ERCOT made market work
Columnist Chris Tomlinson says the quickest ways to drive up electric bills are low natural gas prices and little growth in demand for electricity.
AUSTIN — Houston’s NRG will focus less on generating power and more on selling electricity, according to its CEO, part a nationwide trend that could mean a wave of clean energy or widespread blackouts, depending on who you ask.
Low natural gas prices and little growth in demand for electricity have the power industry in turmoil. And past proponents of deregulation and free markets are calling for a return to government dictates that guarantee generators a profit.
Texas lawmakers were among the first to break up the electricity business in 1998, dividing it into three distinct parts: generation, transmission and retail sales. Most cities sold off their assets, and private firms have dominated generation and retail sales ever since.
Only the Texas transmission system remains regulated. The wholesale electricity market and grid are operated by the Electric Reliability Council of Texas, better known as ERCOT.
Independent generators bid their electricity to ERCOT,
which buys power starting with the lowest-cost producer until demand is met. A traditional generator’s margins are based on fuel price, so when a fuel like natural gas is cheap, profits are also low.
The advent of hydraulic fracturing has flooded the country with cheap natural gas, and generators have installed inexpensive natural gas plants across the country that are more profitable than coal or nuclear plants. Renewable energy sources, backed by federal tax credits, have also driven down prices.
NRG, which owns large coal and nuclear power plants, lost $2.3 billion last year and laid off 3,000 employees. The losses would have been much higher if NRG did not also own Reliant, which sells electricity to consumers and generates steady earnings.
CEO Mauricio Gutierrez told investors recently that NRG is flipping the business plan, selling off power plants and expanding the retail business.
“We no longer have a model that is generation-driven,” he said. “This model will take us away from the historical feast or famine earnings of our sector and allow us to take advantage of earnings stability.”
Generators across the country are selling off power plants or shutting them down. Vistra Energy, which bought up TXU’s old power plants, shut three Texas coal facilities this year.
The worry now is where will our electricity come from, and will there be enough?
Uncertainty over future demand and the plummeting cost of renewable sources make it difficult for a generator to make 40-, 60- or 80-year investments in new power plants, said Nicholas Akins, CEO of American Electric Power, one of the largest generators in the nation.
“If you look at the way the industry is changing, large central station generation facilities are the most risky investments you can make,” Akins said during the Energy Thought Summit, an annual utility conference in Austin. “It is really difficult to bet against technology.”
Ohio-based First Energy is calling on Energy Secretary Rick Perry to issue an emergency order that would blow up competitive electricity markets by guaranteeing profits for its coal and nuclear power plants. If he doesn’t act, the company said it will shut down three nuclear plants and endanger the PJM grid, which covers parts of 13 states.
Officials who manage PJM deny the closures will hurt reliability and have asked Perry to stay out of it. He should remember Texas, where ERCOT has proved that competitive electricity markets work by encouraging the lowest-cost producers and generating some of the lowest prices in the country.
Vistra’s decision to shut down its oldest, dirtiest coal plants has sent electricity futures in ERCOT for August to $185 a megawatt-hour, compared with the most recent peak of $71 in 2015. ERCOT CEO Bill Magness said a hot summer with higher prices will test the market’s efficiency.
“If we see scarcity conditions that do generate higher wholesale prices, we’ll see what impact that has on people’s incentives to invest” in new generation, he told me on the sidelines of the summit.
ERCOT will also learn how many large customers have employed new technologies to generate their own energy or shave consumption when prices spike. If demand drops in response to high prices, there is no need for new investment. That’s how a competitive market is supposed to work.
“It can be more nerveracking because when you enable a market to make a lot of the decisions, you don’t have the same control,” Magness said. “But our markets have enabled a whole lot of investment to come into this state.”
The electricity business is undergoing a transformation that will bring some volatility, but that comes with a free market. Our policymakers should resist any attempt to choose winners or losers and trust the market to work.