In a long-awaited report ordered by the Public Utility Commission, the Brattle Group’s study entitled “Estimating the Economically Optimal Reserve Margin in ERCOT” was released last week and showed that Texas has many options to keep the lights on, including potentially doing nothing.
The study was ordered by PUC Chairman Donna Nelson to determine the most economic reserve margin – literally the amount of supplies over the amount of demand – in Texas. The answer? A reserve of only 10.2 % would be the most economic approach and the good news is based on normal weather patterns Texas’ market would actually provide a 11.5 percent reserve margin in the coming years. In other words, in purely economic terms, Texas’ energy-only market would provide reliable and economic electric power. In fact, in normal years, one would expect less than an hour of reliability issues out of 8760 hours in a year.
Nonetheless, the study also presented an alternative market structure, and suggested that a 14.1 % required reserve margin would be more reliable long-term though slightly more expensive to maintain. The study did suggest that in extreme weather situations – like the 2011 heatwave – the 14.1% required reserve margin would be cheaper during that year because energy prices would volatile in any energy-only market. Thus, overall a capacity market during an extreme weather year would cost consumers $3 billion less because of lower power outages, while during a normal year, a capacity market would be about $400 million more expensive.
Table. What the Brattle Study Says about the Reserve Margin
|Category||Energy-Only Case||Capacity Market Case||Difference|
|Equilibrium Reserve Margin||11.5%||14.1%||2.6%|
|Loss of Load Events Per Average Year||0.33||0.23||(-.1)|
|Loss of Hours Average Year||0.86||0.23||(0.63)|
|Energy Price -$/MWh||$58||$48||(-$10)|
|Capacity Price ($/kW-yr)||$0||$39||$39|
|Total Customer Cost ($B/YR)||$35.7||$36.1||$0.4|
|Extreme Weather Year Energy Price||$99||$65||(-34)|
|Extreme Weather Year Capacity Price||0||$76||76|
|Total Customer Cost (Hedged)||$44.7||$41.5||(-3.2)|
It is important to note that the Brattle report – like all economic studies – made assumptions about load growth, weather, the impact of demand response, and the amount of wind generation at peak – all of which can be challenged. As an example, the study still assumed that wind production only generates 8.7% of its total capacity during peak summer hours, a number that has been shown through repeated studies and actual data to significantly undercount the value of wind. Thus, the assumed margin are probably in reality higher than reported in the Brattle report. But the essential message – that the energy-only market in most years would provide reliable and economic energy – at least gives policy makers breathing room and time to make any needed changes to the market.
The Sierra Club believes the answer is actually somewhere in the middle – that a required reserve margin slightly above the economically optimal reserve may be needed assuming that extreme weather events continue to face Texas. As an example, the report notes that assuring a reserve margin of 12.9% would meet the Southwest Power Pool’s reliability standards even in extreme weather events. We believe that assuring some build-out of new generation and new demand response programs – largely through expanded ancillary services — could assure this targeted reserve. Thus, the long-term solutions are not necessarily the imposition of a forward capacity market as has been imposed in markets like PJM and New England at great costs to consumers, but rather targeted programs meant to grow new resources like energy efficiency, demand response, energy storage and solar to meet Texas’s growing electric demand and supply needs. Paying older power plants a capacity payment just for being around is not the way to meet these new needs.
Texas will need to make significant investments in new transmission grids, continued smart meter development and other technologies like energy storage and demand response, while making the market work for these new technologies. It will also need to economically retire its older, dirtier power plants and transition to cleaner forms of energy. Look for our solutions soon!
In the meantime, PUC is expected to schedule a workshop on the Brattle report, as well as an additional study looking at the cost and benefit of each approach to keeping the lights on and ERCOT’s latest supply and demand projections, which are still being debated at the ERCOT Board of Directors.