Texas Electricity Market: Fall and Winter Outlook

by · September 11, 2012

Texas electricity operators can breath a sigh of relief as the summer seasons winds down.  There had been a great deal of concern about the ability of theTexasgrid to withstand the demands of another hot Texas summer. The Electric Reliability Council of Texas (ERCOT) the organization that manages the majority of theTexaselectric grid, had warned Texans that without conservation there might not be adequate supply inTexasto keep up with demand for electricity.  This would be especially true in the event of an unexpected supply disruption such as a strong storm.

ERCOT now assures the public that there should be adequate supply to meet demand over the fall and winter.  This is despite the planned shutdown of two coal power plants operated by Lumiant. Lumiant is the electricity production unit of Energy Future Holdings who is also the parent company of  TXU.  Lumiant plans to leave the plants in mothballs for 6 to 9 months and bring them back on line in time to meet demand next summer.

Challenges Ahead & Potential Rate Hikes

While the grid appears to have survived summer 2012 relatively in good shape,Texas is not out of the woods yet with respect to tight power supplies.   The problem of not having enough power to meet needs is a chronic condition that will likely effectTexasfor many years.

One of the more controversial measures taken to address the demand issue is the recent increase in the wholesale rate cap for electricity in Texas.    Since the Texas electricity market is deregulated, there is no fixed rate set on electricity prices.  However, there is a maximum rate cap set on wholesale prices.  Retail electric providers that sell electricity to Texas consumers must purchase electricity on the wholesale market.

The wholesale rate cap was already substantially higher than the normal price at which electricity is bought and sold on the open market in Texas.  The theory is that by raising the rate cap 50% beginning this summer and eventually raising it 200%, producers will have the opportunity to make more money and be incentivized to build new power plants.

Producers count on prices spiking up to the rate cap several times a year.  It is during these times that producers will get most of their annual profit.

Critics say power producers will simply pocket this new windfall and there is no guarantee it will lead to the development of new electricity generating projects.   While the rate cap increase doesn’t apply directly to rate payers, it’s not likely that retail electric companies will simply absorb the extra cost that will likely come about as a result of the rate cap in crease.  More than likely, it will put upward pressure on the electricity rates paid by residential and commercial electricity customers.

Winter Demand for Electricity

ERCOT expects peak winter demand to be about 53,000 megawatts. Total power supply at this time is expected to be 74,500 megawatts barring any major outages.  Assuming routine loss of capacity do to normal outages the reserve margin should be a comfortable 12,700.  In a scenario that takes into account extreme outages or extreme weather the reserve margin could dip to as little as 3,300 megawatts.  Reserve margin is the safety cushion that planners try to have between expected demand and available supply.  ERCOT likes to maintain at least a 13% reserve margin.

Although supply is expected to be adequate, ERCOT is forecasting a strong demand for electricity this winter as a result of the el Nino weather pattern that typically results in colder than usual winter weather for Texas.

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