March 6 (Bloomberg) -- Texas power users face potential outages and price volatility as the state’s main grid operator tries to keep up with population and demand growth, an Electric Reliability Council of Texas Inc. official said today.
The most important question before the Texas Public Utility Commission is how to address the resource adequacy, or power-generating capacity, concerns, Brad Jones, Ercot’s vice president of commercial operations, said at the IHS CERAWeek energy conference in Houston.
“We’d rather keep the lights on,” Jones said. “Are we going to accept an outage every three years? I’m leaving that question out there without an answer.”
Generators are struggling to get regulatory approval for a proposal that would pay them to keep spare producing capacity, while the U.S. shale revolution floods the market with low-cost natural gas that reduces their bottom lines. As the debate dragged on over the last two years, power companies delayed decisions on whether to build new plants.
Texas population growth is outpacing new generation, Manu Asthana, president of Direct Energy Residential, one of the largest retail electric providers in North America, said at the conference. At the same time, industrial customers don’t support a capacity market, he said.
“We don’t want to subsidize one solution over another,” Asthana said. “We would encourage the market to think about this on a level playing field basis.”
Steven Schleimer, senior vice president for government and regulatory affairs for generator Calpine Corp., said current market rules rely on high prices to work, which means a change should be considered to encourage building of new power plants.
The proposal has pitted consumers worried about higher electricity bills against generators seeking a more stable revenue stream amid volatile commodity prices that have pushed Energy Future Holdings Corp. to consider bankruptcy. New data that show sufficient power capacity to meet the state’s needs over the next several years and legal questions about Texas regulators’ authority to impose the change has stalled a vote for now.
Donna Nelson, the chairman of the Texas Public Utility Commission, said at an Ercot market summit last month that the commission should “step aside” and let the state legislature decide the issue if that’s what it wants. She had previously voiced support for the proposals.
In a Jan. 30 note to clients, Julien Dumoulin-Smith, a UBS analyst in New York, said there’s a 25 percent chance of a capacity market being implemented in Texas, down from his previous estimate of 50 percent.
Average on-peak power prices in Texas are the lowest in the U.S. even as the state’s electricity consumption climbs at the fastest pace in the nation. Power producers from NRG Energy Inc. to Calpine say so-called capacity payments, which are allowed in the U.S. Northeast and are being considered in California, will ensure there’s enough supply on the Texas grid.
Consumers, including homeowners, retail giant Wal-Mart Stores Inc. and oil refiner Valero Energy Corp., say these payments will drive up their costs by as much as an extra $4 billion a year without guaranteeing improved reliability.
New data shows sufficient amounts of reserve power will be available in Texas for the next several years unless there is a major power crunch caused by extreme weather. According to a report from Ercot on Feb. 28, electricity demand growth is slowing in Texas even as the population and economy expand.
Schleimer said at today’s conference that the PUC has the authority to make a decision and if the legislature does anything, it should affirm that position. He acknowledged gaining traction for his position has been a challenge.
“It’s such a complicated issue, it’s difficult to get some legislators who are dealing with a million different things to support it,” Schleimer said. “It’s easier for them to be neutral or oppose it.”
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