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The Texas Electric Market Isn’t Being Manipulated, It’s Just Built That Way (…And That’s Not A Good Thing)

By / Published: July 19, 2012

Last week, the Independent Market Monitor for the Electric Reliability Council of Texas (ERCOT) released a report showing that the violent prices fluctuations of June 25 and 26 were not the result of market manipulation, as asserted by earlier reports.  Most have greeted this as welcome news, but the finding could spell rocky years ahead with wild swings in electric prices from day to day, which makes it difficult for investors, generators and most importantly customers to plan ahead.  To understand why, let’s back up a second and talk about what these findings mean.

Wild Mood Swings

If the market isn’t being manipulated, it is at least feeling a little bipolar: one hot summer day with high demand prices are up slightly but everything was working fine. The next day however, a 2 percent uptick in demand combined with an unexpected loss of 1.6 percent sent prices soaring.  The peak price on June 25 hit $438/ megawatt hour (MWh), but on June 26 prices maxed out at $3,000/MWh, meanwhile average prices skyrocketed to 640 percent above the average for the 25th. 

In a well functioning market these price swings wouldn’t be so dramatic and unpredictable, and those swings point to fundamental problems with the electric markets in Texas.  In extreme situations prices and profits may increase enough to support new investment but those extremes are so unpredictable that no power company can plan well for them, much less finance new investments.  As Brattle Group says in their report to ERCOT, “reliance on scarcity prices is unlikely to achieve ERCOT’s current reliability objectives.”  The solution?  Reduce our reliability standards or implement reforms that will lead to reliable electricity over the long term without the need for emergency regulatory intervention.

The reason for these swings is pretty simple, and outlined in the Brattle Report: the ERCOT supply curve does not efficiently reflect current or upcoming scarcity conditions in the market.  The supply curve is dominated by low price resources like wind, efficient natural gas power plants, along with nuclear power and some cheaper coal, all of which come in at or under about $30/MWh.  But as the chart shows, when you start getting near the 100 percent peak demand level there’s a sharp “hockey stick” curve upwards in price.  This means that when we’re in that high demand territory, a single power plant going offline or an unexpected spike in demand can send electric prices from $30/MWh to $3,000/MWh without warning, like we saw in late June.  Other regions have a more gradual supply curve of price increases during scarcity conditions, providing a kind of ‘warning’ to the market that the Brattle Report suggests as part of its suite of recommended market reforms.  That gradual curve is important because it allows demand-side resources to help stabilize prices and at the same time it provides potential investors with the kind of predictable certainty that allows them to consider investing in Texas.

Solving the Problem

As we said above scarcity pricing by itself, especially when it’s so dependent on weather extremes, is not enough to keep the lights on in Texas.  To do so, regulators and stakeholders will need to roll up their sleeves, put politics aside and find a solution that works for all Texans.  As a many have pointed out, the Public Utility Commission (PUC) made the decision to raise the offer cap without even a cursory analysis of the impact on ratepayers, an oversight that hopefully won’t happen again. 

If and when ratepayer impacts are taken into account, demand-side resources will be seen as playing a key role not only in maintaining reliability, but also in reducing the impact to ratepayers.  According to the Brattle Report we can reduce our peak demand needs 15 percent with such demand-side resources, with residential customers and small businesses making up 72 percent of the reduction during the hottest days of the year, but only if serious changes are made to the market.  In PJM (another grid operator) , where demand-side resources are allowed to participate in energy and capacity markets, participants have received over $174 million for over 10,000 MW of customer provided demand-side resources, over $20 million of the payments went to residential customers. In Texas, as we consider implementing new policies that improve reliability and provide stable predictable market signals it will be critical to include demand response, and to tap into growing residential and small business markets.

Also posted in Demand Response, General / Read 2 Responses

ERCOT Protocols Debated In Business And Commerce Committee Hearing

By Marita Mirzatuny / Published: July 13, 2012

On Tuesday, the Business and Commerce Committee in the Texas Senate held an interim charge hearing on the Electric Reliability Council of Texas (ERCOT) protocols, including a look at the impact on system reliability, a topic that EDF is following closely.  The charge as given directs the Texas Senate Business and Commerce Committee to:

Review current and pending ERCOT protocols as they apply to all generation technology, and identify those protocols that may provide operational, administrative, or competitive advantages to any specific generation by fuel type. Consider the impact any revisions to the protocols may have on grid reliability and electricity rates. Make recommendations for revisions or statutory changes to limit distortions in the Texas electrical market.”

