Texas’ decade-old experiment in electric deregulation is in trouble. That’s the subtext of a rather technical report released this morning by ERCOT, the grid operator. The report, authored by Massachusetts-based the Brattle Group found that even if state regulators allow prices to dramatically spike, it may not be enough to prevent rolling blackouts in the near future.
The whole premise of deregulation is that the state government has no place meddling in the market; that’s up to the Invisible Hand. But, alas, the Invisible Hand won’t lift a finger. The price of power is too low, we’ve been told, for investors to undertake new power generation projects. No new power plants means Texas faces the prospect of blackouts.
So, the Texas Public Utility Commission has come up with a solution: Artificially induce higher prices by lifting the cap on wholesale power prices from $3,000 per megawatt-hour to as high as $9,000 per megawatt-hour. Hello, higher utility bills.
ERCOT commissioned the Brattle Group to get a better understanding of precisely why investors have been so reluctant to build new power plants and look at potential policy solutions to avoid a crisis.
Many power generation companies, Brattle noted, said they found ERCOT’s laissez-faire market “excessively volatile and uncertain” and therefore required higher profit margins to even think about investing in new generation.
While the authors agreed with the Public Utility Commission proposal to raise the cap on wholesale power prices, they also warned that it was unlikely to avoid a power crunch in the coming years.
Even with a $9,000 cap, Brattle wrote, Texas could expect “approximately one load-shed event per year with an expected duration of two-and-a-half hours, and thirteen such events in a year with a heat wave as severe as the one in 2011.” In other words: at best we’d constantly be under the threat of power outages and at worst we’d have more than one power crisis each month despite paying more for our electricity.
Given that dim scenario, Brattle suggests that if the Perry-appointed PUC commissioners want to continue their “demonstrated philosophy to let the market work,” then that may — and I love this phrasing — “require managing public expectations about reliability implications and the potential for periodic high spot prices.” Translation: You may want to tell the public the power’s gonna go out more and prices will go up.
The PUC is not without options, though. Environmental and consumer groups, for example, have been pushing for the PUC to do more to encourage energy efficiency, demand-response programs (e.g. turning down A/Cs during hot summer days), and spurring the development of solar farms, which work best during times of peak demand.
The Sierra Club today said increasing the wholesale cap was unnecessary.
“Texans shouldn’t take the bait,” said Cyrus Reed, Conservation Director of the Lone Star Chapter of the Sierra Club. “This is the worst possible time to put an extra burden on our families’ wallets.”
Meanwhile, some of the retailers in the deregulated market are trying to figure out how to pass potential price hikes along to their customers. TXU, the privately-held Texas utility spiraling toward bankruptcy, is arguing that it should — only theoretically mind you — be allowed to unilaterally increase the rates of its customers on fixed-rate contracts. At least 16 other retailers, including Reliant, Green Mountain and Stream, have concurred.
Of course one of the beneficiaries, and supporters, of busting the cap is Luminant, the sister company of TXU Energy, which runs a fleet of coal, nuclear and gas power plants. Luminant stands to gain from power prices spiking higher.
But a spokesman for TXU told me that the company “does not currently intend or desire to change the fixed-rate contracts.”
It’s all very reassuring, isn’t it?