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ERCOT reliability-risk conclusion draws doubts

mark watson | s&P global platts | 21 september 2016 

To read the full article in S&P Global Platts, click here.

The article in S&P provides differing opinions to those of PA's energy experts submitted via an Op-Ed piece in The Monitor newspaper. We welcome these opposing views as they help contribute to the wider discourse on how best to provide cost-effective and reliable electricity to Texas ratepayers. We would note that Mr. Gulen's comments do not consider the lead time required to build new natural gas-fired power plants, which necessitates near-term action to solve long-term problems. Similarly, Mr. McAndrews contemplates ORDC-induced energy price spikes occurring due to atypical weather events, however we believe price spikes, in a well-balanced energy-only market, should also occur in a normal weather year. Lastly, we would challenge Mr. Schroeter's assertion that the ORDC is working well, since Texas experienced record high electricity demand this past summer, but ORDC-induced price spikes were less than 2015.

A consultancy's analysis concluding that the Electric Reliability Council of Texas Inc. faces the risk of rolling blackouts without "immediate reforms" of the state's power markets has drawn skepticism from power industry observers.

PA Consulting Group, a global consultancy focusing on energy and utilities, announced Sept. 16 that it had completed a study indicating that unless the Texas Public Utility Commission acts soon to introduce new reforms to the electricity market's structure, Texans could be subject to rolling blackouts and high electricity prices in the near future.

According to the research, one of the fundamental principles of any competitive market is that producers should have a reasonable opportunity to recover their costs and make a fair market return, otherwise existing producers could go bankrupt and new producers will not enter the market.

The independent analysis by PA Consulting energy and utility experts David Cherney, Ethan Paterno and Ryan Hardy, which was not commissioned by a client, states that the Operating Reserve Demand Curve, a price adder introduced in 2014 to reflect scarcity in high-demand conditions, is "not working."

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As stated in the research, published as commentary in The Monitor newspaper of McAllen, Texas, "Over the past two summers, Texas has seen record highs in electricity demand, but 2015 and 2016 were among the least profitable years for power plants in recent memory. If this continues, it's doubtful that new power plants will be built."

PA Consulting analysts said ERCOT's "actual reserve margin" this past summer was below 11.5%, while other U.S. markets had reserve margins above 20%.

According to PA, during the next several years — as demand for electricity increases and potential power plants retire due to poor profitability — ERCOT's reserve margin will decline absent the development of new power plants.  As a result, the 24 million customers that ERCOT provides power to could face sustained rolling blackouts and high electricity prices.

Asked why other stakeholders have not generally been calling for substantial reforms, Ethan Paterno said: As our analysis suggests, this is not necessarily a current problem, but one that needs to be addressed given the lead time to build new power plants.”

Ethan concluded: Shifting the ORDC to the right so as to yield higher prices at higher reserve levels is the best path forward at this time.”


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