Leaders from all parts of the Texas electric system discussed the process of creating protocols and concerns about the impact of protocols on system reliability: Public Utility Commission (PUC) Commissioner Ken Anderson gave an update on activities at PUC and ERCOT this year, many of which we’ve discussed previously.  Anderson was followed by a panel including ERCOT CEO Trip Doggett.

Mr. Doggett told lawmakers that the “electric supply will be tight this summer and warned that the agency will likely declare Energy Emergency Alerts asking consumers to cut back on use. ERCOT may also implement emergency procedures, including taking industrial users offline. But blackouts would happen only if there was an extraordinary drop in generation or the state experienced record high temperatures.”  Senator Leticia Van de Putte asked about the Brattle report’s suggestion of a capacity market that would allow demand response (DR) and whether the 13 percent reserve margin should be treated as a target or a minimum requirement. This was not fully addressed beyond saying the Brattle report will be discussed at a Commission workshop on July 27.

The Director of ERCOT’s Independent Market Monitor, Dan Jones, keeps an eye on the system to make sure the market is functioning efficiently and no one is exerting undue influence over the Texas market.  Concerns of market manipulation have been raised by outside observers and committee members were clearly concerned about those allegations, which Mr. Jones is in the process of studying.  Jones also discussed the Brattle report recommendations, including one to further increase price caps in ERCOT.  Senator Kirk Watson asked how the recent cap increase, approved by the PUC to encourage more generation, could affect volatility, another issue that will be addressed along at the upcoming PUC workshop.

John Fainter, representing the Association of Electric companies of Texas (AECT), an electric industry  group, stated that the industry “supports the flexibility in the process with the current protocols”  and that “we will continue to have emerging technologies and that demand management should be part of the solution.”

We agree that it is important for the protocol development process to remain flexible and stakeholder driven, but the problem lies in the inertia with which these new emerging technologies and demand resources are brought into the market. The current stakeholder process tends to favor the status quo and, if that process is not successful in implementing the desired solution, consider further action through other means.

According to Brattle, “competitive DR resources can reduce our peak demand needs by 15 percent, greatly improving system reliability and playing a critical role in addressing future resource adequacy concerns.”   Large commercial and industrial customers, who are already “quite engaged” in various DR programs, only represent 14 percent of the total DR potential in ERCOT.  In contrast, during the summer of 2011 residential and small commercial customers accounted for 72 percent of peak load and “currently provide little DR.”

While EDF did not testify at the hearing, we submitted written testimony. Despite the current flexibility, the mechanisms by which new demand side resources expand do not necessarily allow for all stakeholders to be evenly weighed and can stymie the flexibility needed.  Texas is currently among the lowest states in terms of load management, despite having the highest potential according to FERC and the Brattle Group.  As ERCOT works to address resource adequacy issues, and this committee considers whether some protocols provide operational or competitive advantages to any specific generation, we believe it is important to note that ERCOT protocols generally provide operational and competitive advantages to generation resources over most demand side resources.

Therefore, we advocate the following changes to ERCOT’s market structure, including protocol revisions as proposed by Brattle:

  1. Enabling DR to directly participate in energy markets so it can set prices directly;
  2. Enabling all emergency DR to set prices at their individual strike prices during reserve shortage conditions, as in PJM;
  3. The adoptions of  provisions by ERCOT that allow demand resources to submit other operational data in lieu of  telemetered data in order to substantially expand participation;  and
  4. If supply offers clear, they should be paid a market price, such as the economically efficient price as determined by ERCOT’s Demand Side Working Group.

As this committee, ERCOT, and the PUC consider resource adequacy and inequities within current protocols, EDF recommends paying special attention to expanding DR options for residential customers and small business.  The four-market structure changes recommended above are critical to those efforts, but more work is needed to ensure that as other changes begin to impact retail rates, customers have recourse through DR programs that compensate them based on a fair market price.

Also posted in Demand Response / Comments are closed

Do Shale Gas Activities Play A Role In Rising Ozone Levels?

By Elena Craft, PhD / Published: July 10, 2012

This commentary was originally posted on the EDF Texas Clean Air Matters Blog.

