By: Erin Douglas |

Texas regulators approved a proposal to change the way wholesale electricity markets work in Texas, a move expected to significantly boost revenues for power generators while increasing electricity prices for consumers and businesses.

The state’s power companies have long pressed regulators for relief from a competitive market that in recent years has paid low prices and hurt their profits. The companies have argued that without changes that increase prices, they won’t have incentives to invest in new power plants as electricity demand grows and potential shortages loom.

The Public Utility Commission of Texas on Thursday approved a change to a market mechanism known as the operating reserve demand curve, which pays higher prices to power companies by increasing the wholesale price of electricity when demand increases and reserves run low. The commission estimated that the change would increase wholesale power costs by nearly $80 million over two years, assuming that new power plants come online to boost supplies, old plants stay online for longer than they would have otherwise and people react to higher prices by cutting their consumption.

A spokesman for the commission said regulators could not estimate how much more consumers might pay.

But, other estimates are not as optimistic. The Texas Public Policy Foundation, a conservative think tank in Austin, said the market change could boost power costs by hundreds of millions of dollars per year, and in one estimate, said electricity prices could increase by as much as 13 percent for the majority of Texans who buy power in deregulated markets.

“It’s going to raise prices for consumers with no promise that it will solve the problem of lower reserves,” said Bill Peacock, vice president of research at the Texas Public Policy Foundation.

Shrinking reserves

The PUC’s action is a win for merchant power companies such Calpine and NRG Energy, which have struggled with low power prices in recent years, sustaining losses and revamping their businesses. NRG in 2017 launched a plan that included selling off as much as $4 billion and increased its focus on its retail electricity business. Calpine sold itself to a group of investors led by a New Jersey private equity firm. Another Houston power company, Dynegy, was acquired last year by Vistra Energy of Irving.

The power companies have long lobbied for the change, arguing it was vital for encouraging investment in new plants to maintain the reliability of the power grid. Unlike other deregulated power markets in the country, Texas does not pay generators through a mechanism known as a capacity market to keep plants open and available to ensure that enough power is available at times of peak demand. The only incentive for generators to bring plants online is price.

“With this decision, the Public Utility Commission of Texas has taken an important step to strengthen the market and improve reliability over the long term,” Mauricio Gutierrez, NRG’s chief executive said in a statement. “Electricity is the fuel for our state’s economy and with more reliable electric power, the state can confidently grow as a business-friendly location.”

The PUC’s action comes against as backdrop of shrinking power reserves headed into the summer. The shutdown of coal power plants over the past year has contributed to reducing power reserve margins to 7.4 percent, just over half the goal of 13.7 percent set by the state’s primary grid operator, the Electric Reliability Council of Texas. Low reserves increase the risk of shortages, price spikes and disruptions to the power system.

Commissioners at the PUC expressed concern for the shrinking power supply cushion on Thursday, likening the dwindling reserves to buying a new car and taking out the spare tire. PUC Chair DeAnn Walker said at the meeting that she was concerned about low reserve margins over the summer, particularly after the owners of the Gibbons Creek coal-fired plant said recently that they would take it offline.

But, opponents of the change say the market has worked well. Low electricity prices that Texans enjoy are evidence of an adequate supply of power, meaning no additional incentives are needed to build more plants, according to the Texas Public Policy Foundation.

Higher bills

Adrian Shelley, the director of the Texas office of Public Citizen, a progressive consumer advocacy group, said he was skeptical that the market will react quickly enough by the summer to add capacity, though he said he was relieved that the Public Utility Commission scaled back the power companies’ initial proposal to reduce the cost increases.

“We’re not happy with the fact that it raises prices on consumers,” said Shelley, the director of the organization’s Texas location. “We will have higher summer bills.”

The PUC twice delayed making the decision on Calpine and NRG’s requests at their December meetings. Vistra Energy of Irving, which owns the power generating company Luminant, praised the move by the PUC, stating that it will send “proper” price signals needed to encourage investment in the market.

But, the Texas chapter of the Sierra Club doubts that the change will be able to help with ERCOT’s reserve margins.

“There’s not an investor out there that will say, ‘Oh this bump up is worth so much that I’m going to suddenly get this new plant built in time for this summer,’” said Cyrus Reed, the conservation director of the Lone Star chapter of the Sierra Club. “It might encourage investment a year from now.”