More and More, Proposed Changes to Texas Electricity Market Just Look Like Windfall for Generators

Categories: Biz

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Peter Ryan
The state's biggest power generators are agitating for an expensive change in the market model that dictates what your electricity bill looks like. Right now, Texas is the only state with an electricity-only market, which means generators like Dallas-based Luminant make a living based only on the price of power. When prices are high, there's no better business than selling the juice that makes a Texan's air conditioner go. The side effect of that model is that the marginal costs -- like natural gas -- drive pricing. Thanks to a glut driven by shale gas plays in Texas and elsewhere, that price has been low for sometime, and power generators are smarting.

But it also means nobody wants to pony up the financing to build new plants so supply can keep up with Texas' ever-increasing demand.

They want Texas regulators to change the game: To institute a capacity market whereby the ratepayer -- you and me -- effectively subsidize the construction of new power plants. If it sounds like the opposite of a free, deregulated market, that's because it is. You could call it a bailout, where we pay for a power generator's fixed costs while they get to keep the insane revenues generated when our hellacious climate drives us to the thermostat.

NRG, one of the state's biggest generators, released a study recently that said a capacity market would cost us $4.7 billion. What a deal, though, because the company commissioned a second study concluding that the rolling blackouts a capacity market will prevent would cost the state $14 billion. "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," NRG regional chief John Ragan wrote in an op-ed a few months back.

Texas Public Utility Commissioner Donna Nelson has signaled her support for such a model. Her colleague, Ken Anderson, isn't so sure. They've been deadlocked on the issue. That impasse, however, is finished. Governor Rick Perry named Brandy Marty, his chief of staff, to fill the vacant seat, and I imagine the commission will vote on a capacity market in the near future.

As we head toward a decision on the future of Texas electricity, perhaps it is time to question some basic assumptions about the state of power grid reliability, here and elsewhere. In a recent earnings call, NRG CEO David Crane seemed to indicate that, contrary to what his colleague Ragan wrote about the blessings of capacity markets, it isn't only the Lone Star State that's looking at future power shortages.

"As the governors of various states consider how they are going to replace the wave of generation capacity that will be retired over the next few years as a result of either economic distress or environmental obsolescence, they are increasingly reaching the conclusion that they need to offer some sort of state-sponsored long-term off-take agreement, even for conventional new build," Crane said, according to EnergyChoiceMatters.com, a trade journal.

As journal writer Paul Ring notes, Crane obviously isn't talking just about Texas. "It's clear the Northeast states with capacity markets were included in his discussion," Ring writes. If even states with the kind of capacity market that Texas now contemplates are struggling with attracting financing for new power plants, will it truly solve our grid problems?

Ring came up with a second, troubling admission from the industry that seems to cast doubt on the narrative of an impending plague of Texas blackouts. In Arizona, where they're debating an electricity market similar to ours, opponents pointed to Texas' predicted electricity shortage as a cautionary tale. But the Retail Energy Supply Association, of which NRG is a member, said "the outlook for dire consequences in Texas appears to be wholly overstated."

That completely contradicts NRG regional chief Ragan's ominous op-ed, where it is foretold that rolling blackouts will darken the land and that businesses will pass on the opportunity to locate in Texas, seeking out more reliable grids.

None of this is to say that the Texas electric grid doesn't face obstacles. But before we institute a capacity market in which generators like NRG simply cannot lose, we need to make sure we know for certain what those obstacles really look like.

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22 comments
ruddski
ruddski

Obamacare will bring a windfall to insurance companies, and no-one seems to mind.

jahed700
jahed700

Obviously, those who can show they do not are able to help pay for the electrical service or bring about the construction of the national infrastructure or new plants, don't need to. Right?thanks.

holmantx
holmantx topcommenter

Just do it like Obamacare.  Pass a law.  Government orders everyone to pay their fair share.  That's what you are advocating isn't it?  Top down, autocratic decree.  In the name of . . . fairness.

Of course, those who can show they do not have the ability to help pay for the electrical service or contribute to the construction of the infrastructure or new plants, don't have to.  Right?

Certainly works in Mexico.

Brownouts and rolling outages only occur in countries who demand topdown fairness.

It's more important that everyone suffers fairly.

Montemalone
Montemalone topcommenter

Wait. Didn't we have this before the "deregulated market"?

Power plants set rates based on the cost of production + cost of new plants + cost of upkeep + profit margin and were approved by PUC?

Keith Funk
Keith Funk

That's what happens with the GOP in control of state government.

d-may
d-may

I would actually be fine with this -IF there was a rider that said at least 50% of all NEW power generated from the capacity bailout is from renewable sources. If we are going to be tapped for a bailout, we need to demand the highest quality work for our money. Otherwise we will only get the bottom dollar coal plants. 

But hey, this is Texas. That pretty much means that the state is just going to start forking over money. 

