Texas’ two largest natural gas electricity generators are pressing state officials to implement a self-serving policy change that would significantly impact how wholesale electricity is priced in Texas.
Calpine Corporation and NRG Energy are pushing for “marginal losses” – a way of accounting for electricity that is lost on transmission lines as it moves from power plants to homes and businesses – when figuring the price that power plants get paid for electricity as retailers and public utilities buy it to serve their electricity customers.
The proposal is a penalty system that would benefit a few electricity generators at the expense of the rest of the state. Moreover, it has the potential to stifle the growth of clean energy and cause Texas to forgo the nearly $5 billion in energy cost savings that is projected to result from that growth.
Current approach is working
Since its inception, the Electric Reliability Council of Texas (ERCOT), Texas’ electricity system operator, has accounted for lost electricity using averages of electricity actually lost across the state’s grid during transmission and distribution. Using those averages, ERCOT then charges electricity providers – like retailers and publicly-owned utilities – for a percent of the total power lost in proportion to the amount of the grid’s electricity that the provider sells to its customers.
The current approach allows for power plants to be built away from highly-populated areas in the state, including away from areas with tough air-quality challenges, as well as in West Texas where solar and wind resources are strong.
Marginal losses
Calpine’s and NRG’s proposal takes a different approach. Transmission losses and the related charges would be based on a “penalty factor” – a calculated amount of transmission losses based on a power generator’s distance from a regulatory reference point (known as a “reference bus”). The generator would be charged for the calculated losses. Generators include any company that produces power, including both fossil-fuel (like coal and natural gas power plants) and renewable-energy projects.
The penalty would add more transmission losses the farther a coal plant or wind turbine is from the reference point. Conversely, the penalty would add less transmission losses the closer the generator is located to the reference point.
In Calpine and NRG’s current marginal-loss proposal, the reference point would be selected to represent the “center” of the state’s electricity use, i.e. near Houston – where both Calpine and NRG have headquarters.
ERCOT projects that power plants around Houston and South Texas would increase their revenues if the proposed marginal-loss method were implemented. On the other hand, the proposal would penalize generators – whether in Dallas, East Texas, West Texas, or the Permian Basin – just because they’re not near Houston.
Inefficiencies
The ERCOT market is working well and providing reliable service to customers, even during the hot summer days of 2018. There’s no need to dramatically change the market to benefit the two companies sponsoring the marginal-losses proposal.
Furthermore, marginal losses would discourage efficient siting of new power plants. Investors would forgo building in less-populated areas and areas with more potential for wind and solar to instead build near the reference point. Houston is already Texas’ most populated city with pollution challenges – its large petrochemical industry, port, and car-dependent culture already contribute to lung-damaging smog. Building more power plants near there is not a good idea.
Since ERCOT’s current approach is rooted in how much electricity the grid actually loses, the amount of money ERCOT collects for losses more or less matches what’s actually lost and owed. The marginal-losses method uses calculated losses, and ERCOT estimates it would collect approximately twice the amount of money it currently collects to cover the cost of transmission losses.
This introduces to the market a second key and new policy question: Who gets the surplus? The gap between the reasons for charges versus actual losses means any approach to redistribute excess funds would, to a certain degree, be arbitrary.
Stifling economic growth
According to an economic study on the impact to the state if ERCOT implemented marginal losses, the method would cost Texas clean energy growth, causing the state to forgo nearly $5 billion in energy cost savings projected to otherwise result over the next 20 years from that growth. The same study projects marginal losses would cause Texas to miss out on $7.1 billion in related economic activity and adding more than 29,000 full-time employees.
Next steps
As the Public Utility Commission of Texas (PUC) examines how to encourage the development of new power resources in ERCOT, the marginal-losses proposal is a step in the wrong direction. It would add uncertainty to the wholesale electric market and discourage investment in new generation.
EDF is closely watching this issue, and we urge the PUC and ERCOT to reject marginal-loss accounting. ERCOT’s current system of accounting accurately recovers the costs for transmission losses and encourages building power plants in optimal locations, including away from population centers and where natural resources are readily available.
ERCOT is already getting wholesale electricity prices right. Marginal losses would only mean big losses for Texans.
Photo source: American Public Power Association on Unsplash
2 Comments
I understand that all other US ISOs use marginal losses. What argument particularly applies to ERCOT to distinguish it from the other markets?
Thanks for your comment, Ross. ERCOT, unlike other U.S. grid operators, is an energy-only market – with excellent potential for long-distance wind and solar power – that initially chose actual losses. We’re not aware of any push to start charging generators, aside from the current push by two uniquely-situated generators who would increase takings using marginal losses. In other words, if ain’t broke, don’t fix it.