Texas PUC Chair Nelson weighs capacity, reserve market issues

Texas PUC Chairman Donna Nelson capacity reserve markets ERCOT

By Wayne Barber, Chief News Analyst, GenerationHub

In Texas “the risk is too high and the reward is too low,” for investors to justify building much new merchant generation these days, Public Utility Commission of Texas Chairman Donna Nelson said in an analysis Aug. 8.

It's a nagging issue of reliability versus markets; Nelson suggested in her memorandum to fellow Commissioner Kenneth Anderson Jr. Nelson published the document on the PUC website prior to a commission meeting Aug. 9.

With a current vacancy on the PUC, Nelson and Anderson are the only two commissioners until a third is confirmed.

“I know that many parties vigorously oppose a capacity market, but I believe we need to review the pros and cons of the various options before moving forward,” Nelson wrote in her 16-page memo.

“Based upon the questions that linger in my mind regarding the solution that will best service Texans from both a reliability and cost perspective, I strongly believe we should explore this issue further, both in comments and in a workshop,” Nelson said.

This is all part of a commission proceeding to ensure resource adequacy in Texas. (The PUC project number is 40,000). Key issues involve whether to make a reserve margin mandatory and whether Texas needs a capacity market.

“Two years ago, we started this discussion because investment in generation was not keeping pace with increasing demand. If the wholesale electric market within ERCOT [Electric Reliability Commission of Texas] fails to attract sufficient investment, the electric reliability of Texans is threatened,” Nelson said.

The wholesale market for electricity in ERCOT is a competitive market, established to allow the basic concepts of supply and demand to set the wholesale price for electricity.

Generators have three sources of revenue in a competitive electric market: energy prices paid during times of non-scarcity; energy prices paid during scarcity events; and capacity payments, Nelson said.

Some critics say ERCOT intervenes too much

Stakeholders have complained that the efforts undertaken by ERCOT for reliability were often interfering with the functioning of the competitive market. As supplies of electricity become tight, ERCOT often administratively intervenes in the market in order to avoid compromising the grid, avoid rolling outages, and comply with the federal standards, Nelson said.

In response to the complaints, the Texas PUC has sought to determine if ERCOT was intervening in the market in order to maintain reliability in times of shortage and where such actions were hurting the economic underpinnings of the

competitive wholesale market.

ERCOT's planning reserve margin is currently set at 13.75%, “but based on analysis done recently, the margin may need to be higher to provide the same level of reliability Texans have historically experienced,” Nelson said.

A 2012 Brattle study recommendation that the Texas PUC determine whether the reserve margin should be required.

Brattle noted that competitive electric markets work best if prices reflect the value of electricity to the electric purchaser during times of scarcity; Brattle therefore recommended that the system-wide offer cap be based on the value of loss load (VOLL).

Brattle said that system-wide offer cap of $9,000; the energy-only market will produce a reserve margin in equilibrium of only eight to 10%. “And the ability of the energy-only market to achieve even this relatively low reserve margin depends on the development of significantly more demand response than we have today,” Nelson said.

The wholesale market within ERCOT initially entered competition in the mid-1990s with full competition under SB 7 in 2002.

For the first few years of the wholesale market, investment was robust. The competitive electric market was a relatively new concept and companies were eager to invest in the market, Nelson said.

In the early days of the competitive wholesale market, natural gas was the fuel of choice.

Natural gas was relatively inexpensive, and the capital cost of a natural gas plant was much lower than coal and nuclear plants. "As a result of the influx of new, efficient natural gas plants in ERCOT, we quickly became a natural gas on the margin market, meaning the bids submitted by natural gas plants most often set the wholesale price of electricity," Nelson said.

That changed when gas prices started to rise a few years later. “We saw announcements of all types of generation: natural gas, coal, wind, and even the heavily capitally intense nuclear,” Nelson said.

“And then natural gas prices plummeted, the economy weakened, access to the capital markets tightened, and incentives for renewable resources distorted pricing in the competitive market,” Nelson said. “These factors and others made and continue to make funding of merchant generation more difficult.”

Nevertheless, the Texas economy is growing and the state's energy needs are increasing, the PUC chair said.

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