Energy Institute, The University of Texas at Austin Energy Institute The University of Texas at Austin
Wednesday April 16 , 2014
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Meeting the Demand for Power

Experts Debate Possible Changes to Texas’ Electricity Market at Austin Electricity Conference

By Gary Rasp

It’s one of the most common and predictable experiences in life – flip a switch and the lights come on. Every day, at work, at home – wherever we are, whatever we’re doing, we depend on electricity for virtually everything. But what if that seemingly boundless supply of energy wasn’t such a sure thing? And what’s the best way to make sure the lights will continue to come on when we flip that switch?

The question of how to ensure sufficient supplies of electricity to meet expected demand – ‘resource adequacy’ as it is known in energy industry parlance – was deliberated recently at the third Annual Austin Electricity Conference, held April 18-19 on The University of Texas at Austin campus.

Conference participants debated varying perspectives on resource adequacy and other issues facing regulators as they grapple with how to manage the state’s power grid and effectively operate competitive electricity markets.

panelists around a table

The event featured a series of short panel presentations followed by in-depth discussion in plenary session. Click here for a list of conference participants, panelists’ presentations and other information.

The McCombs School of Business, the Cockrell School of Engineering and the School of Law organized and funded the 2013 AEC, with the LBJ School of Public Affairs providing organizational support. The university’s Energy Institute, along with Oncor, a Dallas-based transmission and distribution company, supplied additional financial support.

Ensuring reliability is not a merely hypothetical question in Texas, a state with a growing population and increasing power needs. In early 2011, Texans experienced first-hand what can happen when the system is strained from unexpected demand. To avoid a system-wide black out, officials with the state power grid, the Electric Reliability Council of Texas (ERCOT), initiated a series of ‘rolling blackouts’ that left millions of homes throughout the state without electricity for an hour or more.

It was a rare occurrence, to be sure, but that experience highlighted concerns about the state’s power reserves – the extra capacity used to avert such outages – particularly since ERCOT projects sharply declining reserve margins in coming years.

Panelists and conference attendees discussed a variety of possible enhancements to the current system and debated alternate market models that some say would provide additional assurance that Texans will have the power they need to heat and cool their homes and run the many devices we depend on every day.

Energy-Only vs. Capacity Markets

In Texas’ competitive electricity market, private companies decide where and when to build power plants, rather than being directed to do so by regulators, and are paid for the electricity they produce. In ERCOT’s ‘energy-only’ model, electricity prices reflect locations in the power grid where electricity is needed, and provide incentives for investors to build new generating facilities when and where they are needed – at least in theory.

Some critics of the ERCOT market – the only one of its kind in the U.S. – question whether it provides sufficient financial incentives for investors to build the power plants needed to ensure an adequate reserve margin.

Under one alternative system in place in several other regions, generators and other market entities contract with power grid operators to provide electricity several years in advance, ensuring future supplies. So-called ‘capacity markets’ allow regulators to plan ahead based on the power market participants commit to produce in future years. Under this arrangement, power grid operators do not distinguish electricity produced from existing power plants or new generating facilities.

In some capacity markets, regional grid operators also contract with market entities for a pre-arranged reduction of energy usage during peak periods. Most panelists agreed that such ‘demand-response’ programs hold significant potential to obviate the need to build new power plants, if the programs are properly structured and managed.

One of the goals of this year’s conference, as one of the organizers put it, was “to help policymakers understand the different viewpoints, the different alternatives, the different implications, and the various building blocks” that Texas might encounter should it consider creation of a capacity market to help ensure adequate reserves for future demand.

Overcoming Barriers to Transmission Infrastructure Upgrades

It’s one thing to plan for additional electricity usage, and quite another to build the transmission infrastructure that gets power to people where and when they need it. Sponsors of new transmission lines face numerous challenges, including regulatory barriers at the state level and the thorny problem of how to properly allocate costs of new transmission lines.

A lack of collaboration among market participants further exacerbates problems associated with transmission planning, one panelist noted, adding that individual utilities are reluctant to share their long-term planning with power grid operators.

Ideally, Regional Transmission Organizations (RTOs) such as ERCOT are agnostic about transmission planning, but invariably such decisions are linked to the economics of resource planning, a function of the competitive marketplace.

“You have to plan long-term, but you don’t want to do so much that you influence the market,” one panelist observed. “You want to be just ahead of the market so that you don’t slow it down, but you don’t want to influence the market.”

Another panelist noted that ERCOT – which, unlike other RTOs, is not subject to federal oversight – has shown that barriers to building new transmission infrastructure can be overcome. Moreover, the organization’s success in this area suggests that smaller, regional entities that coordinate both transmission and resource adequacy plans may be a model worth considering elsewhere.

Yet another conferee echoed that sentiment, adding that the most important ingredient for successful transmission planning is greater coordination among market participants and RTOs.

“We don’t know what the future will look like,” he said. “So I would make a pitch for greater collaboration.”

Gary Rasp is communications director for the Energy Institute at The University of Texas at Austin.