* Latest PUC action leads to higher summer forward prices
* Commission working to encourage new power-plant
* 2011 heat wave increased urgency to boost state power
By Eileen O'Grady
HOUSTON, April 18 Forward power prices in Texas
have moved up in response to efforts by state regulators to
boost the wholesale market cap in its competitive electric
market, industry sources said this week.
The Public Utility Commission of Texas proposed increasing
the cap on wholesale price to $4,500 per megawatt-hour beginning
in August, up from the current $3,000 price cap.
Raising the wholesale cap whenever supplies are tight is the
latest in a series of market adjustments by the PUC and the
Electric Reliability Council of Texas (ERCOT) to avoid problems
seen in 2011 when a protracted heat wave strained electric
supplies and threatened rolling blackouts.
"The market is watching the PUC very closely," said Sam
Henry, president of IPR-GDF Suez North America, which is active
in the Texas market.
Last summer's brutal heat wave and drought only heightened
the need to address the state's already shrinking power reserve
margin, the electric cushion needed to avoid blackouts.
Electric demand in Texas has kept growing due to the state's
healthy economy, but low wholesale prices and tight financial
markets have thwarted development of several new power plants
even as stricter federal environmental regulation threaten to
force the shutdown of some older coal and natural-gas fired
plants over the next few years.
That has left ERCOT and regulators scrambling to increase
the amount of generation that will be online this summer as well
as addressing the longer-term need to encourage investment in
new power plants.
Forward prices for the ERCOT North, the most actively traded
hub, moved up 150 heat rate basis points for September and
October delivery after last week's PUC meeting, according the
Forward power for delivery in July and August 2013 and for
the same summer months in 2014 rose by a similar amount.
Rising heat rate indicates power prices are moving up faster
than natural gas prices.
"Progress has been made toward sending good market signals
in the future and so the forwards have come up, particularly in
calendar 2013 and 2014," Henry said.
ERCOT North power for this summer is trading around $66 per
megawatt-hour. For summer 2013, the price is about $92 per MWh
and summer 2014 is about $107 per MWh, according to GDF Suez.
That compares to 2011 when ERCOT North power averaged $78
per MWh in July, then jumped to an average of more than $225 per
MWh in August when ERCOT was forced to declare emergencies on a
half dozen days to avoid rolling power outages.
Real-time power prices hit the market cap of $3,000 per MWh
on a number of hot afternoons when power supplies were strained.
The average day-ahead energy price for the peak-hour was $970
per MWh, compared to $166 in July, according to an ERCOT report.
While forward prices have been heading higher since January,
market trading has become less frequent.
"People are cautious," Henry said, and want to see the final
The three-member commission wants to raise the system-wide
offer cap further in 2013, to $7,500 per MWh or higher.
Raising the price when power is scarce should encourage more
companies to hedge their power needs rather remain exposed to a
sudden real-time price spike.
Other ERCOT market rule changes have already coaxed some
generation owners to bring aging units out of mothballs and one
PUC commissioner expects to see more plants return.
"I think we still need to move up some more to get to new
build economics, but this is a step in the right direction,"
Other market participants argue say higher price caps
benefit existing generation owners and that only more dramatic
changes, such as creation of a capacity market, will be needed
to attract major investment in new power plants.
Mayo Shattuck, Exelon Corp's new chairman, said the
same challenge is seen in all competitive markets across the
country, in a recent speech at the Gulf Coast Power Association
conference in Houston.
"At this time of low gas prices, anyone looking to build new
generation in a competitive market can't ignore basic math,"
said Shattuck. "Without strong, sustained price signals, the
problem of revenue adequacy will remain."
"Ultimately, it may require a combination of policy and
prescription to achieve the goal and maintain the vigorous
investment to address future energy needs," said Shattuck.
While utility commissioner Ken Anderson said the agency is
working to eliminate price distortion and inefficiency, "We
cannot eliminate all investment risk," he told the same power
conference in Houston.