Energy Exchange

After a full week of triple digit temperatures in central Texas, the forecast this weekend for highs in the mid-90’s seems like a blessing both for our thermostat and for the unending topic of this blog series: our electric grid.  Officials from the Public Utility Commission (PUC) and the Electric Reliability Council of Texas (ERCOT) have been worried about the strain on our electric grid all summer long, but they aren’t just worried about this summer.  The energy crunch is an issue that we know will be with us until we deal with it; we can’t rely on dancing cats to ease the crunch. We need real solutions to avoid real problems in the future. 

It doesn’t have to be that way though, and it doesn’t need to cost as much as some worry it will, but that’s assuming that the PUC and ERCOT are able to move quickly and decisively to encourage demand response.  In our blog post last week we focused on the benefits of demand response for residential customers and small businesses, and that’s probably where the greatest overall potential lies.  But the quickest return – and the most financially savvy electric customers – might lie in the commercial and industrial markets today.  Fortunately two great examples in other parts of the country show how we could be doing more for those markets in demand response as well.

 “Making the Most of Your Energy” in NYC

Large commercial buildings typically face a number of hurdles when trying to upgrade their energy systems – particularly those with multiple tenants.  In New York City, the Rockefeller Group Development Corporation saw these hurdles as an opportunity for a new approach to energy management.  By selling their demand reductions to the grid, in the manner we’ve proposed for ERCOT, they managed to reduce energy usage by 60,000 kWh per month and reduced peak demand by 1.4 MW.  McGraw Hill now receives a net income (after payments for the financed upgrade) of $500,000 annually.

Rules in ERCOT might allow for this kind of savings already in some small ancillary services markets, so long as their metering system complies with ERCOT protocols.  Those ERCOT demand response markets are capped and already oversubscribed; leaving developers who want to build smart buildings or upgrade older ones are looking to other markets for their business.

Meanwhile, in the heartland….

We mean Warrick County, Indiana specifically. Alcoa, one of the world’s leading aluminum producers has worked with their grid operator Midwest ISO (MISO) to develop a completely new approach to industrial demand response that has blown the doors off of the possibilities for Texas’ industrial sector.  The market for aluminum is ruthless, and Before Alcoa anything that gives Alcoa a leg up helps them preserve critical jobs and tax income in their communities around the country. 

With this new market, Alcoa has managed to maintain international competitiveness for their Warrick County plant and is looking to expand demand response to their aluminum smelters in other parts of the country.  In Texas, where Alcoa’s Rockdale smelters are were not able already struggling to maintain international competitiveness and have been idled as a result, , new markets like the pilot project announced by ERCOT on Monday could mean the difference for other industries between staying profitable and shutting down operations.

Whether it’s in the city or the country, a big user or a small mom and pop store, demand response markets offer a new benefit to customers if the market rules allow customers to compete with other resources.  As we discussed earlier this week, the potential for these resources in Texas would help us meet 15 percent of our peak demand needs according to ERCOT’s Brattle Report.  That potential stretches across all types of customers, and must be part of the solution to the energy crunch in Texas if we want to keep rates down and maintain reliability.

Source: Brattle Group. “ERCOT Investment Incentives and Resource Adequacy.” June 1, 2012

This Friday, the Public Utility Commission (PUC) will host a workshop to discuss the Brattle Group’s recommendations for Texas’ resource adequacy predicament and how to move towards sustained reliability. This workshop is timely, since the Texas energy crunch continues to be in the spotlight. Just last week, the New York Times reported that Texas ranks last in electrical reliability among all states in the U.S. Texas won’t stay open for business if that remains the case and year after year it seems our state energy policy is based on a hope and a prayer. 

Table 1 of the Brattle report outlines the five policy options to solve the long-term problems.

The report specifically states that “reliance on scarcity prices is unlikely to achieve current reliability objectives.” Therefore raising the price cap is, alone, not going to solve the problem. As mentioned at the Senate Business & Commerce committee earlier this month, this issue was plagued by accusations that the market was being manipulated because of violent price fluctuations on June 25 and 26. It turns out the market is not being manipulated, which is good, but that it is really just dysfunctional in design, which is not so good. Colin Meehan’s blog last week highlights this issue and makes the point that while the PUC is willing to potentially pass the costs of a price cap increase onto ratepayers, it should also consider demand-side resources suggested by Brattle which could positively affect ratepayers. For example, in the PJM market demand-side resources are allowed to participate in energy and capacity markets and over $20 million of the payments went to residential customers.

EDF submitted comments for this workshop and will be in attendance. Other public comments were made from a variety of stakeholder’s including demand response advocacy groups, cities, MOUs, and power companies.

EDF believes that “such reforms must include a substantially increased role for demand response (DR) and other demand-side resources in ERCOT’s markets; the report provides ample supporting evidence for this need. EDF requests detail on the level of DR needed to maintain reliability in each scenario [in chart above], what would be required in each scenario to attain those levels, as well as the role of other demand-side resources in meeting future resource needs.”

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.