One of Texas' Biggest Power Generators Just Admitted Deregulation Is a Colossal Failure

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Peter Ryan
A bigwig at NRG, Texas' second-most prolific electricity generator, took to the editorial page of the Houston Chronicle the other day, and the result was remarkable -- a tacit admission from one of the sector's biggest players that deregulation simply does not work.

As we noted recently, Texas' power grid is far and away the one most likely to run out of juice this summer. To meet summer demand, NRG Gulf Coast sector President John Ragan notes that his company is helpfully dusting off four of its oldest 1950s-era plants. "That's like putting your family in a very, very old car with an odometer that has rolled over too many times and then trying to drive across the country," he adds. This isn't a sustainable solution, he admits.

So, he proposes one: "As our reserve margin dwindles, we face two choices: Hope for mild weather or move to a capacity market, which has brought new generation to electric grids in states across the country."

This being Texas, the former is clearly absurd, so he must being leading us toward the other.

By a capacity market, Ragan means one in which ratepayers -- you and me -- subsidize the construction of power plants to ensure adequate generation. Which is curious, because a capacity market is basically the opposite of what deregulation was intended to accomplish -- allow competition and profit-seeking in an arena where customers were once captive and earnings were regulated.

Ragan isn't shy about admitting the delusional, optimistic bet his industry made. They thought natural gas prices -- and the electricity rates most often pegged to them -- would just keep soaring forever and ever. They didn't bet on the U.S. becoming the Saudi Arabia of natural gas. Natural gas glutted the market, prices fell and so did energy rates. Over-leveraged companies like Dallas-based Energy Future Holdings can't earn enough to pay off their gargantuan notes, and are currently preparing for bankruptcy.

Now, of course, they all want a bail-out. But it's actually worse than that. What they're asking for is a grotesque, Frankensteinian hybrid of Texas' current market regime. Generators like NRG don't want to give up the insane revenues they realize when Texans are running for their thermostats and driving electricity rates ever higher. That's good money. But they also want you and me to cover their fixed costs through a capacity when the money's not so good.

They literally can't lose!

Or, as Paul Ring over at EnergyChoiceMatters.com puts it, they want "a free bet at the table."

They want all of the reward of an energy-only market, and none of its risk. And, if I were a betting man, I'd lay money on the odds that they'll get what they want. As I noted yesterday, four of the top five lobbying clients last year were in the electricity sector. Energy Future Holdings spent more than $6 million on lobbying, despite the fact that it's losing billions.

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43 comments
dman279
dman279

The hard part about energy deregulation is the fact that most people don't shop around for cheaper service.  A lot of people look to brand recognition for their provider not realizing that they are merely billing companies and not the generator.  

It's hard to downplay the effect of deregulation and the number of jobs it has created for people who now bring customers to energy providers.  Hopefully we can find a way to increase capacity in such a way that the "investment" makes sense.

Diallo

www.patentenergyco.com

NuclearLarry
NuclearLarry

Claiming the market is "de-regulated" is a blatant lie.

Here's an example:

There are Clinton era EPA restrictions STILL in place where a power plant cannot replace one of their turbines with a newer one that produces more power from the same amount of steam without upgrading the entire plant and going through inspections as if it were a brand new construction site.

That would be similar to telling a homeowner that if you wanted to add insulation to your house to save money you could only do so if you replaced all your windows with new energy efficient ones, replace your HVAC with a new one that is more energy efficient, tear off your roof and install the new energy efficient radiant shield lumber and install the best energy saving shingles or roofing the government demands, AND have every inch of your home inspected (at your cost) for any and all energy savings items that must be completed before the insulation is allowed.

That is in essence what the power generators are required to do if there are newer more efficient upgrade parts so they end up simply installing exact replacements that end up not only costing the consumers more money but also means that plants that could be producing more electricity with lower pollution/emissions cannot do so.

The best answer to this energy "crisis" is to get off our collective butts and start yelling at our elected Federal officeholders to stop blocking nuclear power plants.

