This is a great article about the current State of the market and everyone needs to read.
Texas Electricity Prices Likely to Rise
By Elizabeth Souder
Dallas Morning News
October 26, 2011
Texans, prepare to pay more for electricity.
And don’t expect to get any more reliability for your money. In fact, next year, the lights seem more likely to go out.
The problem is, power companies aren’t building many more generating plants. Some companies are shutting down plants that are old or don’t comply with new pollution rules. At the same time, Texans are using more electricity than ever. In the Texas deregulated market, when supply declines and demand rises, prices go higher. That could put Texas electricity consumers on a free-market roller coaster. “I think there may be some pressure for prices to rise,” said Phil Tonge, president of electricity retailer Spark Energy. “I’m knocking on wood right now. I’m hoping we don’t see another summer like we did this past summer.”
During the past few years, natural gas prices have been low and steady. Since natural gas prices tend to set the price of power in Texas, wholesale power prices have also declined. That’s good for consumers, right? Maybe not for long. Low prices have deterred some power companies from building new plants. Tight electricity supply could soon turn power prices higher.
The Electric Reliability Council of Texas, which operates the state grid, predicts demand for power will increase steadily for the next decade as population increases. The council’s predictions can be conservative. This year, we used much more electricity than expected, thanks largely to February’s freeze and August’s record inferno.
Power plants
At the same time, the supply of new power generation isn’t keeping pace with demand growth. Between 2000 and 2002, when natural gas was cheap, power companies built more than 100 natural gas-fired generators within the Texas grid. Then, as natural gas prices rose to record levels, driving wholesale electricity prices higher, power generators built dozens of wind and coal-fired plants. Wind and coal plants are cheaper to run than natural gas plants, and therefore earn a fatter profit margin when natural gas prices push wholesale power prices higher.
But when natural gas prices collapsed a few years ago, power-plant building hit the skids.
Consider how things shaped up for the plants that were scheduled to go online next year. Back in 2007, plant operators had the permits and grid-connection agreements to add 4,221 megawatts of capacity in 2012. The following year, the planned capacity for 2012 rose to 5,987 megawatts. Now, generation companies plan to add 1,940 megawatts of capacity next year, less than half of what they originally intended. Also, the state’s largest power generator, Energy Future Holdings, announced it will stop operating two coal-fired plants in order to comply with stiffer pollution regulations. That would wipe out 1,200 megawatts of capacity on Jan. 1.
Without those power plants during the August electricity emergencies, the lights would have gone out, ERCOT executives have said. ERCOT chief executive Tripp Doggett predicts the loss of power generation due to new Environmental Protection Agency rules could boost customer electric bills by around 10 percent.
Price signals
In theory, when generating company leaders see higher prices, they build more plants. But some experts say prices aren’t going high enough in Texas to persuade power-generation companies to break ground. So long as natural gas prices are low, investors worry any rise in wholesale power prices is temporary. “Fundamentally, we’re trying to establish the right price signals to get the investment we need when we need it, to keep the lights on,” said Dan Jones, ERCOT’s independent market monitor. He thinks prices should be allowed to go higher.
In the land of electricity deregulation, ratepayers no longer pay a monopoly company to build power plants. Instead, competing power generators build plants on their own dimes and make money by selling the electricity into the market. Each day, power generators bid their electricity into the market. ERCOT tells power plants to fire up to meet demand, calling on the cheapest bids first.
Some old, inefficient natural gas plants cost a lot to operate and may get called on to do so only when demand is tight and market prices jump very high. For those plants to make enough money to stay in business, they need to get called on to operate a few times a year at extremely high prices.
Currently, wholesale prices are capped at $3,000 per megawatt-hour. (The average Texas family uses about one megawatt-hour of power each month.) That cap is far, far higher than the usual market price of around $20 to $50 per megawatt-hour. Jones, the ERCOT market monitor, proposed boosting the cap to $6,000 per megawatt-hour, but only when ERCOT declares a grid emergency.
Trickling down
Higher wholesale prices have a way of trickling down to consumers. Anyone who signed up for a variable-rate plan, in which rates can change each month, probably saw much higher rates after this year’s grid emergencies. Even people on fixed-rate contracts could see higher prices when their contracts come due. That’s because if wholesale prices are higher, it costs retail electric providers more to buy the power. And if wholesale prices are more volatile, retailers have to pay more to protect themselves from price swings.
Retailers often buy electricity ahead of time to keep costs predictable, or they invest in market securities that hedge against price swings. “Almost anyone who’s a retailer in Texas, if they don’t have any generation, is going to have to take significant steps to protect themselves against the high peaks,” said NRG Energy chief executive David Crane. NRG executives have said they expect to spend more money next year to protect their retail companies against price swings, and such costs will surely fall to customers across the industry.
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