Source: AFP

As we continue seeking relief from rising temperatures this month, it’s also time to be on the watch for ozone alerts. The annual Texas smog season – April 1 through October – already appears to be in full swing this year with numerous counties around the state exceeding health-based ozone concentrations many times since March.

Just last week, the Houston Chronicle highlighted the magnitude of ozone exceedances that the area hasn’t seen since 2003. Additionally, the month of May was the nation’s “smoggiest” in the past five years according to a recent report released by Clean Air Watch. Texas ranked second, surpassed only by California, for the most Code Red and Code Orange days so far in 2012, with 18 days and 27 days respectively.

Ozone-forming pollution is emitted by cars, refineries and various industrial plants. As more Texans begin to see shale gas drilling rigs pop up around them, many are asking the question: Could emissions from natural gas and oil operations significantly contribute to ground-level ozone? The answer is an unequivocal yes.

The Role of Natural Gas and Oil in Rising Ozone Levels

While burning natural gas produces less smog-forming pollution than coal combustion but more than renewable energy generation, much of the equipment used in the drilling, production, processing and transporting of natural gas and oil produces significant amounts of such pollution. This equipment releases volatile organic compounds (VOCs) and oxides of nitrogen (NOx), which combine in the presence of sunlight to form ground-level ozone or “smog.” According to the state of Colorado, natural gas and oil operations were the largest source of ozone-forming pollution, VOCs and NOx in 2008.

The Texas Commission on Environmental Quality has reported that storage tanks used in the exploration and production of natural gas and oil are the largest source of VOCs in the Barnett Shale. Recently, there have been additional concerns that San Antonio may not meet federal ozone standards due to Eagle Ford Shale development. Peter Bella, natural resources director at the Alamo Area Council of Governments, told the Houston Chronicle that the city is “right on the edge of nonattainment.”

Ozone concentrations comparable to those recorded in some of the most heavily polluted U.S. cities have been measured in rural parts of Wyoming and Utah, where little other industrial activity occurs:

It’s important to note, however, that ozone monitoring does not exist in many oil and gas development areas, so we don’t know the full extent of the potential problem. For instance, though the Texas Commission on Environmental Quality has committed to start monitoring in the Eagle Ford, there is not currently sufficient monitoring to characterize ozone problems in the area.

Protection of Human Health

As natural gas and oil development expands into new regions, adverse air impacts are likely to follow, absent sufficient emissions controls. It is crucial for states to have strong standards in place, especially for a state such as Texas, which experienced exponential production increases in a short period time. The Eagle Ford Shale alone saw a 432 percent increase in natural gas production from 2010 to 2011.

We are happy to report that EPA recently finalized clean air measures that will serve as an important first step in reducing harmful pollution discharged from a variety of oil and natural gas activities. In fact, last month, EDF President Fred Krupp testified before the U.S. Senate in support of these new clean air standards, which will result in significant reductions in smog-forming pollutants and hazardous air pollutants like benzene, a known carcinogen. As a co-benefit, the standards will also reduce methane, a potent climate forcer.

In his testimony, he said “these common sense measures are a win-win: they reduce pollution, conserve valuable domestic energy resources, and in some cases, actually save producers money.” He added that it was “critical that we build on these clean air measures if our nation is to fulfill the President’s promise in his State of the Union to develop natural gas without putting the health and safety of our citizens at risk.”

While mounting evidence continues to link natural gas drilling with rising ozone levels, it is important to remember why we should care in the first place:

  • Ozone has been linked to a host of maladies, including premature mortality, heart failure, increased hospital admissions and emergency room visits for respiratory causes among children and adults with pre-existing respiratory disease, such as asthma and inflammation of the lung, and possible long-term damage to the lungs.
  • Children, the elderly, and people with existing respiratory conditions are the most at risk from ozone pollution.
  • Ozone also damages crops and ecosystems. Ozone is one of the most phytotoxic air pollutants – causing damage to vegetation in national parks and wilderness areas, especially in mountain regions and to valuable crops.
  • Ozone pollution also contributes to climate change. According to the Intergovernmental Panel on Climate Change (IPCC), ozone is the third-largest contributor to climate change after carbon dioxide and methane.

In the end, we’re talking about the protection of human health as well as our entire planet. Continue to visit this blog for updates on rising ozone levels in our state, as well as other vital information related to Texas air quality.