Unlike back in the day when each nuclear plant was so unique and the cost were artificially made to be extremely prohibitive through concerted efforts of small but vocal anti-nuclear fanatics that meant each plant was planned, designed, constructed, and operated much like how you would be forced to build each and every automobile from scratch each time without being able to rely on mass production techniques!

Today there are standard types of plants that are used all around the globe and if you look at just how France has a cookie cutter approach to nuclear plant construction for power generation.

Federal regulations still in place from back in the 60's and even more recently in the US have not only kept the initial capital costs so high and construction times to long that very few energy corporations dare to even try to enter the fray by trying to get a permit.  There is even a Generator III type that has been approved that can extend the basic lifespan of the reactor to an 60 years instead of 40 for ones today and that can be extended to 120 years instead of the current 80 that many could be extended.

But the left doesn't want nuclear and even the unions don't want nuclear.  Nuclear plants require less construction and a lot less union labor once finished and online whereas the coal and gas plants generate a lot more of ongoing union jobs while it is running.

An operation nuclear plant employs between 400-700 people most who would not be unionized where a coal plant employs under 100 just in the plant but almost all are unionized.  BUT for coal, there are over 1,000,000 workers around the nation working in the coal industry and yes, most of them are union.

And here's another kicker.  All employees at a nuclear plant are run through background checks, drug screening and random drug testing.  Anyone else catch the news not long ago where those UAW workers in Detroit were getting high and drunk before and during work shifts?


guest
guest

Anyone who thinks deregulation is failed hasn't compared CoServ's rates to the rates in the deregulated parts of the state. I went from 5 cents to 12 cents a KwH when I moved the Flower Mound. Urban cooperatives need to be deregulated now.

roadsidecouch
roadsidecouch

It would work fine if the EPA would just F themselves instead of Texans.

DrGene
DrGene

Actually the market is working.  Every hour the absolutely lowest possible price for energy is being bid by the generators and we the customers are benefiting with low energy costs from that very competitive market.  But here is the problem.  The market design has no mechanism for keeping the lights on.  In fact the market would like for your lights to go out from time to time so they would make more money by bidding up the prices.  This is the same mentality as a water shortage on Mars and using biddings by thirsty Martians to determine who gets water and who doesn't.  The capacity market is only put in place to insure that there is enough new generation constructed to keep the lights on.  The capacity market is itself a bidding process.  Its just a necessary extension of the already existing energy market.

Dr Gene Preston, PhD, PE Texas

DrGene
DrGene

Actually the market is working.

ThePosterFormerlyKnownasPaul
ThePosterFormerlyKnownasPaul topcommenter

Act 1 has ended.

Act 2 is just starting, get ready for even higher electrical costs as we move to a "capacity charge".

Act 3 will be time of day pricing.


This market just fundamentally does not work.  It is sending mixed signals.  To the generators the low price indicates a lack of demand.  To the purchasers the low price indicates a surplus of generating capacity.


One aspect that is overlooked is that generators are not required to maintain a reserve.  They may book as much sales as they desire regardless of potential demand.

PersistentID2345
PersistentID2345

Texas Coalition for Affordable Power - 12/12 Deregulated Electricity in Texas Report

http://tcaptx.com/wp-content/uploads/2013/03/SB7-Report-2012.pdf

Recommendations - last bullet point (page 6)

'Re-regulation is Not the Answer

Policymakers should strive to make the state’s deregulated electricity system as efficient and fair to Texas consumers as possible. Re-regulation is not the answer. Instead, the Public Utility Commission should pursue a balanced approach with regard to the state’s electricity market. Consumer protection and affordability should have equal footing with the promotion of competition.'

