Should Texas overhaul its wholesale electricity market? If so, how much might that cost?
A report made public on Friday has shed light on those questions amid an increasingly intense debate over the long-term reliability of the state’s electric grid — and the costs of improving it. Unsurprisingly, however, the analysis has not brought opponents any closer to agreement.
“It’s got a little something for everyone,” said Michael Webber, deputy director of the Energy Institute at the University of Texas at Austin. “People with an ax to grind one way or the other can take what they want from it.”
At issue is whether Texas should shift its current “energy only” market to a “capacity” market, which would pay power plants to maintain excess capacity that grid operators can tap when the state’s energy demand soars — usually in blistering weather. That question has largely pitted electric generators and against industrial energy users and consumer advocates.
Under current market conditions, electric generators say, the status quo provides little incentive to invest in capacity, threatening grid reliability as Texas’ population soars. But opponents suggest that generators are exaggerating the size and urgency of the problem, and that electricity bills would soar under a capacity market.
The highly technical report, commissioned by the Public Utility Commission and written by the Brattle Group, a consulting firm, considers the implications of aiming for various “reserve margins” on the Texas grid — the threshold between generating capacity and demand on peak days — and suggests how regulators might maintain such a cushion, which some observers liken to insurance.
The takeaway? Texas’ current market over the long term will support a reserve margin higher than what’s “economically optimal” — when the average costs of building new power plants matches the costs of grid strains. Under current market and weather trends, the “economically optimal” cushion ranges between 9.2 and 11.5 percent, the report says. Meanwhile, market forces under the current system will keep reserves between 9 percent and 13 percent.
“This important finding suggests that the current market design will support sufficient reserve margins from an economic perspective,” the report says.
Jake Dyer, a spokesman for the Texas Coalition for Affordable Power, a consumer advocacy organization, was among several capacity market opponents who said the findings support their view. He said that his group is still “digesting” the 101-page report but that “it seems to raise question about the urgency of this situation.”
“One has to question why we’re having this debate about a capacity market,” Dyer added.
Ken Anderson Jr., the only public utility commissioner who opposes the market shift, echoed that notion in an interview.
“It really says we don’t have a problem,” he said.
Anderson’s two colleagues on the three-member commission have yet to weigh in on the report.
Capacity market supporters, however, say the analysis supports their claims that Texas needs more insurance on the grid, and that mandating a higher reserve margin would not cost as much as opponents say.
“It just eviscerates the false cost argument about capacity markets,” Eric Bearse, a spokesman for the generator-backed group Texans for Reliable Power, said of the analysis.
The report suggests that switching to a capacity market would cost consumers about $400 million per year in the long run. That includes $3.2 billion in capacity payments to generators, with $2.8 billion in reduced costs of the electricity itself because of increased market certainty. Though the $400 million tab appears huge, it would only amount to a 1 percent increase in electricity rates in Texas.
Brattle economists, however, said the report did not constitute a full cost-benefit analysis. For instance, it did not calculate the short-term costs of shifting the market, including overhead and software costs.
The report also suggests that requiring a higher reserve margin under a capacity market would help bolster reliability in case of unexpected weather or economic shifts in the coming years.
In a press statement on Monday, Bearse said the tradeoff between added costs and improved reliability is “not even a close call.”
"The cost of increasing Texas’s electric grid reliability is minimal, while the cost of continuing the status quo is a significant increase in rolling blackouts and major damage to our economy," he said.
Under a capacity market, grid operators generally set reserve margins on a “1-in-10” standard, meaning that, on average, peak demand will soar above capacity once every 10 years, causing outages. In Texas’ case, that would entail requiring a reserve margin of 14.1 percent.
Under the current system, the Electric Reliability Council of Texas, the state’s grid operator, does not require a reserve margin, but it aims for 13.75 percent.
Brattle economists calculated that a 11.5 percent reserve margin would yield a capacity shortage once every two years, with 1,700 megawatts needed to be curtailed for about 2.7 hours during each event.
Webber, energy expert at UT-Austin, said that capacity shortages on the grid are relatively rare in either scenario — far less typical than outages caused by storms, for instance — and that they typically don’t last long.
“It’s all about peak power demand — a few hours, a few days of the year,” he said. “The problem isn’t that we have too little capacity; it’s that we use all of the capacity too little.”
That’s why some observers of the debate have suggested that focusing on lowering peak electricity use through programs such as “demand response” — which relies on high-tech thermostats and meters that allow utilities to power down air-conditioners, heaters or pool pumps when demand peaks — could help boost reliability, just as adding capacity might.
Anderson said such programs seem to be working and have plenty of room to expand. As evidence of their early success, he cited ERCOT data showing that electric consumption grew about 2.1 percent in 2013, but peak demand increased just 1 percent.
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- Brattle Group Report for PUC (6.7 MB) DOWNLOAD