Texas Electricity Prices Reach $5,283 MWh Amid Freezing Temps : Electricity Buyer Today
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Texas Electricity Prices Reach $5,283 MWh Amid Freezing Temps

by Joe Quenet on 01/07/14

Texas Electricity Tops $5,000 MWh.  Would A Capacity Market Have Made A Difference?  

   The Texas power grid narrowly averted rolling outages early Monday as frigid temperatures gripped the state, forcing the grid operator to take emergency steps to meet rising power demand for heating. Electric supplies became tight after more than 3,700 megawatts of generation was forced to shut overnight Sunday and early Monday. About 1,800 MW of the 3,700 MW of the forced outages were weather-related, including two large power plants in north central Texas, and  came on top of nearly 10,000 MW of generation that was already shut for the season or in planned maintenance. As a result, wholesale electricity in Texas topped $5,000 a megawatt-hour for the first time in ERCOT’s history, prompting the grid operator to avoid rolling outages by calling on about 1,600 MW of demand response (programs under which some customers are paid to curb power use) and import 180 megawatts from Mexico and another 800 megawatts from the Eastern US just to keep the lights on.

“Energy Only” or Capacity Markets, Which is Better for Texas?

 Monday's emergency is sure to complicate the debate about the need for more generation in Texas, which has divided the Public Utility Commission and raised concern among state lawmakers. Scarcity price caps of $5,000 (2013), $7,000 (2014) and $9,000 (2015) assumes that competitive firms will enter the market as needed to maintain the right amount of reliability in response to these prices. But consumers could still be paying much more than necessary because this mechanism develops a price stream that is highly variable year-over-year. Sure, equity investors will earn a reasonable return over the long run, but the key issue concerns debt. Lenders are going to look at yearly cash flows and ask what are the chances of a year, or even multiple years of little or no scarcity prices?  What about the risk of unseasonably cool summers that can occur about 20% of the time and recessions can happen  a few years every decade?. These are the questions that will be asked by lenders because they are not worried about average returns, but instead about the ability to make debt payments in bad years. Any system that makes it harder for energy companies to borrow money drives up the costs for all consumers.  

 While an "Energy Only" structure isn't perfect, a Capacity Market might not be the answer either as congestion problems can often remain unresolved. This particular problem is a challenge for all short-term capacity markets to date. Where transmission congestion is a problem, prices will be high in the constrained region, but the addition of the needed capacity in just the right place can often result in the prices collapsing and the supply that solved the problem is no longer compensated. Just like with scarcity pricing, once the problem is solved the premium is gone.  But from the customer's perspective it's even worse: They have to be happy with a structure that charges them extra for an unreliable system where the extra money they are spending does nothing to solve the problem.  As we’ve seen in other markets where capacity charges exist, more that 90% of the payments made to date (totaling over $50,000,000,000) has not resulted in the building of any new generation..

What Can Texas Consumers Learn From This?

Whether we go to a Capacity Market or stay with an “Energy Only” market, high prices are an indication of a problem, but do not provide the right incentive to fix it.

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