Rapid Power Management

Despite 10 year low natural gas prices, why are ERCOT electricity rates now rising?

Wholesale power prices follow natural gas prices, especially in Texas where about half of power plants are powered by this fuel.  A compilation of several factors including tight reserve margins and an increased market cap are adversely affecting electricity prices.

Rates have increased by $0.002 to $0.004 per kilowatt hour (kWh) on new retail electric contracts. For a customer with an annual usage of 1 million kWh, this equates to $2,000 to $4,000 in extra costs per year.

Additionally, the population in Texas is increasing by nearly 200,000 people each year and no new generation has been constructed nor have any plans for new generation been submitted. This means Texas’ electricity needs are spread even thinner to accommodate not only the rising population, but the extreme demand in severe winter or summer months.

Reserve Margins

A reserve margin refers to the amount of available power capacity above the capacity needed to meet normal peak demand levels. ERCOT’s target reserve margin, used to ensure stable grid operation, is set at 13.75%. The forecasted reserve margin for summer 2012 is slightly above that at 13.99%.

Last year’s reserve margins were at 17.5% and still, in February and August 2011, the grid not only failed to meet demand but also set a new winter peak demand record and three all-time summer peak demand records in 4 days. Read More: ERCOT News Release

Market Caps

The lack of generation has led the Public Utility Commission of Texas to come up with a potential solution: raising the market cap. A market cap is the maximum cost a generator can charge for electricity per megawatt. The cap is important during peak demand times and electricity generators rely on these peaks to make a profit.

Wholesale prices of electricity are currently around $40 per megawatt. In August of last year, when record-high temperatures plagued Texas, wholesale prices spiked to the current cap of $3,000 per megawatt or $3.00 per kWh.

The PUC is pushing to increase the cap to $4,500 this summer and potentially up to $7,500 in the next several years. Raising the cap will hopefully bring in new generation by providing a financial incentive to investors. Rather than earning $3,000 per megawatt during peak demand, they will earn a minimum of 1.5 times more than the current cap.

We will keep you updated on any further information regarding the market cap and or reserve margins.

ERCOT has released both the winter 2011/2012 assessment as well as their biannual assessment for the next 10 years. Risk is very low, according to CEO Trip Doggett, that peak demand will exceed the available resources this winter season. ERCOT will continue to monitor the situation. Beginning summer 2012 it may be a different story. Power reserves — the extra capacity used to avoid rotating outages — will likely fall below the minimim target as they have decreased by five percent.  This means we can expect emergency procedures and potential outages.

Click to read more on the Winter 2011/2012 Assessment.

Team up with the Environmental Protection Agency by purchasing your electricity from retailers who provide clean, renewable resources such as wind or solar power. This Green Power Partnership will promote green power in order to reduce harmful environmental impacts. The minimum requirements to become a partner are as follows:

As a partner, your business name and ’snapshot’ will be added to the EPA’s partner list on their website. In return, the EPA gives your company permission to use the Partner Mark logo on its site. Please note that this program is completely voluntary and does require an application and yearly profile update.

If ”going green” is important to your company, this is a great way to promote it.  Through this program businesses receive expert advice, recognition and market updates.

The Environmental Protection Agency begins enforcing the Cross-State Air Pollution Rule January 1, 2012. To meet the terms of this ruling, power companies are being forced to significantly reduce their sulfur dioxide and nitrogen oxide emissions. One Dallas power company has made the decision to shut down two of its coal plants.

Energy Future Holdings (EFH) generation unit, Luminant, announced last Monday their plans to suspend generation in Monticello and Mt. Pleasant, Texas.

NRG Energy Inc. also made a decision to cease operation at three of their natural gas plants near Houston. The combination of EFH’s and NRG’s plants amount to more than 1,600 megawatts of electricity – enough to power 400,000 households at any one time.

Another proposed environmental regulation could begin affecting natural gas plants. According to ERCOT, the Clean Water Act requires cooling-water intake structures to minimize negative affects on fish populations. The proposed revision to the Clean Water Act requires closed-loop cooling tower systems to be installed at all existing
facilities that currently utilize once-through cooling.

The combination of the two rules could significantly affect generation in Texas. As you can see in the above chart, more than 75% of Texas’ electricity is generated by natural gas and coal plants. Approximately 36 plants would need to make a choice by 2016 on whether to stop producing electricity entirely or comply with the new rules.

 The top figure shows expected power plant retirement with the CSAPR enforced. The bottom figure shows potential retirement with the CSAPR and the Clean Air Act combined.

More operators could follow suit due to the high costs of retrofitting the plants with equipment to comply with these standards. With the decision to retire plants comes the realization that grid operators may have an increasingly difficult time meeting demand, especially when temperatures begin rising again.

Aside from new guidelines tightening the grid, the record-high electricity demand in August eliminated profits for several Texas retailers. This has forced many to purchase more insurance to protect against extreme swings in the wholesale market. Insurance costs would then be passed along to the customers, increasing retail rates.

With the combination of high insurance costs and limitations on production, customers might see increases in their electricity prices on any contracts moving forward. RPM will continue to monitor any changes in the ruling.

Please note that one of the biggest changes to our industry happens in two days as we will move to a new wholesale market design. The design has been delayed for several years and the tab is estimated to be around $644 million. Retailers don’t know the exact potential cost impact, thus they all have a different stance on what the results will be. For you the client, the potential for additional costs exists as all contracts have a Change In Law provision that will allow them to pass thru extra costs. Even if you are a fixed price client, your fixed price won’t insure you have no additional costs. Thus, please send your January invoice to your sales representative for review on any potential extra costs moving forward. For more in-depth information on the market transition, please reference the link below which leads to our Amber News article about Texas Going Nodal!