Panel weighs changes to pricing in the state’s electricity market

By: Bob Sechler |

Electricity that most Texans take for granted when they flip on their lights or crank up their air conditioners is increasingly being generated by power plants running on cheap natural gas or by the wind turbines proliferating across the state.

The result has been lower wholesale electricity prices and plaudits from advocates for a cleaner energy mix. But some power plant operators say the trend also has revealed cracks in how prices are set on the state’s wholesale market — and they’re advocating changes to the system that, among other things, would make it more expensive for remote Texas wind farms or any other faraway generator to transmit electricity to population centers.

“If (the pricing issues) are allowed to persist over time, then you won’t be sending the right economic signal and some plants that should be economical won’t be” and will end up shutting down, said Bill Barnes, director of regulatory affairs for power company NRG. “You are going to have a higher chance of a reliability event (such as a blackout) because you are not going to have enough capacity when you need it.”

The state’s Public Utility Commission has been holding work sessions — the next is scheduled for Oct. 13 — regarding recommendations for changes in how prices are established in the Texas market, which is overseen by the Electric Reliability Council of Texas, commonly known as ERCOT.

The recommendations come from a study sponsored by NRG and fellow power company Calpine Corp.

One proposal would essentially raise the cost of transporting power over long distances because it would require prices to reflect the small amount of electricity lost during the transmission through heat or other factors. These so-called marginal losses from transmission currently are omitted from prices.

Wind energy proponents say the plan would be a blow to the sector in Texas, which has become the top producer of wind energy in the country.

Another proposal under consideration would increase prices for power that generators bring on line quickly when demand is climbing and existing generation isn’t keeping up.

Concerns about long-term grid reliability haven’t been limited to Texas, as cheap natural gas from the shale boom and the rise of renewable energy sources have rendered traditional coal-fired and nuclear plants less economical to operate nationwide.

Energy Secretary Rick Perry last week urged the Federal Energy Regulatory Commission, or FERC, to consider new rules that would provide a form of subsidy to power plants viewed as resilient — such as coal-fired and nuclear generators — in terms of having large supplies of fuel on hand and the ability to run uninterrupted during emergencies or other unusual circumstances.

“Immediate action is necessary to ensure fair compensation in order to stop the imminent loss of generators with on-site fuel supplies, and thereby preserve the benefits of generation diversity and avoid the severe consequences that additional shut-downs would have on the electric grid,” Perry’s request said.

FERC doesn’t regulate the Texas power grid because it’s contained entirely within the state’s boundaries, and subsidies such as those proposed by Perry haven’t been recommended to the Public Utility Commission of Texas or garnered support from Texas producers.

Still, traditional coal and nuclear plants have been losing ground in the state to newer and cheaper producers.

Coal-fired and nuclear plants produced slightly more than 40 percent of the electricity used in Texas combined last year, according to ERCOT, compared with slightly more than half a decade earlier. Natural gas plants accounted for about 44 percent of energy consumption last year, compared with about 46 percent in 2006 — while wind energy consumption soared to 15 percent from about 2 percent.

Power producers advocating the ERCOT pricing changes say the rise of wind energy in particular has skewed the state’s system. They cite federal tax subsidies for wind production that aren’t accounted for in the Texas market, as well as the issue involving long-distance transmission.

Such factors are “artificially kind of dampening the power prices,” Calpine spokesman Brett Kerr said, although he said that the changes his company is advocating are aimed at increasing the pricing efficiency of the market overall.

But Jeffery Clark, president of the Wind Coalition, a wind energy trade group, said the subsidy issue is a smokescreen. He said federal policy has supported many different kinds of energy exploration and production over the years.

“We have had incentives for energy since the dawn of our republic,” Clark said. “When they talk about their own they call it a tax incentive. When they talk about mine they call it a subsidy.”

The proposal to increase the cost of long-distance transmission could hamper the state’s wind sector, he said, as well as hurt solar projects or any other generation plants that aren’t near major population centers.

“Free markets work best when everyone has access to the market, and Texas has had great success in promoting the use of its own energy resources,” Clark said. “I think (the potential change in transmission pricing) will hurt a lot of existing projects of all types.”

Panel weighs changes to pricing in the state’s electricity market