ERCOT to City Council: Keeping the Lights On Means Sending the Right "Price Signals"

Categories: City Hall

JassoatEnergyBriefing.JPG
Council member Delia Jasso is officially disturbed by ERCOT's charts, particularly the bar graph showing a big gray empty space between the reserve margin we need to make sure the lights stay on during hot summer afternoons and the colored part that indicates how much generation capacity we'll actually have in 2014. Hint: The two aren't even close to meeting.

"When you look at this chart, you have to gasp," Jasso said during Wednesday's council briefing on keeping our lights on. "In two years we have this gray spot with no electricity."

At the State Affairs Committee hearing last week, ERCOT CEO Trip Doggett told chairman Byron Cook straight-up: We can't ensure the stability of the electricity grid if new power plants don't get built.

But because natural gas prices -- which set the marginal price for electricity in ERCOT -- are so low, nobody's making any money. And because nobody has much cash, nobody's building power plants. So what's the solution? According to ERCOT and basically everyone in the industry, it's all about "sending the right price signals."

"One of the discussions we're having is whether to raise the price cap," ERCOT system planning director Dan Woodfin told the city council. "Whether to let the wholesale market prices go up to a higher level or not."

He's referring to the $3,000-per-megawatt-hour ceiling the Texas Public Utility Commission set as a cap on what generators can charge for electricity, even during times when demand on the grid strains capacity. When he talks about "sending the right price signals," he means removing that cap so prices can soar, reflecting the scarcity of supply. That's how the architects of ERCOT's energy-only, deregulated system predicted scarcity would spur private investment in more power plants.

Low gas prices have all but guaranteed that won't happen (except for, uh, public utilities). The theory, then, is that if you remove that cap and let these guys rake it in, Texas utilities will be in the money again. They'll build stuff. That's the free market at work, I guess.

As a ratepayer myself, though, it leaves me with one prickly question: If the only surefire way to keep the lights on in Texas is to raise prices, what the heck was the point of deregulation in the first place? Was the intent ever to benefit Texans? Did I just answer my own question?

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50 comments
Thelisma Partridge
Thelisma Partridge

Is Ms Jasso PO'd as an electricity consumer or as a city councilperson?  The city of Dallas can't approve or deny electricity rate changes or production amounts or powerplant construction can they?

Mister_Mean
Mister_Mean

Looks like to me that we need to re regulate.

Justin Julian
Justin Julian

Yes, you did just answer your own question: how about building enough infrastructure to handle demand?  That sounds like a pretty damn good benefit for Texans.  How else would it get built?  Public utilities?  Okay, where does that money come from?  Ah, now you're getting the point.

If private energy companies are thriving and not held back by artificial caps on free trade, people will invest, they will seek capital for innovation and development, and over time, prices drop as competition begins.  Will we pay more in the short run?  Sure.  Out of it, we get a robust power system built and funded by private companies, not government.  But only if we let them make the damn money in  the first place.  Otherwise, we're just California with a lower cost of living.

However, this article (and maybe ERCOT) completely overlooks the single biggest roadblock to new generation: is the Obama admin allowing any new power generating plants to be built that aren't 'green' (AKA nowhere near powerful enough to meet demand)?  Coal is out, nuclear is out...hmm, well, unless someone wants to sort out how to build a BIG ass dam, that's the ballgame, folks.  

scottindallas
scottindallas

 "But because natural gas prices -- which set the marginal price for electricity in ERCOT -- are so low, nobody's making any money. And because nobody has much cash, nobody's building power plants."

