Texas moves to raise wholesale power price in August

Reuters News
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Posted: Apr 12, 2012 6:34 PM
Texas moves to raise wholesale power price in August

By Eileen O'Grady

HOUSTON (Reuters) - Texas regulators on Thursday moved to raise the price cap for wholesale power by 50 percent this summer as a first step to prevent the close call seen last year when a record heat wave strained electric supplies and threatened outages.

The Public Utility Commission of Texas voted 2-1 to move forward with a proposal that would allow wholesale prices to climb to $4,500 per megawatt-hour when supplies are tight, up from the current $3,000 price cap.

The change, designed to increase generation resources in the state, would be effective in August under a proposal from PUC Chairman Donna Nelson.

The commission also voted, 2-1, to look at further increases in the price cap, to $7,500 per MWh or higher, beginning in 2013, in a separate docket to be debated over several months.

The three commissioners did not disagree on the need to raise wholesale prices during times of supply scarcity, only the timing and the method.

"We do need to send a strong signal and part of that is doing something this summer," Nelson said during Thursday's open meeting, which was webcast.

Forward power prices rose after the commission vote, industry sources said.

Texans consumed a record amount of electricity in the summer of 2011, when air conditioners revved up during the hottest summer on record.

The Electric Reliability Council of Texas (ERCOT) declared emergencies on a half dozen days in August, barely avoiding the need for rolling power outages.

Since then, ERCOT and the commission have made a number of changes designed to increase the amount of generation that will be online this summer and to address the longer-term need to encourage investment in new power plants. New plants are needed to replace older ones that are expected to shut due to stricter environmental regulations.

ERCOT warned last month that Texas will likely see another hot summer that will strain power supplies.

Commissioner Ken Anderson voted against the proposal, saying changes already implemented should be adequate to maintain reliability for the upcoming summer.

Anderson, who favors raising the price cap next year, said a higher cap will do little to increase power supplies this summer, but may disrupt the retail market by increasing collateral needs that may be passed along to customers.

"I continue to believe that doing something (to raise the price cap) this summer is neither necessary nor warranted," Anderson said.

Rolando Pablos, named to the PUC as the protracted heat wave ended last year, said the market must be prepared for another hot summer and the risk of rolling outages.

"Ensuring we get through this summer is paramount," Pablos said. "We have to weigh the consumer costs versus being able to get through the summer. More disruptive would be a rolling outage situation."

Other market participants argue that higher price caps only benefit existing generation owners and that more dramatic market changes, such as creation of a capacity market, are needed to attract investment in new power plants.

Anderson noted that nearly 1,300 MW of previously mothballed generation has returned to service since last fall which will boost ERCOT's reserve margin - the surplus power needed to avoid blackouts - above the 13.75 percent minimum this summer.

NRG Energy, AES Corp and the San Antonio municipal utility have returned units to service. Luminant, the state's largest power generator, continues to evaluate market conditions, a spokeswoman said Thursday.

Nelson said time is running short for ERCOT to get new power plants under construction that will be needed by 2014 to meet the state's growing power needs.

"If we don't get investment in our generation resources, we are going to be in a world of hurt," she said.

"I don't believe (wholesale) prices are high enough - even with the changes we've made - to attract the investment we need," Nelson said. "We want to send signals that we are serious about changing our market now."

ERCOT and the commission want to see results from a study from The Brattle Group to determine longer-term market changes. Brattle was hired by ERCOT to examine factors that influence long-term investment decisions for financing power plants. The report is due by June 1.

(Reporting By Eileen O'Grady; editing by Jim Marshall and Bob Burgdorfer)