* NERC wants to see Texas plan by April 30
* Texas regulators divided on long-term solution
* Developers say more changes needed
By Eileen O'Grady
HOUSTON, Jan 14 (Reuters) - The top U.S. power grid watchdog has turned up the heat on Texas to address a looming shortage of electric capacity that increases the likelihood of rolling outages.
Despite changes made last year to raise wholesale power price limits, the prospect for rolling blackouts remains high in Texas in coming summers as the supply of electricity fails to keep pace with growing demand. And Texas regulators are divided over a long-term solution to encourage new generation.
In a letter sent to the Electric Reliability Council of Texas (ERCOT), Gerry Cauley, president of the North American Electric Reliability Corp, warned that the "solutions have not yet sufficiently materialized" to address NERC's concerns.
Last month, ERCOT said the state's electric power reserve margin - a cushion against blackouts - will be 13.2 percent this summer, below the agency's minimum target of 13.75 percent.
ERCOT's forecast for a shrinking reserve margin each year through 2022 increases the chance of a power outage from the agency's target of just once in 10 years.
Dwindling reserve levels "imply higher reliability risks, especially the potential for firm load shed, and ERCOT will need more resources as early as summer 2013 in order to maintain a sufficient reserve margin," Cauley said in the letter.
NERC wants to see ERCOT's plan to address declining reserves by April 30 and wants the grid agency to include "a discussion of the risks to reliability if new resources are not constructed or acquired in the short term."
The warning letter refers to a November NERC report which said that given economic growth in Texas, ERCOT's supply outlook does not appear sufficient to meet "normal" summer peak demand, never mind extreme or prolonged weather conditions.
Trip Doggett, ERCOT chief executive, said reliability and resource adequacy are the agency's top priorities but represent a "complex issue" with no simple solution.
He said the agency has a variety of tools to maintain a stable grid under a wide range of conditions.
"Electricity is vital to our economy and our way of life and we continue to explore policy and market-based solutions to address future resource adequacy concerns," Doggett said.
A lack of new power plants under construction and two extremely hot summers strained power supplies in Texas in 2010 and 2011, adding urgency to the ongoing regulatory discussion about the need to encourage new generation.
In the past year, the Texas Public Utility Commission (PUC)has raised the price cap for wholesale power in times of scarcity, but that and other changes have not been enough to raise prices to a level that would allow generators to invest in new power plants, generation owners and developers said.
"It is essential to send the right reliability signals to prospective generation, and also ensure that the (PUC) has sufficient information to fully understand the increasing risks," Cauley said in his letter.
PUC members are studying two general options: whether to modify ERCOT's existing "energy-only" market to incorporate more programs that pay customers to curtail electric use when supplies are tight, or to create a so-called "capacity market" that pays generators to be available in future years.
The Brattle Group, hired to evaluate the state's options, called the energy-only design the most efficient market, but favors a capacity market as the best option to address supply in a competitive, market-based fashion if state leaders want more generation as a cushion against potential power disruption.
PUC Chairman Donna Nelson favors creation of a capacity market while commissioner Kenneth Anderson is against the idea. Commissioner Rolando Pablos has called for additional time to better understand long-term implications of any action.
"The commissioners are trying to balance several complex issues - trying to preserve low-cost energy and maintain reliability," said John Moore, a principal of Stratus Energy Group of Austin. The panel is looking for a combination of changes that will work with ERCOT's specific market design.
"They are making progress on a number of fronts, but the silver bullet has not been found," said Moore.
Power-plant developers say time is running out.
"We are now well past the time when new construction must begin in order to assure Texans a reliable supply of power," said Greg Platt of Cobisa Corp, a Houston company working to develop a large natural gas-fired plant north of Dallas. "The short-term measures taken and currently contemplated do nothing to provide potential lenders and investors with any assurance that they will recoup their substantial investment."
Despite ongoing market uncertainty, affiliates of Dallas-based Panda Power Funds were able to finance and start building two natural gas-fired plants last year which they hope to complete in 2014.
Todd Carter, Panda Power Funds president, acknowledged the difficult position the PUC is in.
"The PUC and Texas will have to take a really hard look at the generation system, make some tough calls and stick by its guns to make it happen so that it allows companies like ours to build generation and sell power," Carter said.
Other generation owners in the state include Luminant, a unit of Energy Future Holdings, which is owned by Kohlberg Kravis Roberts & Co LLP and several private equity firms; NRG Energy ; Calpine Corp ; NextEra Energy Inc and Exelon Corp.