Brant, you fail to attribute these words to anyone.  They are factually inaccurate.  There is no incentive for these debt laden firms to build plants under deregulation, it has nothing to do with prices and necessary profits.  Our deregulation law is a disaster, the answer is in the fine print.  You might contact Ed Wallace, or see what he's already said/written about deregulation.   But, it's painful to see your grasping to retell a story that's been better told.  There's much more reporting to do, this is an important beat and it needs light and air more than anything.  Our electricity prices aren't low compared with the rest of the country.  Our environmental controls aren't burdensome here.  So, where's the money going?  Where is the regular compulsion in the utility market to compel these players to privide energy.  This can be easily calculated, the cost covered by state backed loans, and the financing and a fair profit can be ensured.  But, there is something rotten in the system, get digging.

Max from the Sandspit
Max from the Sandspit

Glad to see that the EPA has nothing to do with this, just a bunch of greedy capitalists. Go Gang Green.

The Credible Hulk
The Credible Hulk

Shorter article might read something like this:

ERCOT to Texans: "Put 'em up!"

Chris Danger
Chris Danger

This is why Re-Reg needs to be pushed in Texas. Instead of playing the free market roulette wheel, its time these companies are required to keep more plants on line during the winter and summer. Instead of making excuses, come up w/ innovative solutions by using wind, solar,geothermal and tidal when building out new plants. Also, its time a price cap is engaged to prevent these companies from gouging the public during high demand season(s).

Paul
Paul

Now we enter the next phase of electricity market deregulation ... the shakedown phase ...

For those of you who are not students of history, history is repeating itself.  This among other items is why PURPA (The Public Utilities Regulatory Policy Act) 1935 was passed and electric generating companies became regulated utilities.

The argument that $3,000 per MWHr is insufficient is bogus.  Remember a year ago when we had rolling blackouts due to several generating plants not being winterized?  Well the 15 minute bid price hit $3,000 per MWHr despite the order of rolling blackouts by ERCOT to reduce demand and prevent collapse of the entire system.  (PS:  Freezing weather with temps below 32F for more than 24 hours happens in North Texas about every other year on average.)

For those among us who a a little bit math challenged, $3,000 per MWHr is the same as $3 per KWHr and current pricing is around $0.12 per KWHr.

I predict that the former TXU will implode financially within the next two to three years and then the electricity generating market will be economically reregulated in Texas.  In the meantime, KKR and TPG will walk away with several billion dollars in cash and leave behind a gutted hulk.

I also predict that we will have "time of day" pricing forced on us within the next one to two years as demand reduction strategy.  This will be courtesy of the "smart meters" that we are paying for.

Montemalone
Montemalone

Remember Enron?The guys have no incentive to build new plants if scarcity lets them make money for nothing.How about massive fines for NOT building pants to keep up with demand? That sounds better to me.

trudat
trudat

REGULATE RIGHT NOW!!!!!!!!!!!

scottindallas
scottindallas

again, you're ideological and not factual.  If electricity were a regulated monopoly we wouldn't see the kind of marketing that these customer service firms do.  How much money is spent by these non-productive parts of the electricity market?  How much waste, that should be focused on generation.  Your free market ideology doesn't jive with the utility market, with no competition, and no alternative the customer is powerless.  It's competition and alternatives that define the free market, not the exchange of money for service.  

Brantley Hargrove
Brantley Hargrove

If, by debt-laden firms, you mean Energy Future Holdings and its subsidiary, Luminant, then yes, it isn't just the low price of gas preventing them from building. I think it's fair to point out, though, that they just spent like $3 billion on some new coal-fired plants. They're also paying an absurd amount of interest on that merger debt.

But I'm talking generally about generators in Texas. What is factually inaccurate about tying low profits to low natural gas prices? If there's some alternate theory out there, I haven't heard it.

Derek
Derek

The EPA has forced many of the generators to go offline by imposing tighter restrictions that would required major capital expenditures.  Energy costs money to produce and is probably the most precious resource we have when it comes to 105 degree heat..how come no one complains about iphone prices and outrageous data rates? 

scottindallas
scottindallas

Wind is a nightmare for TX we've spent $7.8 Billion on wind and we still have brown outs.  It is the only new generation we have and guess what, when that cap is on us and the heat is high, there ain't any wind.  They work 8-12% of the time.  For what we've spent on wind, we could have replaced all our dirtiest coal plants with new natural gas plants, and have a surfeit of electricity.

