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By Elias Hinckley on May 7, 2014 with 16 responses

Texas is the American Leader in Energy – So How Can Its Electricity Markets be Such a Mess?

Texas both produces and consumes more energy than any state in the U.S. It controls one-quarter of U.S. proven oil reserves. Energy companies looking to grow or to establish a U.S. presence set up operations in Texas. The primary electricity transmission system in Texas is independent of the rest of the country (a long-time source of pride). The Electric Reliability Company of Texas, or ERCOT, is responsible for regulating the generation and supply of power to 85% of the state, except the extreme eastern and western portions.


The fundamental challenge of a closed system is that it must meet its own needs, and that has not happened.  There are increasing concerns about rolling blackouts in America’s “energy capital”. NRG Energy reported that by 2016, Texas could experience four rolling blackouts a year, and strongly recommended that the state build more power generation reserves to improve grid reliability.

Old and inefficient power plants are being fired back up to meet demand peaks, which is an inefficient use of inefficient technology and is unreliable. The transmission system is outdated.  Financial obstacles like the bankruptcy of Energy Future Holdings (and all the associated fallout) - which controls the largest retail utility and the largest power generation fleet in the state – overhang any possible solution.  All these challenges combined with growing electricity demand amount to a potentially serious problem.

ERCOT Reserve Margins

ERCOT Reserve Margins

Obviously for anyone living in or doing business in Texas, the potential for a breakdown in electric reliability is a very serious concern. Systemic disruptions in the energy sector are dangerous and can also cause serious and lasting economic damage. Simply the threat of unreliable supply and potential power failures reduce incentives to invest in Texas industries.

Much Bigger than Texas

Texas’s power problems are about much more than Texas. The obvious concern is that the direct economic implications could be much wider than just Texas. The state represents a huge portion of U.S. economic activity, and is a vital part of our national energy strategy. Perhaps more important than the direct economic considerations is that the fight over EPA regulations may be defined by the battles in Texas. Similarly, how the lack of long-term power price certainty is resolved (allowing adequate financing to support necessary new generation projects) will cause ripples throughout US power markets.

Five Challenges1) Texas electric demand is huge and growing. Texas produces and consumes more electricity than any state in the U.S. Population growth is booming, and the nearly 26 million residents have a growing demand for power, as does the petrochemical and energy industries that has made up most of the state’s relatively rapid job growth.

2) EPA regulations are coming at a difficult time for power systems operators. For ERCOT, greenhouse gas emissions and mercury regulations for power plants is turning aging inefficient power infrastructure that is already expensive to operate into economically unviable dinosaurs.  The state government and industry groups have struggled with the EPA for some time, and the Texas state legislature voted to have the state Department of Environmental Quality take over the permitting process for new power plants.

3) Texas’s power system is a deregulated market, and inconsistency brings inefficiency. There is no certainty for long-term pricing contracts for new developers under the current system, and in Texas’ energy-only market, power providers are not paid for their capacity or for remaining online in case of emergency. The decision to build more generation capacity is based on potential economic consequences rather than regulatory forecasting (which provides security for investors), and drawing in investors without long term revenue certainty is extremely challenging.

4) The fracking boom is producing energy, but also straining resources. Low fuel prices lower the apparent cost for new gas generation, but those same low prices pull down electricity prices in the current market lowering revenue for a new generating facility and energy companies have not been motivated to build new power plants. Fracking is energy intensive adding to the growing demand for power and it is also a tremendous stress on water resources.

5) Drought and the energy industry’s huge demand for water has run some communities dry. During each of the summers of the past few years, droughts in Texas have threatened energy capacity shortages. Investors and lenders are demanding that developers of new gas generation can show adequate water availability throughout the life of a new plant, which increases costs and slows development.

Texas’ larger utilities like NRG Energy are taking action primarily on the demand side, installing smart meters and using pricing mechanisms to “shed” customers during times of peak energy demand. In fact, ERCOT’s emergency response service is credited (along with some fortuitous timing of very high wind power output) with avoiding blackouts during the Polar Vortex this winter. ERCOT is planning to raise the System Wide Offer Cap, or the total amount of money energy service providers can make during peak demand times, to $9000 per megawatt hour by the summer of 2015. Increasing this cap on wholesale power prices is intended to attract greater investment, and Texas utilities will combine these price increases with other efforts to shed peak load demand.

