* Report calls for re-evaluation of needed reserve margin
* Advises progressive price cap increases when supply tight
* Sierra Club criticizes push for higher wholesale prices
(Adds Brattle Group, NRG Energy, Panda comment)
By Eileen O'Grady
HOUSTON, June 1 The current design of the
wholesale power market in Texas will not encourage needed
investment in new power plants, the Brattle Group said in a
report commissioned by the state electric grid operator.
Texas electric regulators and the grid agency that oversees
the $34 billion deregulated wholesale market are working to
encourage construction of new generation in the state, which has
little ability to import power from its neighbors.
Unlike many areas of the United States, electric demand in
Texas continues to grow because of the state's healthy economy.
"Electric reliability matters to all of us and we must
remain focused on the central question of whether we are doing
enough to guarantee an adequate power supply," said Craven
Crowell, chairman of the Electric Reliability Council of Texas.
ERCOT, which oversees the grid for most of the state, has
warned that the prospect for rolling blackouts in future years
will increase as the power supply is unable to keep pace with
Low wholesale prices and tight financial markets have
stalled development of new generation in Texas even as more
stringent environmental rules threaten to shut older coal- and
gas-fired plants over the next few years.
"The cold hard fact is that new power plants will not be
built unless power prices support that build," said Bill
Nordlund, managing director of Panda Power Funds. Panda has two
natural gas-fired plants primed for construction in Texas.
Last summer's protracted heat wave, which triggered record
electricity demand and six emergency declarations from ERCOT,
intensified the need to address the state's shrinking power
reserve margin, the cushion needed to avoid blackouts.
The report by the Brattle Group, a power industry
consultant, did not recommend a specific course of action to
modify ERCOT's "energy-only" market, which pays generators only
when they produce power, but outlined five options along with
advantages and disadvantages of each.
Brattle principal Sam Newell said the energy-only market has
worked well to attract generation investment in Texas, but low
wholesale prices now will not encourage as many new megawatts as
regulators believe are necessary to meet a 13.75 percent reserve
margin in the summer when electric use soars.
Newell said Texans should reexamine that reserve target
given the fact that power line problems are the cause of many
more outages than supply shortages.
"You can plan on a very high level of reserves and almost
never, ever have to shed load, but that would be more expensive
than maintaining a lower reserve margin," Newell said on a call
with reporters. "There's got to be a balance somewhere. We think
it's worth re-evaluating those standards."
If the commission decides the state requires a higher
reserve margin than the energy-only margin will provide, Brattle
offered several potential solutions.
Options included keeping the energy-only design, but adding
a market-based reserve margin; higher prices to support a target
reserve margin; or a back-stop procurement process to maintain
minimum acceptable reliability.
Other options included a mandatory resource adequacy
requirement for companies that supply power to customers, or
having a resource-adequacy requirement with a centralized
forward capacity market.
While the Texas Public Utility Commission has resisted calls
to create a capacity market similar to those used in other U.S.
power markets, the Brattle report addressed a number of
criticisms that capacity markets simply boost overall costs that
benefit existing generation owners without attracting new power
The PUC and ERCOT have already implemented a number of
market changes, including raising the price cap on wholesale
power when supplies are scarce, to encourage construction of new
"The Brattle Group's report confirms that we are moving in
the right direction," said Donna Nelson, PUC chairman.
Unlike what the commission has proposed, however, the
Brattle Group advised ERCOT to gradually increase the wholesale
price cap to $9,000 per megawatt-hour from $3,000 MWh, reaching
$9,000 only in extreme scarcity when power to customers is being
curtailed. These prices would be paid by the suppliers who serve
homes and businesses.
"We like scarcity prices to progress over a range instead of
jumping to the cap (because) with a smoother price curve, you
have better market behavior and it will work better with demand
response," Newell said.
The report warned that simply increasing price caps will not
attract more generation.
"Many market participants that were supportive of the
commission's actions so far were wary of the prospect of raising
caps much higher," the report said.
The Sierra Club criticized the report for its limited look
at energy efficiency and conservation options where customers
are paid to reduce power use when supplies are strained.
"Instead of using our money to build more coal and gas
plants, the PUC should implement their rules proposed to raise
energy efficiency goals," said Cyrus Reed, conservation director
of the Lone Star Chapter of the Sierra Club.
The Brattle report said expanded demand-response programs
will be needed, but that over the long-term the state will have
to see new power plants built.
Reed also called on the state to increase use of renewable
power, such as solar. Texas is already the No. 1 state for wind
The Brattle Group noted that growth of wind power in Texas
has depressed wholesale prices to the point that generators
cannot justify investment in new gas-fired power plants.
John Ragan, president of NRG Energy's Gulf Coast
region, complemented regulators and ERCOT for seeking "expert,
external analysis of the different options Texas can implement
to encourage greater resource adequacy while maintaining a
strong commitment to competition and regulatory certainty."
"I am confident that we can address the issues that we
face," Ragan said.
(Reporting by Eileen O'Grady in Houston; Editing by Lisa Von
Ahn, Tim Dobbyn, David Gregorio and Bob Burgdorfer)