Texas Electricity Manipulation Questions Possibly Reveal Larger Concerns

by | Jul 24, 2012 | Industry News

After writing a post asking some questions about whether or not it was possible if the Texas electricity market was being manipulated on 06/26/12, I have since received a fair amount of attention. On top of the previously linked articles, my post was also mentioned at the bottom of another Houston Chronicle piece discussing the state of Texas generation capacity as well as an article the Texas Energy Report. The most interesting to me, however, were some mentions in articles in the Environmental Defense Fund blog, a website dedicated to making green initiatives work together with economic interests.

Particularly, this article discussing the volatility pricing and energy scarcity I thought was especially insightful. I’ve been no stranger to criticizing the recent increase of the Market Cap by the PUC, and this article also questions the long-term benefit of raising the market cap. The most interesting sections I’m just going to paste below in their entirety:

Wild Mood Swings

If the market isn’t being manipulated, it is at least feeling a little bipolar: one hot summer day with high demand prices are up slightly but everything was working fine. The next day however, a 2 percent uptick in demand combined with an unexpected loss of 1.6 percent sent prices soaring. The peak price on June 25 hit $438/ megawatt hour (MWh), but on June 26 prices maxed out at $3,000/MWh, meanwhile average prices skyrocketed to 640 percent above the average for the 25th.

In a well functioning market these price swings wouldn’t be so dramatic and unpredictable, and those swings point to fundamental problems with the electric markets in Texas. In extreme situations prices and profits may increase enough to support new investment but those extremes are so unpredictable that no power company can plan well for them, much less finance new investments. As Brattle Group says in their report to ERCOT, “reliance on scarcity prices is unlikely to achieve ERCOT’s current reliability objectives.” The solution? Reduce our reliability standards or implement reforms that will lead to reliable electricity over the long term without the need for emergency regulatory intervention.

The reason for these swings is pretty simple, and outlined in the Brattle Report: the ERCOT supply curve does not efficiently reflect current or upcoming scarcity conditions in the market. The supply curve is dominated by low price resources like wind, efficient natural gas power plants, along with nuclear power and some cheaper coal, all of which come in at or under about $30/MWh. But as the chart shows, when you start getting near the 100 percent peak demand level there’s a sharp “hockey stick” curve upwards in price. This means that when we’re in that high demand territory, a single power plant going offline or an unexpected spike in demand can send electric prices from $30/MWh to $3,000/MWh without warning, like we saw in late June. Other regions have a more gradual supply curve of price increases during scarcity conditions, providing a kind of ‘warning’ to the market that the Brattle Report suggests as part of its suite of recommended market reforms. That gradual curve is important because it allows demand-side resources to help stabilize prices and at the same time it provides potential investors with the kind of predictable certainty that allows them to consider investing in Texas.

The article then goes on to discuss that none of the efforts that have currently been implemented are likely to solve our looming shortage of generation. The study the Brattle Group released at the behest of the PUC agrees, and despite that fact that the PUC voted in favor of increasing the market cap anyway.

I hope these discussions continue to put pressure on the PUC to continue to find solutions to the potential energy generation crisis Texas looks to be facing in the next few years. I’ll take any increased attention and pressure on the matter, regardless of the source. Otherwise it is not just our electricity bills that will suffer, but also the ability to trust we won’t have blackouts in the dog days of summer.

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