MorganEnergy

Over at Knowledge Problem, Michael Giberson reports that a shake-out is occurring in the Texas retail market and asks whether vertical integration might have been a better option for Texas.

I don’t have Sally Hunt’s book to hand, and I know that there are complex issues involved in this case, but here are some quick thoughts.

1. The end result of vertical integration is a situation like we have in the UK where there is no serious wholesale market in electricity, and consequently much less transparency in the market. Transparency, in general, is a good thing, and I don’t like doing without it.

2. Texas is experiencing a shake-out of retailers because it, like California, made the foolish assumption that the retail market would see enthusiastic and successful new entry. All of the experience around the world suggests that this does not happen. Energy retailing is a business in which economies of scale are everything, and new entry is practically impossible. The Texas market will eventually settle down to a small number of very large companies all of which, I suspect, will also have retail businesses in other states.

Knowledge Problem has an update on the negative prices in Texas issue.

Mike Giberson also muses on this very interesting article from the WSJ. If electricity demand growth in the US really has stopped that is a very big story.

And finally the nodal market in Ercot, due to go live next month, has been pushed back all the way to December 2010.

Things have been a little quiet here of late due to pressure of work on other projects, but while I have been busy various other things have been going on:

• Governor Schwarzenegger committed California to a target of 33% renewable generation by 2020;
• Mike Giberson complained about excess wind capacity causing negative prices in Texas; and
• I received a fat document from the Cato Institute railing against the evils of renewable energy subsidies.

I’m not paying much attention to the Cato rant. As usual with such things it highlights all of the problems with the issue under attack while conveniently turning a blind eye to any problems associated with the big businesses whose entrenched interests Cato is trying to protect.

Giberson is much more even handed, but I find myself wondering whether asking for perfection in government action is wise. Of course other forms of generation get subsidies too – sometimes very well hidden, but they are there. If you try to take those subsidies away the companies that enjoy them will complain about being victimized. And of course we really ought to focus on the problem in hand, but if that means taxing something then the voters will get mad. Government interference is, I suspect, inherently inefficient, but if we want something to be done about climate change then governments need to prod markets into action.

Still, there are always things that can be done, and here is a paper on how real time pricing might reduce the problems that wind generation causes.

The fashion for new nuclear plant has moved closer to becoming a reality in the USA. Exelon Generation has submitted a formal request to build and operate a new nuclear power station in Victoria County, Texas. The twin reactors would be capable of producing 3,000 MW of power.

Meanwhile the EU Energy Policy blog has a long article by William Nuttall and David Newbery of Cambridge on policy attitudes towards new nuclear build around Europe.

Knowledge Problem is a general economics blog run by Lynne Keisling of Northwestern University assisted by Michael Giberson. Many of the posts are about energy issues. Yesterday Lynne took Rebecca Smith of the Wall Street Journal to task for yet another one of those articles that looks at a market that is having problems (in this case Texas) and claims that all of those problems are caused by deregulation.

The Texas Public Utilities Commission has committed the state to a massive $4.93 bn project that will build transmission to carry up to 18,456 MW of wind (and possibly solar) power from remote areas of the state to the major population centers.
(more…)

In response to continued price spikes in its balancing market, ERCOT will be adjusting the way in which congestion rules are applied. An emergency meeting of the ERCOT board held on Friday voted to accept recommendations made by the Public Utility Commission’s independent market monitor, Dan Jones, that it hopes will reduce the severity of price spikes in the system. Although prices in the balancing market are typically in the region of $100/MWh, recent spikes have been as high as $4,500/MWh.

The Houston Chronicle cites congestion on a few key transmission lines and some unexpected outages as causes of the spikes. However, as the market prices have been well in excess of the market’s bid cap of $2,250/MWh it appears likely that some sort of market rule is being applied to create these high prices. Changing the algorithm will presumably reduce the incidence of spikes. The Chronicle quotes Jones as saying, “We were using a tool to fix certain problems that was not particularly effective.”

Meanwhile the high market prices are continuing to pose problems for retail companies. As the Chronicle article explains, ERCOT requires retailers to post collateral equal to three times the value of their wholesale power purchases. The price spikes have caused three small supply companies to default on this requirement and go out of business, while a fourth has applied for bankruptcy protection.

Xcel Energy, which serves eastern New Mexico and western Texas, has warned customers that it may be necessary to implement rolling blackouts through the summer because it will not have enough capacity to meet demand. Part of the reason is that temperatures are expected to be considerably higher than average. May demand for 2008 has been a massive 19.4% higher than last year. But an additional factor driving the surge in demand is believe to be farmers switching to electricity from diesel as a source of power because of the current high price of oil.

The regulatory authorities in Texas continue to be worried about high power prices. Yesterday the Public Utilities Commission issued a press release announcing a conservation alert system that would help consumers know when it was necessary to turn down the air conditioning and take other power-saving measures. This is in response to “potential record high electricity demand for June.” Although the PUC expects supplies to be adequate to avoid blackouts, conservation by consumers could help prevent massive price spikes like those experienced in recent weeks.

As to the causes of the problem, the Dallas Morning News pins the blame on “hot weather and power line congestion.” A further clue can perhaps be gleaned from The Independent which reports:

Thousands of wind turbines in the US are sitting idle or failing to meet their full generating capacity because of a shortage of power lines able to transmit their electricity to the rest of the grid.

While building new power lines may well be a viable solution to the problem, they are not going to get built in time to save Texans from an uncomfortably expensive summer.