Fearing outages, Texas regulators consider controversial plan to boost power generation

The warnings from the operator of Texas’ electric grid came several times: The amount of power the state's generators were slated to produce last summer might not meet escalating demand, resulting in rolling blackouts and bloated utility bills.

That didn’t happen, despite record-setting power demand. And it’s not expected to happen next summer either.

But the Electric Reliability Council of Texas is already warning that the so-called "reserve margin" — the amount of power generators are expected to produce beyond projected demand — will likely be significantly slimmer next summer.

And the state's Public Utility Commission, which regulates electric utilities, is considering a variety of ways to increase the odds that the lights — and air conditioning — stay on.

One of those ideas has generated pushback from across the political spectrum, in part because it could significantly increase the price of electricity, potentially adding a few hundreds dollars per year to the power bill of a family of four. Those who oppose the plan fear it just might fly, given the outsized influence of who's championing it.

Major power generators including Calpine, Exelon and NRG are asking the commission to tweak an existing formula known as the operating reserve demand curve to increase the amount of money they receive when demand for power escalates. The formula was implemented several years ago as part of a compromise deal that stemmed from a similar debate around reliability.

The companies say it would incentivize them to invest in new power plants and take other measures that would keep electricity reliable across the state in the hot summer, and cold winter, months. They acknowledge nothing went wrong last summer, but describe the supply-to-demand ratio as too close for comfort.

Such a tweak could cost some $4 billion a year, at least according to estimates from Exelon. That sum would almost certainly trickle down to Texas residents in the form of higher electric bills.

It’s hard to say exactly how much that would inflate the average residential power bill. There are many variables at play, including the weather. But divvied up among the 25 million Texans served by the state’s deregulated power market — the vast majority of the state — it would cost $160 per year per person.

A different set of calculations provided by the Texas Public Policy Foundation — the conservative, fossil fuel-funded think tank that is fighting the proposal alongside liberal watchdog groups like Public Citizen — show the average family of four would pay $233 more for electricity per year. The foundation also points out that there would be indirect costs as businesses facing higher power prices pass their cost down to consumers.

Generators pitched the idea to the commission at a public workshop in late October; their executives argued the cost of doing nothing would be much higher.

"Exelon believes there needs to be a robust price signal sent to the market as soon as possible," Bill Berg, the company's vice president of wholesale market development, said in testimony to commissioners. "It is our belief, and I think it's shared by others, that each successive summer... will be tighter than the previous summer. Now is the time to signal to the entire market the need for resources, innovation and investment."

Commissioners have not publicly indicated what, if anything, they intend to do. They had been scheduled to take up the issue on Friday, but a revised meeting agenda released Thursday indicated they had postponed the discussion — a decision commission spokesman Andrew Barlow said stemmed from their desire to take more time to study it. There is no deadline for a commission decision.

"A challenge of this magnitude and complexity... merits more discovery and conversation," he said.

That's a point the Texas Chapter of the Sierra Club raised in written comments to the commission, saying "such an adjustment would be premature, especially given that (Electric Reliability Council of Texas) or PUC staff has not actually conducted an analysis of the likely impacts of such a change."

The commission does not have the authority to mandate the construction of new power plants, but it does have the authority to pursue policies to ensure the power doesn't go out on residents and businesses. A report released earlier this week by ERCOT, the grid operator, predicted the reserve margin is expected to tighten more than expected next summer given growing industrial demand and canceled power generation projects — both natural gas and renewable.

ERCOT had previously projected that supply would outpace demand by 11 percent in the summer of 2019. That's about what it it expected going into last summer. Now, it's estimating 8.1 percent. But it also expects that margin to widen in 2020 and 2021, to 10.7 percent and 12.2 percent, respectively.

The reserve margin sweet spot is a constant point of debate. But a recent report by the Brattle Group, a global research firm that often crunches numbers for the PUC, says that the "economically optimal" reserve margin is around 10 percent — and that "current market design will support more than sufficient reserve margins from an economic perspective."

Adrian Shelley, director of the Texas office of Public Citizen, and Bill Peacock, vice president of research at the Texas Public Policy Foundation, both say those projections are no reason for panic.

"Reserves are tight but the projection is we’re still going to have more than we need," Peacock said. "Tweaking the market in this way is going to do absolutely nothing to improve the reserve next summer."

Disclosure: The Texas Public Policy Foundation and NRG Energy have been financial supporters of The Texas Tribune, a nonprofit, nonpartisan news organization that is funded in part by donations from members, foundations and corporate sponsors. Financial supporters play no role in the Tribune's journalism. Find a complete list of them here.