On the supply side, ERCOT is currently overhauling their power forecasting methods to better predict when they may need to bring more power generation capacity online. FERC’s recent order 764, requiring that utilities and other power generation sources report power capacity in 15 minute increments, will push ERCOT in the direction of more flexibility and enable it to predict when demand will reach emergency levels.  Developing a capacity market, which is used in many other power markets, is a possibility. In many ways capacity markets are still maturing, so a new take on capacity market design could have broader consequences.

ERCOT recently hit a record for wind power generation, reaching over 10,000 MW and 30% of total power generation. In Texas, as across the country, energy storage will be an important means of guaranteeing energy supply while supporting a renewable energy infrastructure. The largest battery storage facility is located in Texas, and ERCOT is working with the Energy Storage Association on plans to redesign the energy storage infrastructure.

Electric Vehicles are increasing in popularity across Texas; because of deregulation, electric utilities within ERCOT can charge EVs directly at power stations as a secondary income source. Utilities also value the power demand from charging stations as a way of offsetting the variability of wind power generation.

The state may also end its independence and isolation.  While ERCOT independence may be a source of pride, it is running up against the limitations of a contained system. Significant emergency power was imported from Mexico during the Polar Vortex. Tres Amigas SuperStation, which will connect the Texas Interconnection to the Eastern and Western Interconnections is designed to reduce transmission bottlenecks, and may help the state meet its power needs and provide a larger market for Texas’s wind power generation.

By Elias Hinckley and Clair Austin

  1. By Shiggity on May 7, 2014 at 10:44 pm

    Distributed solar PV answers most of these problems. Maybe they’ll wake up when its over 100 degrees for 40+ days in a row and the AC shuts off.

  2. By Forrest on May 8, 2014 at 7:17 am

    Headline aside, the rest of nation should be so lucky to suffer Texas economic growth problems. EPA regs were stiff and sudden. Not good for power suppliers to cope with long term investments required for planning economical change. My Michigan cooperative utility has been screaming to push politicians away from EPA disastrous agenda. Michigan just beginning to suffer consequences of D.C. politics. Each state has different problems or unique needs. It’s is an injustice to wholesale invoke regulations per some political promise or election needs. Michigan has about zero solar energy and small zones of wind power. Getting permits to construct modern nuclear or low polluting coal power just about impossible. I reviewed map of power cost within U.S. and realized the open market economies very attractive. The northeast, AK, and CA have 13 to 34 cent / KWH power compared to Texas 8-9 cent / KWH power.
    Last I heard California imported most of power from Texas? Remember the accusations that Texas producers had manipulated peak power to victimize California residents. The popular Enron political whipping boy.
    Michigan has structured for open market choice of power producers and about to flip the switch. We have problems and these problems will get worse in future, but the open market approach if handled correctly will present cost effective solutions quicker.
    Texas ERCOT commission appears to be on top of the problem per your article. Half the solution is just understanding and defining the problem. Solar and wind a tremendous resource for the state. BTW, I just realized or became aware that apparently solar photovoltaic energy future growth wholly upon shoulders of domestic home owners. These folks have real estate, labor, roofs, and land readily available at zero cost and enjoy high value for the power.

    • By Clee on May 16, 2014 at 5:16 am

      “Last I heard California imported most of power from Texas?“
      Forrest, you heard wrong. In 2012 California consumed 302 TWh of electricity, of which they generated 199 TWh (66%) in-state. They imported 39 TWh (13%) from the Northwest, and 63 TWh (21%) from the Southwest.

      That’s a large amount, but the Southwest includes Arizona, Baja California, Colorado, New Mexico, Nevada, Utah and Texas. How much did Texas contribute? Not much.

      According to Table 10. Supply and Disposition of Electricity of
      in 2013 Texas exported 4 TWh of electricity to other states. If they exported only to California and no other state, that would have contributed a mere 1.4% of the electricity that California consumed.

      It wasn’t the Texas power producers who manipulated California’s electricity markets, it was Enron, in their role as power trader, broker, middleman, not producer.

  3. By Eric Valentine on May 8, 2014 at 9:19 am

    I find this article biased and inaccurate. IMHO authors should not inject opnion into such a story unless they so state that it is just that. Shame Shame Shame

    • By Robert Rapier on May 9, 2014 at 8:19 pm

      It would be more productive to pull out a comment or two that you disagree with, and state why.

      • By Russ Finley on May 10, 2014 at 11:17 am

        I had similar strange comments on an earlier post. I assumed they were from paid commenters from the corn industry trying to set a negative tone.

  4. By M on May 8, 2014 at 3:50 pm

    how do I thumbs down this biased nonsense?

