach, said the electricity market needs to be opened up to entrepreneurs who will help consumers control their electricity usage. But the group said consumers must be compensated fairly to reduce their power usage and reimbursed for investing in smart thermostats and home energy management systems.

Unanswered is whether residential consumers would save enough to be motivated to join demand response programs.

Timing is crucial.

It might take years to create 3,500 megawatts of demand response — about 5 percent of the current electricity capacity — that the consultants are suggesting.

That’s why the commissioners could also consider increasing operating reserves — in effect holding back more power from the market — to drive up wholesale prices and encourage investment in new power plants until they can see that a demand response market is developing. The operating reserves would be used only when wholesale prices hit the cap.

But it takes at least three years to build new generation.

“These are some weighty issues, and we need to make some decisions,” Chair Donna Nelson said at the utility commission’s last meeting. “Time is of the essence.”

Commissioner Rolando Pablos acknowledged “legitimate concerns” about future shortages but said the current system “has produced a reliable grid that has consistently answered the call of our ever-growing consumer base.”

He warned against “making hurried decisions today that could later prove to be lamentable.”

“We are not in crisis mode,” he concluded at a recent meeting.

Pablos suggested postponing raising the wholesale cap until a decision is made on remaking the wholesale market.

Nelson and Commissioner Ken Anderson Jr., however, argued that the commission at least should make a decision Thursday on raising the wholesale price cap to send the right signals to investors who might build power plants.

Tweaking the wholesale market or redesigning it will take longer to decide.

The first decision for commissioners is whether to continue to let the market determine the reserve margin — the amount of generation over the projected demand — or have state officials set it.

There are trade-offs.

Leaving the decision on reserve margins to the market creates a higher risk of rolling blackouts, but its supporters say the energy-only market has delivered lower prices to consumers in recent years. Meanwhile, paying the industry to build power plants lowers the blackout risk but could result in customers paying for extra generation that isn’t used.

The Brattle Group says the current market system would provide only 8 to 10 percent reserve power even if the commission tripled the $3,000 wholesale price cap to $9,000 per megawatt-hour. The Electric Reliability Council of Texas, which operates the grid for 75 percent of the state, including Central Texas, has suggested a reserve target of 13.75 percent.

The utility commission is trying to bridge that gap.

Tweaking the current system could include either holding back some existing generation for emergencies or buying just enough backup generation for use during peak demand.

The state’s industrial customers and AARP favor tweaking the current system while encouraging more demand response from customers.

The other approach — a capacity market — pays the industry to build new generation in addition to paying for the electricity that is sold.

Supporters include investor-owned generators as well as city-owned utilities, such as Austin Energy, that own power plants.

That approach, supporters say, has worked in other states and is the best method for avoiding shortages.

Under one method, ERCOT would forecast the state’s electricity needs, then invite bids to build additional generating capacity.

An auction, supporters say, would ensure transparency and add an element of competition.

But a capacity market, however it is done, is a lengthy and complicated shift in public policy.

“I know companies don’t like risk and want more guarantees,” said Bill Peacock of the Texas Public Policy Foundation, a conservative think tank. “We’d be going backwards and shifting the burden from companies to consumers.”

Proponents of a capacity market argue that the additional generation should help keep energy prices in check, but Anderson said he is worried about the lengthy transition.

“Texas might very well get the worse of both worlds with very high capacity prices coupled with very high energy prices,” he wrote in a recent memo.

He said a capacity market might take too long to address projected shortages that could occur between 2015 and 2017.

“The result is that no additional new generation not already announced would likely be on-line before 2017,” he said. “The resulting combination of very high capacity and energy prices would be a disaster for Texas consumers and for the Texas economy!”