----

 Also see page 67 for a discussion on reliability issue options.


wcvemail
wcvemail

This former de-reg fan has paid enough to know that this policy has failed us. Granted that the natural gas bounty could not have been predicted, the trends were there all along. We've given it a thorough trial, and now let's give de-regulation a thorough burial. I skew right-of-center economically, but here's a case for government regulation, real regulation, not lobbied give-aways.

everlastingphelps
everlastingphelps topcommenter

Why not?  Privatizing the profits and socializing the risks is how the Feds have been handling electric cars, green energy and banking for about six years.

d-may
d-may

I'm okay with that so long as a sizable portion of that power paid for by rate payers is required by law to be renewable. Say 50% of all new generation capacity. Sounds fair to me. 

If WE are paying for it, and WE are assuming all of the risk, WE should demand they install the best possible solutions.

Sotiredofitall
Sotiredofitall topcommenter

@guest Who were you getting a 5 cent rate from?   How did you calculate the 12 cents for CoServ, I see a rate closer to 9 cents?   More details please

scottindallas
scottindallas topcommenter

@guest relative to the price of natural gas, we're paying much more. 

Sotiredofitall
Sotiredofitall topcommenter

@DrGene

Over the same period, municipally owned utilities such as Austin Energy and San Antonio's CPS Energy have shown they can outperform the for-profit companies on reliability while paying their CEOs far less.

A new report from the Texas Coalition for Affordable Power says Texans in deregulated areas paid $10 billion over the national average for power over the last decade.

Is it your contention that lack of capacity and higher consumer price is a good thing?


wcvemail
wcvemail

@DrGene I take your informed point about the market's success, but that's from a macro, historical POV. From a daily, personal POV, rolling blackouts define the consumers' perception that the market is not working. In fact, blackouts can be linked to poor planning in the consumers' minds, or even greed on the part of producers. That's because as Paul pointed out below, "...generators are not required to maintain a reserve. They may book as much sales as they desire regardless of potential demand."

If you're right that capacity planning will maintain a baseline SLA, I would pay another buck. But I want to know that buck is really going to build/maintain production, not into lobbying or exec bonuses, so I'll need some transparency and some guarantee for that buck. That ain't happening in Texas in particular, and throughout the utility industry in general.

Granted that we as consumers need to better consume, such as weaning ourselves from the "all power FULL!" at 5:30 p.m. when we flip on the AC, the dishwasher, the entertainment, etc.

ThePosterFormerlyKnownasPaul
ThePosterFormerlyKnownasPaul topcommenter

@DrGene Please see below.  One question that is not answered is what is the rate of return on invested capital that is needed in order to compensate for the risk taken to invest the capital into the generating asset given the uncertainties of the generating market and the fuel costs.

Sotiredofitall
Sotiredofitall topcommenter

@DrGene Only on a purely academic level - it's not working in practice as it results in higher customer cost and questionable capacity

primi_timpano
primi_timpano topcommenter

Yes. Bush never should have let Paulsen bail out Wall Street.

scottindallas
scottindallas topcommenter

@everlastingphelps "Privatized" utilities ARE prime examples of socializing the costs and privatizing the gains.  THere's no better example.  NONE

RTGolden1
RTGolden1 topcommenter

@dallas.l.may except for..... renewable energy has not shown itself to be capable of providing 50% of texas' energy needs on a consistent basis.  I agree that a percentage of generation should come from renewable energy, and I support public investment in renewable energy research, but I live in reality and that reality is that under current conditions, new fossil fuel burning generation plants or nuclear are the only way to meet Texas' growing demand for electricity.

DrGene
DrGene

@Sotiredofitall @DrGene 

Adding new capacity doesn't necessarily mean a higher price.  The new generators can lower energy costs.  The optimum generation mix will have a mix of different kinds of generators, some with high capital costs and low energy costs and others with low capital costs and higher energy costs.  One problem with the current market is it has no long range vision.  There is no mechanism to address climate change nor is there a mechanism to secure a future for us when natural gas prices rise once the current gas bubble goes away.  The gas producers feel they should be charging about double for their gas prices from current prices.  They have over produced, driving down the price of gas to lower levels than they expect.  Our current market design treats energy like a bunch of woodsmen with chain saws ready to plunder a forest with no vision of what the forest looks like 10 years from now. (i.e. natural gas exploitation).  This is not how we should be planning for the future in my opinion.

