Postcard From the Future of Energy: Making Markets Work in Texas

Wind power is booming in Texas, the number-one state for wind. That’s thanks to great wind resources, an early policy commitment by then-Governor George W. Bush, and a deregulated market that creates few barriers to new power companies.  Wind provides about 9 percent of the state’s power, and employs more than 10,000 workers.  And with a new set of transmission lines just coming online, wind capacity will increase by at least 50%.

For Milton Howard of Duke Energy Renewables, which has almost 1000 MW of wind in Texas, it’s simple.  “There’s great wind resources here, and Texas is an easy state to do business.”

But there is trouble brewing that will require big changes in the market rules.  Texas faced capacity shortages in the last few years, thanks in part to a market that pays only for energy, and not for capacity.  Texas is 45 percent gas-fired power, and with cheap fracking gas, power prices have been very low—too low to attract new power plant construction, according to power companies. 

A recent forecast of lower demand growth has given regulators some breathing room.  This is good, because the question for Texas is not whether they have enough power plants, but whether they have the right kind of power plants—and other tools to keep the lights on.  Do they have a system that is flexible enough to efficiently and reliably incorporate rapidly growing wind and solar energy?

Because there is a lot of wind and solar coming.  With new transmission lines recently completed, Texas is expected to see over 18,000 MW of wind by 2016, the most of any state by far.  Austin Energy recently signed contracts for wind at less than 3.8 cents per kWh and solar at less than 5 cents per kWh

Monty Humble of Brightman Energy, the developer of the Austin solar project, thinks solar could be at a competitive tipping point in Texas.  “Because of the size of the ERCOT market and the size of the state, Texas is potentially the largest solar market in the country,” he told Greentech Media.

The future success of renewables will hinge on the market design—how money flows, what different kinds of energy are worth, and how the system adapts to make integrating variable generators cheaper and more reliable.

Source:  REAMP Media Center.

First, a little background: wholesale markets, where power companies buy and sell power, can have three components.  Energy is the kilowatt-hour that keeps our lights on and our beer cold.  Capacity is the ability to generate the energy, measured in megawatts (MW).  Ancillary services are all of the technical things needed to run the grid, and are usually a small part of the cash flow.

In an energy-only market, like Texas, power generators are paid only for the energy they produce, and are not paid to stand by to be available to produce energy if needed (for their capacity). Power companies bid into the market every hour, and their bids are ranked from lowest to highest (called the “merit order”).  The market operator, called ERCOT, accepts all the bids up to what is needed to meet demand, then all the bidders get paid the price of that last bidder (called the “market-clearing price”).

Not all power sold in the state goes through the ERCOT market process.  Power companies sell directly to customers too, through long-term bilateral contracts.

Because wind and solar power have very low operating costs and will produce power regardless of the market clearing price, they bid into the market at a very low price to make sure their power is sold.  They take whatever the market-clearing price is.  Nuclear plants are usually next in the merit order, since they are difficult to switch off if their bid is not accepted.  Coal, biomass, and gas plants follow.  Typically, the most expensive plants are “peakers,”  like gas combustion turbines, which run only a few hours per year to meet peak demand, but that need to recover all their costs in those few hours.

The market operator buys as much power as needed to meet demand in each hour.  As shown in the chart, the market on the left has low levels of wind and solar power, which has little effect on market prices.  But as renewables grow, as shown on the right, they push other plants farther down the merit order, driving down prices and excluding higher-priced fossil plants.

Source:  Agora Energiewende. 

This is great for consumers, since wind is displacing higher priced generators and lowering costs for everyone.  Every time the wind blows in Texas, consumers save money.

But Texas still needs enough capacity even when wind is not blowing or the sun is not shining.  One solution is to make payments for capacity to ensure that these power plants are available when needed.  If they aren’t going to run as often, they need to make their living more from capacity payments than from energy payments.

But not just any kind of capacity is needed—with so much wind on the system, Texas needs flexible capacity.  Big nuclear and coal power plants that can’t ramp up and down quickly will only create problems as wind and solar sources grow.  Rapid-acting gas generators, like the GE FlexEfficiency 60 turbines, along with demand response, energy efficiency, more transmission connections, and storage, can bridge the gaps, smooth out fluctuations in demand or supply, eliminate congestion, and reduce demand during peak hours, all at a lower cost than peaking generators. 

The challenge for Texas, and for other places that see growing amounts of wind and solar,  is to tweak their market design to encourage flexibility.  There are a host of options, such as accepting bids every 15 minutes or less (instead of hourly), better forecasting of both wind speeds and demand, consolidating the number of operating areas, and new types of ancillary services, such as payments for ramping generators up and down.  These are documented by Mike Hogan of the Regulatory Assistance Project in Aligning Power Markets to Deliver Value, a report for America’s Power Plan.

In some ways this system will be more complicated, with both supply and demand fluctuating, more market activities, and constant change.  But constant change is par for the course with electricity.  You don’t have to notify the utility when you turn on your TV, but the utility has to be ready to meet that demand.  More renewable energy is just another variable, and one that grid operators with modern information technologies can easily handle.  The trick is matching markets with technologies. 

This blog was written by Bentham Paulos.

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Our nation’s electricity system is undergoing a rapid transformation. Market forces, driven by public demand for cleaner, more efficient energy, and technological innovation are redefining America’s power sector. These trends will change the electricity system and utility businesses at their core. But our century-old legal, economic, and regulatory structures are thwarting innovation. More than 150 top energy experts from academia, industry, and non-profits have joined America’s Power Plan, a project designed to tackle the tough questions and provide a vehicle for policymakers at the state and local levels to address these challenges and make informed decisions about the future of our nation's power system.

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