Also posted in Climate, Natural Gas / Tagged | Read 2 Responses

Forecasting Calamity In Texas

By / Published: July 5, 2012

(Credit: www.newsinarlington.com)

We’ve already had a spring of record highs, and now a June that is breaking records for electric demand (in June and July), including a peak demand that has already surpassed the projected peak demand for this summer –which we usually don’t hit until August.  Also, in an important decision last week – albeit one that won’t really change much this summer except for wholesale electric prices – the Public Utility Commission (PUC) voted 2-0 to raise the cap on energy bids in the electric market.  Given all of this activity over the past few weeks, one of the most interesting things to see has been the shift of focus from this summer to the next few summers, specifically 2014 and 2015, without stopping to consider why that time frame was chosen as a focus.

It all comes down to one obscure forecast, one that has almost nothing to do with energy: the Moody’s non-farm employment forecast. The energy crunch on the horizon that has everyone worried is a direct result of projected growth in demand in 2014/2015, derived from Moody’s projection that employment will remain fairly level in the near term, followed by a drastic increase in Texas employment around 2014.  Economic forces, in particular low natural gas prices and the need to further reduce pollution, will force some older, inefficient power plants out of the market, but the overwhelming factor is the projected ramp-up in demand in two years.

An important question arises that hasn’t been fully explored: why 2014, could it be later, or even sooner?  Today’s report on Texas Economic Indicators from the Federal Reserve Bank of Dallas has good news: “Texas factory activity surged in June… posting its strongest reading in 15 months,” which is welcome news of continued economic expansion in Texas, but is our electric grid ready to handle this spike in demand?  Tomorrow, the Bureau of Labor and Statistics will release its monthly unemployment numbers, which will have additional relevance for Texas as we struggle to meet electric demand in the face of record temperatures and economically-driven population growth.

The truth is, as with most projections, ERCOT’s planning process involves a little bit of art combined with a lot of analysis, and with every new national and local report on employment indicators the near term risks to our electric grid may shift.  As such, it’s important to realize that the major decisions currently being made at ERCOT and the PUC are largely the result of a single forecast with a highly time-dependent factor.

We won’t know how accurate these forecasts are until after the fact, but the decisions being made in Texas right now will have substantial, long-lasting effects on electric rates and customers.  Those effects haven’t been fully examined by the PUC, as the Houston Chronicle pointed out last week.  Historically the PUC has hesitated to take on clean energy policies purportedly out of concern for their impact on consumer rates, so it’s unclear why that analysis hasn’t been undertaken for such major market changes. 

What is clear is that these changes don’t do much to address real long term issues like water shortages, rising costs associated with fossil fuels and the flexibility to adapt to future economic conditions.  The recent Brattle reports – one showing that demand response is needed to maintain future reliability and another showing that solar power will help reduce electric costs – point to key steps the PUC can take to help customers deal with rising costs the will result from other PUC decisions.

Also posted in Demand Response / Comments are closed

The Heat Is On In Texas, But Will The Power Be?

By Marita Mirzatuny / Published: June 29, 2012

Source: Doggett, Trip. “Texas Renewable Energy Industries Association.” ERCOT. April 9, 2012.

As Texans celebrated the Summer solstice last week, the forecast for this week’s weather was simultaneously making people uneasy.  With practically all of Texas, from El Paso to the Panhandle and the Coast, hitting 100+ degrees the only solace is that we were spared triple digits for the majority of June. Despite this respite, it was by no means a cool spring. According to the National Climactic Data Center, “Texas had its warmest spring (March through May) on record and its third warmest January-through-May period“.  

This heat is not only uncomfortable for the people living in it, but it also puts a strain on our electric grid as demand increases.  According to the Electric Reliability Council of Texas (ERCOT), “peak-hour power consumption could exceed 66,000 megawatts (MW) Monday afternoon, surpassing the monthly records for June of last year and straining the state’s electric resources.”  ERCOT goes on to conclude that it “expects to have adequate generation and surplus available to serve the state without imposing emergency programs that could lead to curtailment of power to certain industrial customers or broader rolling outages,” however warning, “that rolling outages could occur this summer given the state’s limited amount of surplus generation.”

So what is ERCOT planning for?

ERCOT is projecting weather, and thus electricity usage, using a “normal weather” baseline that reflects more a 2007 outlier (an abnormally cool and lush summer) than it does the actual trajectory of increasing temperatures year after year from 2006 to 2011.  Their “normal weather” equates to a usage of 63,898 MW.