TacoBellGas
TacoBellGas

Texas is already the #1 wind energy state in the nation. Alternatives are great, but they are not always cost effective or as reliable.  The wind don't always blow, except from Washington.  Fuel prices will always fluctuate, but right now natural gas is a huge bargain. 

TacoBellGas
TacoBellGas

That has been the whole point of the evil "smart" meters all along.  Their goal is cut capital expenditures by raising rates and forcing people to cut back consumption.  Why spend to build new plants, when you can just raise rates and force people to cut back?  This "shortage" is created to force through that plan. 

Anon
Anon

time of day pricing makes a lot of sense. energy costs more during the day to produce AND there is greater demand for it. why shouldn't you pay more for something when it is more costly to produce and more people want access to it? 

Me
Me

massive fines for forcing people to build in unprofitable conditions are you a communist?

Phelps
Phelps

Remember Econ 101?  If it really is overpriced, then someone will enter the market and undercut them for the money.  Except that we're only mostly deregulated, so there are still plenty of barriers to entry that aren't economic.

Anon
Anon

they've paid over $10 billion in interest over the last couple years as a result of the buyout. no one to blame but themselves for not having free capital to expand production capacity.

Montemalone
Montemalone

 EFH CHOSE to LBO TXU and get saddled with huge debt payments.As to profitability, the cost of gas to create steam to turn the turbines is passed through, with a mark up for profit. If Walmart can buy TVs from China cheap, and sell them cheap, and still make a nice profit, then why can't the generators?

scottindallas
scottindallas

 bs, it's population growth.  EPA has threatened this but as yet done nothing.

Chris Danger
Chris Danger

TacoBellGas would be an awesome fuel source to get this state running, its the purest form of natural gas out there ;)

I'm all for alternative energy resources, would help also if dereg was tightened up and price-capped these companies who gouge people during the summer and winter as well..

Paul
Paul

The purpose of the demand reduction strategy is to increase the utilization rate of the generating plants.

By increasing the utilization rate, the generators will have a higher return on their invested capital ... and we will have a less reliable power supply.

The result of deregulation has been increased power rates and reduced reliability.

If deregulation is so great, then please explain why my power costs are less from a regulated rural electric coop than the so called free market in the DFW area?

Montemalone
Montemalone

 It doesn't cost more to produce during the day. Natural gas, coal, and uranium are not cheaper at night. Now the demand is greater at 2 pm than 2 am, so that creates scarcity, which bumps up the price.But the argument for deregulation posited by the utilities and venture cap guys in the first place was competition would ensue, new generation would appear, and life would be ass tickling with a feather sublime.

Me
Me

wow someone actually gets it

Anon
Anon

econ 101 also points out that utility markets never truly function as a perfectly competitive market in which demand and supply are roughly in equilibrium.

scottindallas
scottindallas

 Where's that cheap energy?  I'd suggest that not only the debt (important story) but also the expense of all this marketing by the customer service firms who compete, and only increase profits, and costs, all of which is utterly non-productive.  All those ads are wasteful marketing.  Utilities shouldn't market, they should be regulated monopolies, hence, no need to market.

Brantley Hargrove
Brantley Hargrove

As to the first part: Duh.For the second, in Texas's energy-only market, the wholesale price correlates to the price of gas, not the generator's operating expenses. I'm not saying it works, I'm just saying that's the way it is.

scottindallas
scottindallas

 Wish we were trading with OK, they're still regulated, still have a profitable firm running the show, and their electricity only when up 1cent/kW/hr while ours more than tripled.  And, the OK firm is traded on Wall St and pays a nice dividend.  Your ideology is blinding you to the facts.

scottindallas
scottindallas

 la Nina means a wet mild Winter.  Always did, till this year when "drought" was the big environmental buzz word.  I've been saying this all along.  I'm a gardener by trade you know.  You neophytes to the climate observation game don't really know what you're looking at. 

scottindallas
scottindallas

this might be your least considered position yet.  So, these companies seeing systemic scarcity, and a potential for greater scarcity due to environmental concerns couldn't justify building new natural gas plants to off-set the less efficient, more polluting, more expensive to fuel keep running coal plants?  You really haven't thought this through.  Further, it shows you don't understand utilities. 

