Latest Brattle Report Suggests Either Energy-Only Market or Capacity Market will keep lights on in Texas

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.

5 responses to “Latest Brattle Report Suggests Either Energy-Only Market or Capacity Market will keep lights on in Texas

  1. Why overlook the 300% wholesale price gift to electricity genertors this year!

    ROI (return on investment ) jumped higher, and with Ll the global cash looking for investment …. It’s not necessary to increase the retail price.

    “If it ain’t broken….Don’t fix it ”
    Are there some really greedy corporations and their high pAid managers salivating?

    • Frank – I agree — they raised the wholesale cap and it is scehduled to go up again both this year and next, all the way to $9,000 per MWH in 2015 as the maximum you can bid into the market during times of scarcity. They also put in an energy adder if you provide power at times of scarcity. Generators want both — high energy prices and a capacity market.

      I am, however, sensitive to the need to have fast, flexible resources — including demand response — when it gets really cold or really hot which is why we are working on changes in the energy market and ancillary services to make sure we take advantage of new technologies. But we don’t want to give NRG or Luminant an extra payment just for having their coal plant up and running!

  2. I just don’t understand. All these studies. All this back and forth.

    Data has shown that most of our peak demands in Texas are caused by the SUN. Why not use technology available today (and only getting less expensive) that can address a large part of our peak energy needs – rooftop solar. It leverages existing local resources and limits the amount of transmission required at peak periods.

    If we spent a fraction of what we are spending on all these studies and the angst that goes along with it – and instead focused on increasing the awareness of what rooftop solar can do, then a vast majority of our Texas residents would make their own long term investments to product some of their own electricity, and thereby help the entire grid and all electricity users.

    If the PUBLIC Utility Commission (PUC) focused more on the “public” and less on electric utility companies, then the public could be more aware.

    Why not have the PUC update the “Power to Choose” website to include consumer information and installation company selections for the “real” power to choose – the power to generate some of your own electricity. They include information for at least a hundred REPs, why not solar installation companies?

    If individuals make these long term investments locally in their own communities, then we will have less back room deals being done that only benefit a few individuals and a few locations.

    And by the way, electricity generated from PV solar is CLEAN energy and it doesn’t require our precious water resources to operate.

    With the technology advancements over the last years, we can now tap the solution (at least a large part of it) that shines on us every day.

  3. Larry — agree and thanks for all you are doing in north texas to grow solar. I am excited by three utility solar plants coming on line in Pecos, Kent and Bexar counties this year, but more excited by continued growth of onsite solar. The bills we passed in 2011 on homeowner associations and third-party ownership are helping, but I still think some further rule changes on net-metering and interconnection would help as well as growing out Clean Energy Districts for loan funding. Let’s work together and eventually much of this demand can be met by solar. California is busting through their onsite solar goals as costs have come down and states like New Jersey and Vermont — with virtually no sun — are beating us on jobs and MWs. But we are fifth overall and growing and can be No. 2 behind California by a year or two

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