December 10, 2012 / 6:51 PM / 5 years ago

UPDATE 2-Texas power surplus falls despite higher price caps

* ERCOT revises peak use based on slower state economic growth

* Grid report drops 2,300 MW of proposed generation from outlook

* ERCOT sees one new coal plant online in summer 2013

By Eileen O‘Grady

HOUSTON, Dec 10 (Reuters) - The prospect for rolling blackouts remains high in Texas in coming summers as the state’s electricity supply fails to keep pace with growing demand, the state grid operator said on Monday, despite wholesale market changes made this year to encourage investment in new power plants.

The Electric Reliability Council of Texas (ERCOT) said the state’s electric power reserve margin - a cushion against blackouts - will be 13.2 percent next summer, below the agency’s minimum target of 13.75 percent.

ERCOT’s latest reserve-margin forecast falls each year through 2022 even with the addition of some new power plants and the return of aging “mothballed” units in the summer, according to the report.

A lower reserve margin increases the chance of a power outage from ERCOT’s target of once in 10 years.

After a boom in power-plant construction in the early 2000s, falling wholesale power prices, tight financial markets and a growing supply of wind power forced a number of developers to cancel or delay plans to build new nuclear, coal and even some natural-gas fired generation.

A dearth of new construction and two extremely hot summers strained power supplies in the state in 2010 and 2011, adding urgency to a regulatory discussion about changes needed in the state’s deregulated power market to encourage new plants.

In the past year, the Texas Public Utility Commission has approved several market design changes including raising the price cap for wholesale power in times of scarcity, but the 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.

Texas regulators are divided over a long-term solution to encourage new generation.

“The projected reserve margin for summer 2013 has dropped slightly (from ERCOT’s last report in May) but we are seeing healthier reserve margins in future years,” said Trip Doggett, ERCOT chief executive.

That’s because ERCOT lowered its peak demand beginning in 2013 and beyond, based on a slower statewide growth model. Annual power demand growth was pared to about 3 percent from more than 4 percent.

The closely-watched Capacity, Demand and Reserves (CDR) report calls for the reserve margin to shrink to 10.9 percent in 2014; 10.5 percent in 2015; and below 10 percent in 2016.

Of the many economic scenarios ERCOT reviews, a low-growth forecast was used as a basis for this report, said Warren Lasher, ERCOT’s director of system planning.

“Based on the last six months of information, it appears that the current economy in Texas is more closely tracking the low-economic growth forecast from Moody‘s,” Lasher told reporters. “Even the low economic growth (forecast) leads to a fairly robust economic growth in the three- to five-year time horizon.”

Major power producers in the state include Luminant, a unit of Energy Future Holdings, NRG Energy, Calpine Corp, NextEra Energy and Exelon Corp.

Despite a difficult financing market, Dallas-based Panda Power Funds is working to build two gas-fired plants in the state, with the first expected to come online in 2014.

Calpine is also adding generation in the state.

Last week, NRG Energy said it canceled plans to build an 800-MW coal-fired plant, but it was never included in future ERCOT reserves.

Other developers remain on the sideline, closely watching PUC action before moving ahead on projects, some of which are already factored in ERCOT’s future reserve margin.

One such project is the proposed 1,350-MW Pondera King gas plant planned near Houston. InterGen acquired the project in 2009 and ERCOT is counting on the project’s output beginning in 2017 because it meets the current planning criteria.

However, InterGen is currently watching ERCOT market changes, said Mark Iamonaco, InterGen’s vice president of corporate development.

“We think the biggest challenge is that the power revenues generated in the market currently don’t support financing and operating new generation,” Iamonaco told Reuters.

Despite a lot of discussion at ERCOT about tightening criteria for new generation included in the CDR report to more accurately reflect which projects will be built, the report has not changed, Lasher said.

Since the May capacity report, ERCOT said it dropped projects totaling 2,360 MW from the long-term outlook due to changes in project status, including the 660-MW Coleto Creek 2 coal plant, the 1,240-MW Las Brisas petroleum coke plant and a 400 MW wind farm.

Another 2,305 MW have been added, including 1,309 in new wind power projects, which are only counted at a fraction of capacity based on historical output.

For summer 2013, ERCOT anticipates 961 MW of new supply: LS Power’s 925-MW Sandy Creek 1 coal-fired unit in McLennan County which was delayed from last summer; and 36 MW from a storage facility in Winkler County.

“Although peak demand is expected to grow less quickly than previous economic predictions indicated, we should continue to encourage new generation and develop more demand response options,” ERCOT’s Doggett said, to address electric use during summer when air conditioners run for extended periods.

One megawatt can supply about 200 Texas homes during the highest-demand periods in the summer.

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