DrGene
DrGene

@wcvemail @DrGene 

The energy market is working and working extremely well.  Like I said, there is no mechanism in the current design for insuring there is enough capacity on the ground to keep the lights on.  Keeping the lights on is not the responsibility of the current market design.  The ERCOT ISO has the responsibility of keeping the lights on but no way to get new capacity under construction if and when its needed.  Don't blame any company or individual.  The fault is in the design of the rules.

DrGene
DrGene

@ThePosterFormerlyKnownasPaul @DrGene 

The rate of return is high when there is high risk.  There is high risk at this time for market participants because their revenue stream is so uncertain.  Since regulated muni's can set rates to pay for capital investments, they have a more steady income, and can charge a lower cost for invested capital.  This is one advantage of regulated utilities.  So in this sense competition may increase investment risk which might be more costly for covering fixed costs.  Its something to consider when deciding to regulate or deregulate the electric system.  Both have their advantages and disadvantages.

scottindallas
scottindallas topcommenter

@Sotiredofitall @DrGene you're full of crap.  the only thing deregulated was the customer service branches, the easiest thing to scale up, so no savings there.  Further, the true monopolies, Oncor and it's regional equivalents and the generation have not been deregulated.  Nor is there any connection between the customer service firms that we bid to and the generators.  And, the price is at the HIGHEST last unit, so again you've obfuscated.  Furthermore, ever single ad run is a flat waste of resources.  No one is debating whether to get electricity or not.  No one has a choice on who generates or delivers that electricity.  Why waste everyone's time to find a marginally better deal (inherently we're screwing all those who pay too much, not for better service, the customer service has no connection to Oncor, the Generators, nor the quality of the electrical feed)  So, we'd be better to go back to reregulate the industry.  A market with no alternatives, and no real competition is not a free market, and only an idiot would suggest so. 

A-nony-mouse
A-nony-mouse

@RTGolden1

If "renewable energy has not shown itself to be capable of providing 50% of Texas' energy needs", then how would you explain Denmark producing enough energy from wind power to satisfy the whole country’s electricity demand back in March. Or Spain having over half of their electricity generated from renewables in both March and April. Or Portugal announcing that 70% of its energy consumption came from renewable sources in the first quarter of 2013. Or Germany using solar to met half of the country’s electricity demand in May 2012.

The technology is there. It could be done and probably done in the next 5 years... if there was any political will to do so.

mavdog
mavdog topcommenter

@RTGolden1 @dallas.l.may

solar is able to meet the demand. Texas has the greatest potential for solar power generation in the country.

mandate net metering and it will not take very long before there is more generating capacity put onto the grid than these mothballed power plants will produce.

karenj503
karenj503

@DrGene Is THAT how your Texas woodsmen treat a renewable commodity like forests?  Chop them down and not re-plant?

Not a very good analogy, since responsible forestry product companies in other states like mine re-plant every logging operation so that a continuous supply is growing for future generations.

A better analogy might be the plastics industry, failing for the most part in educating the public in the value of recycling.  Instead we have shorelines clear down to Panama littered with plastic soda bottles and other plastic trash.

DrGene
DrGene

@wcvemail @DrGene

I'm retired and doing wind power studies on the side.  I keep up with ERCOT task forces.  I have filed some PUC testimony.  I post comments like these when the comments may be helpful (i.e. read).  I have posted a letter to the editor here in Austin every few months concerning ERCOT or climate change.  I have contacted Lamar Smith, Lloyd Doggett, and others recently.   I have sent many letters to President Obama.  I have sent a couple of comments to John Baner.  I am a member of the Science Council for Global Initiatives.  Check out my web page www dot egpreston dot com.  I would recommend you try to see the film Pandora's Promise when it soon is showing in Dallas.  Also look up Bill Gate's and Taylor Wilson's TED talks for an inspiration on the bright future possible.

wcvemail
wcvemail

@DrGene Doc, you should have smelled this one coming: what are YOU doing to help? Thanks for not preaching or promoting with your posts, but now it's time. I've already expressed that I'm willing to (a) pay more for better service, and (b) consume more responsibly.