The only logical way to refute me, is to say that these firms should be able to pursue profit over all.  Well, then, in that system plants would shut down power supply to create greater demand.  So, they'd only run the most efficient plants and never run the old ones.  This perverse incentive is why the utility markets better operate when regulated.  The deregulation has caused vast capital to be wasted on marketing the firms who do customer service (which only raises cost for the delivery of this resource, a literal tax on the economy)  and no where is there an incentive to generate.  We have the dereg law that Enron wrote, and it's a disaster.  Perhaps you have a suggestion of how to deregulate, let's see it.  Till then, let's repeal electricity deregulation, rather than Obama care--that's the crazy ideological law that is costing us our economy.

Max from the Sandspit
Max from the Sandspit

True Shrub 1 cut the deal with a phase in, cross border came in under Slick Willy.  Kid you be out of your depth. Smoke some weed, then go to the National Hurricane Center site, click on satilite, scroll down to West Pacific, load rainbow loop and enjoy. Pure weather porn.  

Brantley Hargrove
Brantley Hargrove

Nope. The Clean Air Act Amendments were all HW Bush.

I've seen the plume models. The stuff from Big Brown hits us at around 2 pm every day.

Max from the Sandspit
Max from the Sandspit

Keep drinkin' the coolaid kid. The cross boader crap goes back to Clinton and his wacko's. Most of the Texas crap comes up from Mexico, it rides the Pacific flow, which is finally kickin' back in cuz La Nina is finally breaking up. You might wanna consult Dr. John Gammons on that fact, it's the reason Texas is getting wet right now.   Combine the Green stupidity that forced the sale of TXU in 06' with Clinton hack Lisa Jackson and thatt's why we're here.

Brantley Hargrove
Brantley Hargrove

 The regulatory nightmares you're referring to -- CSAPR and MATS -- were laid out during the Bush Administration and before. They've been tied up in the courts for NOT going far enough to clean air.

Justin Julian
Justin Julian

And those threats have no effect?  You're running a massive corporation, and you're thinking of trying to build some new power generators...with an EPA that's 'threatening' to force you to shut down or perform costly rehabs on your existing plants, and makes it clear they don't want any new coal or nuclear going online.  What are you going to do?

You're going to sit on your money and wait for the air to clear.  And that's where we're at right now: nobody is investing in anything because of the ridiculous regulatory nightmare the Obama admin has become.  Just ask the coal industry how that's working out for them.

Anon
Anon

Demand reduction is what I think we as a society need to achieve. It is the point, in my opinion. There is so much wasted power usage in the current environment, it's pretty disgusting. You see this as a problem that can only be fixed by supply additions. And that is absolutely incorrect. That might be the choice we make, but the pricing signals I would prefer to send are those that encourage conservation, rather than unfettered growth in consumption.

Paul
Paul

 Anon ... no matter what you call a meadow muffin, it still stinks.

In a regulated market the regulated does earn a reasonable return on the invested capital.  Some of the requirements that existed during the regulated period were items such as 3 days of fuel oil supplies at natural gas fired generating plants, sufficient reserve capacity to meet peak demands, allowance for return on investment for low utilization peaking plants.

Time of day pricing is a demand reduction strategy.  It also allows for a higher utilization of the generating equipment.

The power grid is only strained when there is insufficient supply, whether by lack of capacity or by intent of the generators.