  5. By Forrest on May 9, 2014 at 7:12 am

    Accusing Texans of hubris for grid problems a bit over the top. The state’s economy and land mass unique as compared to most states. Per my history California had the biggest electrical problem as they refused to build power plants and relied heavily upon Texas power generators.
    Firing up old generation plants is not a bad thing, meaning they have back up power a good thing. Destroying old power plants not a wise decision, especially upon the experience gained per operation of renewable power generation. Texas leads nation upon wind energy and may be foretelling the problems of utilizing the unreliable power. Picken’s plan once promoted billions of dollars invested in wind energy. Remember the 60 minutes story where he suggested we could power the nation per the wind corridor energy. Problem was the grid connections cost was astronomical. Power storage capability doesn’t exist, at least in practical economical scale. Shoving the Texas utilities to state controlled market is a sure fired way to ensure expensive energy. The process takes risk away as well competitive forces to meet needs of customers for low cost power. I’d vote against such easy solutions. They have to make some adjustments to meet future needs, not a wholesale change in policy. Currently they enjoy cheap power and attract businesses, jobs, and citizens. My guess the natural gas advanced gas turbine combined cycle power plants would be very attractive per their petrol development and natural gas production. Also, now that we have a sensible Energy Secretary that understands the value of Nuclear they should invest in that capacity as well. Roof top solar should be promoted.

  6. By Russ Finley on May 10, 2014 at 10:34 am

    Do you know why they don’t raise their rates and build what they need?

    Interesting how rates vary a great deal state to state. When comparing apples to apples, two states with a similar energy mix may still have different rates, often as a result of mismanagement (building too many power plants and leaving rate payers stuck with the bill for example). Part of the reliability problem in Texas may actually be the result of having so much wind.

    In Texas, as across the country, energy storage will be an important means of guaranteeing energy supply while supporting a renewable energy infrastructure. The largest battery storage facility is located in Texas, and ERCOT is working with the Energy Storage Association on plans to redesign the energy storage infrastructure.

    Utility sized battery storage schemes are typically just large enough to bridge the gap between start up of a power supply and an increase in demand/loss of power supply (typically for no more than a few minutes or even seconds). For example, the time it takes for a natural gas powerplant to spin up when the wind turbines die. Longer term storage remains expensive and limited.

    Good article, by the way.


  7. By Nicholas Sakharov on May 11, 2014 at 3:50 pm

    Do you, guys, have nuclear energy in TX as a base for electric generation? 10GW of wind power is nice but industry needs much more substantional energy source.

    • By Peter T. Belmonte on May 12, 2014 at 11:03 am

      yes we do, South Texas Nuclear, Victoria Station and Comanche peak

  8. By Skorpio on May 19, 2014 at 1:31 pm

    Private Power companies should be turn as CO-OPS just like San Antonio CPS company, they are more oriented to customers, environment and workers and NOT to quick profits and stock manipulation.

    • By Forrest on May 20, 2014 at 9:53 am

      My COOP is not to popular. They have a magazine and bunch of community stuff, but their electrical power cost is very high. Just a few miles away a large for profit utility has rates 1/2 the cost. Also, the COOP is informing it’s customers that we need to be prepared for increasing cost of power. The COOP hates new regulation that would allow customers choice in power supplier. The newsletter claims their customers get a good deal and compare costs to expensive coffee drinks. It is getting close to justifying dropping off grid power.

  9. By Forrest on May 20, 2014 at 10:14 am

    Texas problems are abating as the discovery that Texans are consuming less energy than expected. They have adjusted to need to conserve power. The problem is direct result of rapid state growth in population. Also, to the adjustments to grid needed to accommodate the rapid rise in wind power production. As you post they are adjusting costs to stimulate more investment in power plant construction, but are staying away from controversial solution to base power cost on capacity as this will lead to more expense. The Oncor web site (they maintain a large portion of Texas power lines) full of information. They are experimenting with battery backup, but realize the solution is to costly. Also, they experimenting with small production units to produce back up power per micro turbine generator. They claim a growing portion of patrons will leave the grid as cost effective homeowner solutions make it possible. This will be a growing concern. They are well into smart grid infrastructure to improve response and quality of power.

  10. By Akira Seung on May 23, 2014 at 10:15 am

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  11. By joehall on May 28, 2014 at 3:54 pm

    It’s called solar energy, look it up. Of course the fossil fuels industry is keeping its foot on the neck of solar, knowing it means the end of fossil fuels…

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