Seriously and politely, not belligerently, tell us which legislators you've contacted or studies you've conducted or whatever, and really, how we can get more ideas out into the open.

ThePosterFormerlyKnownasPaul
ThePosterFormerlyKnownasPaul topcommenter

@DrGene @ThePosterFormerlyKnownasPaul  

The best way to summarize your statements is:

"Look at this, I have a self consistent argument supported by axioms of my own choosing.  There for my theory is correct."

I must admit, though, that you have outdone DesCartes when it comes to elliptical thought.  However, his was much more elegant and simpler.


scottindallas
scottindallas topcommenter

@DrGene @ThePosterFormerlyKnownasPaul That's why regulated is better.  The risk is nothing, NOTHING.  Try doing business in a free market, where you have customers.  Utilities don't have customers, BY LAW, BY ECONOMICS, THEY'RE CONSUMERS.  They're different, cause they're different markets.  

scottindallas
scottindallas topcommenter

@everlastingphelps @ScottsMerkin There's nothing risky about electrical generation, and demand, it's chartable.  That's why we're CONSUMERS not CUSTOMERS, demand is INELASTIC such that demand can be easily forecasted.  That bears ZERO resemblance to free markets, where each customer much be fought for.  Are you on the fence whether you want electricity?

ScottsMerkin
ScottsMerkin topcommenter

@everlastingphelps @ScottsMerkin correct, but I think I was just mad at the last guy who came in here calling Tesla a failure.  Its no failure, it may not have been the best deal but its building cars that people are buying

everlastingphelps
everlastingphelps topcommenter

@ScottsMerkin @everlastingphelps That's exactly my point.  Socialize the risk, privatize the profits.  You can get risky loans -- you just have to pay more.  You can get venture capital -- but the venture capital wants a high return for success.

Or, you can go to your cronies in the government, and get a "if I win, I keep the winnings but if I lose you take the loss."  It's like going to Vegas and playing with someone else's $100.  If you lose, they are out.  But if you win $1000, you keep $900?  That's bullshit.

ScottsMerkin
ScottsMerkin topcommenter

@everlastingphelps they claim it was a shitty deal because the government didnt make ENOUGH money off of it.  Ill say anyone that takes a loan and actually pays it back in full, early, is a step ahead of the rest of the schmucks who just plain stole the money and folded

primi_timpano
primi_timpano topcommenter

The Texas generation market bet heavily on coal--it was cheap fuel and electricity was priced on gas. Electricity pricing should be based on actual costs, not theoretical ones. I always thought electricity companies were natural monopolies, thereby requiring regulation.

Sotiredofitall
Sotiredofitall topcommenter

@A-nony-mouse

Best to not over sell your point -  24 August 2012

Though renewable-energy projects are the darling of European politicians, German utilities are placing their bets on coal. According to an April report by Germany’s National Association of Energy and Water, nearly 14,000 of the 36,000 megawatts of new electricity generation capacity being planned for Germany will probably be provided by coal-fired facilities.

Indeed, just a few days ago, the German utility RWE began generating electricity at a 2,200-megawatt coal plant near Cologne. And that plant provides an excellent lesson in scale, particularly when compared with Germany’s much-lauded solar-power sector. Germany has more solar capacity than any other country: 25,000 megawatts. Last year, Germany’s solar panels produced about 18 terawatt-hours (that’s 18 trillion watt-hours) of electricity. And yet, RWE’s new coal plant, which has less than a 10th as much capacity as Germany’s solar sector, will, by itself, produce about 16 terawatt-hours of electricity.

casiepierce
casiepierce

@A-nony-mouse @RTGolden1 Hm.... begs the question, exactly how HOT is Denmark and Spain and Portugal in March and April? I'm pretty sure the combined populations of both Denmak and Portugal is still only half of the population of Texas. Please, A-nony-mouse, go back to logic school.

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