Anon
Anon

Demand reduction strategies work best in a regulated power market. Which is what I'd prefer. I still think people's peak usage should extract a premium to reflect its strain on the grid.

Anon
Anon

peakers can run on nat gas. don't get me wrong - I'm not arguing to continue to current system. just saying that energy should be priced higher during the day. there are other markets that are trying innovative solutions to energy shortages like paying large customers to reduce consumption during peak demand hours. in effect paying them to figure out just how energy efficient they can be, rather than attempting to build ever more generating capacity and wondering why people just consume more. the key is that initiatives like that can only work in regulated markets. 

scottindallas
scottindallas

but peakers aren't fired up in the morning and shut down at night.  Only natural gas has that capacity.  They run for weeks or months, not 9-5

Anon
Anon

please refrain from attempting to explain a market when you don't have the slightest clue how it works. you are absolutely incorrect about the cost of production during the day. to meet peak demand, the most energy inefficient power plants with the highest cost inputs are used. there is even a term for them. they are called "peakers" and they are used perhaps 10-15% of the entire year to meet demand when it spikes out of control. because the highest cost power on the curve sets pricing at any given time, the cheaper baseload producers get a premium during times of peak demand. as you point out, their costs do not increase as demand changes throughout the day. the issue is that the highest marginal cost power producer sets the market clearing price. why does it do that? easy, because no one turns on their production capacity to produce energy for which they will be paid less than their costs. 

Paul
Paul

 Please define "excessive demand".  I prefer to call it inadequate supply.

Just because new demand records are being set does not necessarily mean that we are being profligate in our usage of electricity.  The state is growing in population and per capita income is rising, both of which lead to increased electricity usage and demand.

Perhaps an alternative would be to set rates to include a demand factor.

The still regulated generators in ERCOT are managing to attract capital for investment.  So why are the unregulated generators able to do so, or is it a matter of what the unregulated generators are wanting for a return on capital versus what the regulated generators are allowed.

Anon
Anon

Not sure what was unclear. Phelps tried to turn this into some Econ 101 simplistic supply demand scenario and I pointed out that Econ 101 also says natural monopolies such as utilities do not function in true markets. In such scenarios there can be a benefit from regulation that helps the market operate at longer term marginal cost rather than the market clearing rate.

I maintain that time of day pricing is a needed step to curbing excessive energy demand. I didn't say anything about the absolute pricing level but shifting demand for energy at the margin to times of lower total consumption is prudent.

Paul
Paul

You may want to be a little clearer ... you are coming across as a supporter of the current "deregulated" market.

We do not have a free market place for electricity.

To advocate time of day pricing to force re--regulation is similar to throwing gasoline on a fire.

To further say that a $3,000/MWHr rate is insufficient comes across as very anti consumer.

$3,000/MWHr converts to a typical monthly bill of $3,600 per month for 1,200 KWHr.

How fast do you think that that will cause a revolt.

Anon
Anon

What? I don't support deregulated power in the slightest. Power prices are influenced by the marginal cost of the highest prices producer in all power markets, not just deregulated. I just think if we are going to suffer the fiction of a 'market' that people should be forced to feel the full effects. My guess is that the market would be re-regulated in a hurry.

Paul
Paul

 Don't forget that in the electricity market, the price is set by the high cost provider not the low cost provider.

All electricity produced under deregulation is priced at the last and highest bid in needed to meet the 15 minute demand.

Econ 101 also points out the oligarchies distort any free market as the oligarchy becomes a price giver rather than a price taker.

Adam Smith stated that a true free market place is where the consumers are setting the price.

ERCOT is practicing a fiction as the "consumer" as they conduct their 15 minute bid ins on power.  Because of the oligarchical nature of the electric generators, the market is easily distorted by them.  For example, see the situation a few years ago where TXU did not bid in any power until it hit $150/MWHr.  As they are the largest single generator in the ERCOT system it was not hard for them to do this.

For which generator or reseller do you work Anon?

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