Report on Electric Grid Cites Concerns With Reserves

A 135-page report by a Massachusetts-based consulting group adds to the mounting body of analysis that the Texas electric grid does not have adequate reserves for future years, and it outlines ways to address the problem.

The report by the Brattle Group was released Friday by the Electric Reliability Council of Texas (ERCOT), which operates the electric grid that spans most of Texas. It comes two days after a national study singled out Texas and California as facing especially tight electric supplies this summer.

The report found that low natural gas prices, an efficient fleet and a burst of wind power have all helped reduce the amount of money that power plants can expect for producing electricity. Therefore power companies are not building new power plants because they fear they cannot get a decent return on their investments. (Some investors seek returns above 9.6 percent, for example, the report says.) That reluctance to build comes as demand for electricity rises — at a rate of 2.3 percent a year since 2002.

"This report highlights that there is more work to be done," said Trip Doggett, the chief executive of ERCOT, in a statement.

Power plant companies can often haul in large amounts of money at "peak hours" for the grid, which generally means late afternoons in the summer, when air conditioning pushes demand — and thus wholesale prices — high. Texas regulators currently cap the amount of money the power generators can get at these peak hours ($3,000 a megawatt-hour). Maintaining the cap at that level, the Brattle Group said, would result in a "reserve margin" of 6 percent — less than half the margin for available backup power that grid operators desire.

The Texas Public Utility Commission is thinking of tripling the wholesale price cap, to $9,000 a megawatt-hour. But even if that happens, the Brattle Group says, the resulting investment in power plants  "would still fall short" of what is needed to keep the lights on — because it would translate to roughly one "load-shed event," meaning rolling blackout, per year.

Extreme weather, such as what Texas experienced last year, could push the number of rolling blackouts in a year to 13, the report said, even with a $9,000 a megawatt-hour cap.

Raising the cap would translate into higher electricity prices for ordinary Texans. This worries consumer advocates, who say it raises concerns about how Texas deregulated its electricity market a decade ago. Indeed, the Brattle Group report says that the scarcity of long-term electric power contracts, a result of deregulation, has made it harder for some companies to invest in power plants, because such investments are riskier.

The report said that particular problems could arise when it comes to keeping the lights on in Texas in 2014, because that year "may be approaching too quickly to add some types of new capacity, even if market conditions would support such investments."

A fruitful area for Texas officials to develop is the concept of "demand response," the report found. This involves paying electricity customers a modest amount to cut their usage at peak hours — allowing air conditioners to cycle off and on rather than always being on, for example. Some of this is already being done around Texas, but many Texans, especially homeowners, are not yet involved.

"Small customers account for more than 70% of peak load, and they currently provide little demand response," the report said.  In total, demand response could reduce peak-hour loads by up to 15 percent, according to the Brattle Group, which further noted that the rollout of millions of smart meters across the state could prove the technology needed to build demand response.

Donna Nelson, the chairwoman of the Public Utility Commission, welcomed the report. "The Brattle Group’s report confirms that we are moving in the right direction," she said in a statement. "I look forward to reviewing the report fully and discussing next steps with my fellow Commissioners in the coming months.  This is an important issue for all Texans."