But we are breaking records yet again. In May, we already set a “monthly power demand record of 59,037 MW, surpassing the previous high set in May 2011 by 2.9 percent, and an all-time ERCOT’s peak of 68,379 MW was set last August.” And this week, as predicted, “Tuesday broke the new peak demand record it set Monday. Electric use during the 4-5 p.m. hour reached 66,583 MW, also exceeding the standing record for July”. Typically in the high 80’s this time of year, Galveston reached 100 degrees in June for the first time ever.  

Despite, breaking records this June, and hitting that all-time peak of 68,379 MW last August, ERCOT’s projection for peak summer demand in 2013 is around 67,168 MW. This is a risky projection, but the good news is that this peak amount includes reductions that come from demand response (DR) and energy efficiency mechanisms thus allowing for a firm forecast of 65,649 MW instead.  We argue that if restrictions were lifted for demand response (DR) and energy efficiency measures were not being gutted we would cut that amount even further, avoiding the need for ramping up polluting peaker plants and building new ones.

PUC Chairman Nelson also reflected uncertainty as to the reliability of our grid when she said, “You know, we want to get the message out of reduced usage during peak demand…At the same time, we want to get the message out ‘Texas is open for business. We want to get the message out, peak demand, turn your thermostat up a couple degrees, don’t do your laundry, those kinds of things. But we don’t want to say, ‘if you don’t we’ll have rolling outages’, OK? So, it’s a fine line to walk.”

However, as we reported a few weeks ago, parts of the PUC’s proposed rules would actually hurt energy efficiency programs and decrease the effectiveness of current programs by adding unnecessary red tape and discouraging efficiency. The same types of programs that help shore up ERCOT’s peak demand projections for next year. Right when efficiency needs to expand, the PUC instead is making it more difficult. Why this mixed message?

John Moura, the reliability assessment manager at NERC, the North American Electric Reliability Corp., said “the ‘million-dollar question’ is what will happen if Texas sees a repeat of Aug. 3, 2011, when a prolonged heat wave led to a state record for electricity demand. If power lines go down, the wind stops blowing or drought forces a power plant to stop sucking up water to cool its equipment, the state could be in trouble.”

Also posted in Demand Response, Energy Efficiency / Comments are closed

ERCOT’s Three-card Monte Trick For Grid Reliability

By Jim Marston / Published: June 25, 2012

(Credit: Arnie Levin)

 This commentary was originally posted on the Texas Clean Air Matters blog.

First we have enough generating capacity, but next year is the problem; now that next year is upon us it’s really the next few years that are the issue. The Electric Reliability Council of Texas (ERCOT), grid operator for most of Texas, foresees potential electricity shortages. Clearly the risk is real, but when?  This year? Two years from now? Reports swirl by, some only weeks apart, showing different numbers and contradicting previous reports. Are we seeing a bureaucratic version of Three-card Monte?

During last summer’s drought, demand peaked on August 3, using more than 68,000 megawatts. ERCOT’s stated goal is to maintain a 13.75% reserve margin in generating capacity. Their latest report shows the state’s electrical grid will fail to meet the target reserve margin as soon as 2014, two years from now.  A report in early May actually shows that this summer ERCOT will fail to meet that target as well, although it isn’t stated explicitly.

Meanwhile EPA is meeting with ERCOT and the nation’s other grid operators to develop an implementation timeline for the new Maximum Achievable Control Technology (MACT) air toxics rule, which should begin this fall. Utilities have three years to implement the new rules…unless the three-year timeline threatens grid reliability. Then utilities can get a fourth year…unless grid reliability is still threatened. Then utilities have a full five years to comply.

Concerns about grid reliability are very real, but they are due to power companies deciding to hold off on constructing new power plants while prices are so low.  Unfortunately some state leaders and utilities have seized on these ERCOT reports, and are shifting their conclusions in an attempt to delay rules that have been in the works for years, and in some cases decades.  The new EPA standards will dramatically cut mercury, heavy metals, acid gas and other emissions from power plants. The public health benefits to our state will be enormous, especially for Texas children who breathe air tainted by power plant emissions. The cost of unwarranted delay is a price Texas should not have to pay.

Posted in Texas / Comments are closed