Texas encourage private-sector electricity power generation

Texas asks How to encourage more private-sector electricity power generation?

Texas suffered one rolling blackout last winter and narrowly avoided another this summer.

The weather extremes might have exposed an Achilles’ heel to the Legislature’s decade-long embrace of a deregulated market approach to electricity generation: Investors are reluctant to invest in new power plants because they can’t make money despite rising demand that is testing the state’s electricity capacity.

Power generators are urging state officials to tweak the rules to raise wholesale prices, while consumers are arguing that they would face higher prices with no assurance that the new electricity generation would be built. They say let supply and demand work, but that butts heads in some instances with the overriding concern to keep the lights on.

Electricity customers for publicly owned generation, such as Austin Energy or electric cooperatives, would not be affected by jumps in wholesale prices in the deregulated markets that affect Houston, Dallas or parts of Williamson County, for example.

But all Central Texans have a stake in the debate because rolling blackouts — prompted by a shortage of electricity generation statewide — would be shared by the 23 million Texans served by the Electric Reliability Council of Texas.

“It is concerning that we could end up without adequate capacity,” Jackie Sargent, a vice president at Austin Energy, told a recent audience of industry figures. “Our customers will feel the pain even if Austin Energy has adequate resources.”

Today, the Public Utility Commission of Texas will meet and consider short-term responses even though the larger issue of encouraging construction of new electric power plants could take months, if not years, to play out.

The debate has simmered since August, when record temperatures and extreme drought almost prompted the need for rolling blackouts to keep the state’s largest power grid up and running. On a normal day, ERCOT has 5 to 10 percent operating reserves. In August, on its worst day, the reserves dipped to 3.8 percent, even with many industrial customers being paid to reduce their electricity consumption.

Brian Tulloh with TXU Energy, which buys power from electric generators to sell to consumers, said customers would not like a spike in wholesale prices or rolling blackouts.

“Blame will be painted with a broad brush,” Tulloh said at this month’s Gulf Coast Power Association conference.

Indeed, Gov. Rick Perry’s presidential competitors would cast any temporary power interruption as a blot on Perry’s claims to a Texas economic miracle, while Perry would blame clean air rules by the Environmental Protection Agency as the culprit for several of the state’s coal-fired generating units being idled.

Politics aside, the overarching issue is economics.

The collapse of natural gas prices, a fuel for generating electricity, impacts revenue that go to generators. During peak demand, wholesale electricity power prices can spike from $40 a megawatt to the cap of $3,000 per megawatt.

But generators say the spikes don’t last long enough to encourage the construction of “peakers,” which are gas-fired jet-engine generators that turn on in minutes but run only during the few hours of peak demand for electricity power.

A peaker can recoup its costs if it generates electricity at the $3,000 megawatt maximum for more than 60 hours each year, according to industry estimates. But it is rare for the price spikes to stay at the $3,000 maximum for more than a few minutes at a time.

And there is risk.

“If your plant is out in August, you may have missed the boat to recoup your investment for years,” said Karim Barbir with International Power GDF Suez, a worldwide generator of electricity.

Texas has a hybrid market for electricity power generation because of a political compromise by the Legislature.

Public electric power companies such as Austin Energy can still build a peaker or other new electric power generation and include the cost in its rates to its customers.

But in the larger deregulated areas around the state, ERCOT cannot order that more power plants be built. Rather, the council is relying on private companies, such as Luminant or NRG Energy Inc. , to invest in new plants when rising demand for electricity — and higher prices — justify the investments.

The state’s independent market monitor, Potomac Economics, said the deregulated market is working competitively now but warned of possible shortages beginning in 2014. The report blamed low natural gas prices, which hold down revenues, as well as ERCOT’s suppression of wholesale prices during emergencies, such as last summer’s record demand for electricity.

Texas encourage private-sector electricity power generation