TheCredibleHulk
TheCredibleHulk topcommenter

@ruddski 

You're so right - we need a single payer system that will get those bloodsuckers out of the game.

garlanduberalles
garlanduberalles

@ruddski i disagree with 99% of what you say on here...but you are so freaking right on with comment

scottindallas
scottindallas topcommenter

@holmantx no, idiot.  regulate the market, get the multi-layered financialization, provide a margin for planned demand, and leave them with a modest 8-10% profit,  It's not, and shouldn't be confused with a free market. 

schermbeck
schermbeck

@Montemalone Yeah, it was called CWIP - Construction Work in Progress. It's how Comanche Peak got built despite $10 billion or so in overruns. The then PUC-regulated Texas Utilities would ask for twice as much as they needed. The PUC would give them half, and on it would go.

d-may
d-may

Or, better yet, a way for individuals to get some of that "capacity market" money if they install solar panels or wind turbines and create their own capacity.  

holmantx
holmantx topcommenter

@scottindallas @holmantx

What if natural gas prices fall and the Wall Streeters, who bought Texas' biggest electricity producer, lose your 8 - 10% guaranteed profit?  

HA!  what?  did you forget what happened?  Do you REALLY want to guarantee Energy Future Holdings Corp. an 8 to 10% profit based upon their buy-in at $12 mcf gas prices.

What are you sayng?  EFH is too big to fail?  That the users of their "utility" must pay whatever price they get to charge in order to float the buy-in basis?

friggin' commie.

ruddski
ruddski

Nobody is confusing Obamacare with the free market either.

ThePosterFormerlyKnownasPaul
ThePosterFormerlyKnownasPaul topcommenter

@schermbeck @Montemalone 

Comanche Peak was under construction when the Three Mile Island reactor failed.  This resulted in construction being halted on Commanche Peak while the NRC reviewed the design and order many changes.  During this time period the interest charges on the construction funding was responsible for a major portion of the cost overrun.  The design changes ordered by the NRC was responsible for the rest.

Cancelling Commanche Peak would have been more expensive than completing it.

scottindallas
scottindallas topcommenter

@d-may The problem is that the only power generation that matters is power generated during peak demand.  And here's the problem, wind is worthless.  If you think about it, you'll realize that when we're at peak demand, afternoons on hot summer days when the "cap" is over us, there ain't no wind blowing.  So, while on a very mild mid Oct day, wind power generated a substantial percentage of our power that day, the coal plants were still running, cause that wind is so unreliable.  

Solar, makes much more sense, as the sun is surely shining when we're at peak demand, but we've spent so much on wind power that we could have replaced our old dirty coal plants with new natural gas plants that are more efficient and less polluting.  But, we built all those unreliable wind mills, spent $8billion for power lines alone, and have had to keep the dirty coal plants running, and we rely on them when our air is stagnant, and that pollution spikes on ozone days.  


ThePosterFormerlyKnownasPaul
ThePosterFormerlyKnownasPaul topcommenter

@holmantx @ThePosterFormerlyKnownasPaul @scottindallas

"It's certainly the mindset on how the public pension plans across America became so rich, they collapsed Illinois and California."

That would be the responsibility of the legislatures that authorized the pension amounts to be paid out.  The State of Wisconsin just went through this by showing that the pension payouts were unaffordable and not in line with other similar pension plans.

holmantx
holmantx topcommenter

@ThePosterFormerlyKnownasPaul @holmantx @scottindallas 

In a Leftist Nirvana, if only the government could directly negotiate prices with Wall Street on behalf of the citizen, why then we would all have fair electricity costs.

It's certainly the mindset on how the public pension plans across America became so rich, they collapsed Illinois and California.

What would we be paying if EFH had the regulatory authority to charge us all an amount necessary to yield an 8 to 10% profit on their buy-in basis?

The short answer is - let them fail.  

ThePosterFormerlyKnownasPaul
ThePosterFormerlyKnownasPaul topcommenter

@holmantx @scottindallas 

LBO firms such as TPG and KKR don't touch anything with less than a 25% IROR.

As it was with the $12/MCF gas resulting in retail prices of $150/MWHr, Luminant's cost of production was around $30 to $40/MWHr.

Now with this proposed capacity charge, the generators want "free capital".

schermbeck
schermbeck

@ThePosterFormerlyKnownasPaul @schermbeck @Montemalone I guess putting in one of the reactor vessels backwards didn't add much, or the other shoddy construction practices documented over more than a decade by whistleblowers? But you do highlight another reason why nukes will never be economical in an open market - they'll always be tech upgrades needed due to the latest serious accident.

ruddski
ruddski

Just get Joe Biden to give a speech, outdoors, in W Texas every summer afternoon. Kill 2 birds with one stone. Actually, kill a lot more birds, but Texas has too many damn birds anyway.

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