How to Grow a Power Plant: Texas Struggles With Looming Energy Crunch

Photo courtesy hsld at http://www.flickr.com/photos/26555823@N08/

Texas power generation struggles to keep up with growing demand.

As Texans start packing away their winter clothes and looking ahead to months of heat, here are a couple of sobering facts: Texas has a booming population, and a strained electrical grid.

After last summer’s record breaking heat, the threat of rolling blackouts has become almost commonplace in the minds of many. The easy solution is building more power plants, but that’s not happening.

People point to all sorts of reasons for the dearth of new electrical projects coming online. Some blame EPA regulations; others say advances in renewable energy are coming too quickly to justify the investment. But the main cause is the low cost of natural gas. The same thing that’s driving down electric bills appears to be driving away investment in power plants.

“It affects the incentive to build new generation,” Kent Saathoff, Vice President of system operations with the Electric Reliability Council of Texas [ERCOT], told StateImpact Texas.

“The lower natural gas prices have essentially lowered the cost of electricity, which has made it less attractive for investors to build new generation.”

Photo Courtesy of The Texas Public Utility Commission

Donna Nelson is the Chair of the Public Utility Commission.

Most power plants make their money in long term contracts. By investing in a power plant an owner is essentially placing a financial stake in the the long term price of electricity. If anyone were to build a new power plant in Texas right now, odds are it would be natural gas. But these days the cost of natural gas is so low that investors worry that if the price goes up they’ll be selling power for less than it’s worth, or even stuck in a contract where they’re losing money.

That’s left regulators and lawmakers scrambling for ways to encourage investment.

In other states the solution may be simple but costly: find some state money and use it to encourage more electrical generation.

That seemed to be the direction state Rep. Dan Huberty was going at a recent state House hearing,  when he asked ERCOT CEO Trip Doggett and Public Utility Commission (PUC) Chair Donna Nelson about “public-private partnerships” to build power plants.

“I haven’t looked into that in any detail,” said Nelson. “I guess my perception is that our market is premised on private investment.”

Photo by Mose Buchele/StateImpact Texas

John Fainter is President of the Association of Electric Companies of Texas

Because Texas deregulated its energy market more than a decade ago agencies like the PUC or ERCOT won’t invest in new generation. What they’re looking at instead is raising the cap on how much power plants can ask for a megawatt of power on the open market.

The logic runs like this: if state regulators allow electrical wholesalers to charge more, that would drive prices up and make investing in power plants more attractive. It’s what policy wonks call changing the “price signals” in the deregulated market.

It’s an approach that’s gained support among many policymakers and industry representatives.

“We think with the proper market signals, the market will respond now, because Texas is a good place to invest,” John Fainter, the president of the Association of Electric Companies of Texas, told StateImpact Texas.

But ratepayer organizations worry what changing the “price signals” will do to electric bills around the state.

“We want to make it really clear that whenever folks, in the context of this debate, are talking about sending the right price signals, what they’re really talking about increasing the price of electricity,” said R.A. Dyer, a policy analyst for the Texas Coalition for Affordable Power.

While the PUC looks into raising the cost of electricity, other proposals are also getting attention. Everyone agrees that conservation will be key in the short term.  While last summer’s record-breaking heat caught Texas by surprise, ERCOT says this year it’s better prepared to manage conservation efforts.

Some power companies are also bringing old so-called “mothballed” power plants back online. One side-effect of cheap natural gas is that it’s made operating even inefficient old plants cost-effective in the short term.

Photo by Mose Buchele/StateImpact Texas.

Mark Zion is Executive Director of the Texas Public Power Association.

There’s also the possibility that publicly-owned utility companies could invest in new generation. Even though most of the state operates in the competitive market, there’s still a small part where public money comes to bear.

“Municipally owned electric utilities are about 15 percent of the electric market in the state and they are owned by cities and nonprofit entities servicing their consumers,” Mark Zion, President of the Texas Public Power Association, told StateImpact Texas.

Because public utilities operate outside the competitive retail market and aren’t motivated by profit drive in the same way as private investors, they’re well positioned to invest in more generation, said Zion.

“Municipal utilities are building power plants, they’re also entering into contracts with power plants developers that enable them to obtain the financing,” said Zion. “Those resource additions by municipal and other public power entities help the state as a whole and help our customers.”

But those efforts may amount to a drop in the bucket in a state the size of Texas. And regardless of what approaches are taken, building new power plants takes time. That means steps taken to build now won’t help Texans this year.

If this summer’s as hot as the last one, Texas energy consumers will need to conserve, or prepare for the prospect of rolling blackouts.