The summer of 2018 isn’t quite over, but it will undoubtedly go down as one of the hottest on record with at least 20 days of post-100-degree temperatures in Texas. Not surprisingly, high temperatures have been accompanied by high demand for electricity. In fact, during the July heat wave, the demand for electricity hit new records, more than 73 gigawatts (or 73,000 megawatts) on July 19, 20 and 23, according to ERCOT, the power grid operator for most of the state. That’s a lot of juice.
ERCOT is responsible for keeping the lights on and the air conditioners humming while avoiding any brownouts of blackouts. But the grid has come perilously close to its generating capacity of about 78 gigawatts. Had several large power plants gone offline for maintenance or a broken gas line (more than 50 percent of the state’s electric power is fired by natural gas), we would have been in trouble. Fortunately, we sailed through the oppressive heat thanks to “voluntary” reductions in power demand, as retail providers blanketed both their business and residential customers with e-mail pleas to raise thermostats and defer using appliances until after 8 p.m.
With Texas’ population growing more than twice as fast as the nation’s, and dozens of corporations relocating or expanding in the state every year, the demand for power will continue to increase. However, investment in new base-load generating plants has lagged. Instead, thanks to both federal and state tax incentives, investment has poured into renewables, especially wind turbines. Texas now boasts more than 22 gigawatts of wind power, representing 28 percent of total statewide generating capacity. The problem is that when power demand is strongest in the late afternoon of a hot summer day, the wind in West Texas (where most of the turbines are located) dies down. That’s why base-load capacity (coal, gas and nuclear) is so important.
As has been well documented, coal-fired generation is going away, both in Texas and the rest of the country. Earlier this year, three large coal plants went offline with the loss of 4.2 gigawatts of power, enough to provide electricity to 2.1 million homes. And while we have four efficient nuclear plants in the state, no new nuclear investments are planned. Almost by default, future base-load power plants will be gas-fired.
Fortunately, Texas is blessed with ample supplies of relatively inexpensive natural gas. But because we operate our own grid and have limited interconnections with other power networks, we don’t have the ability to import large amounts of electricity to meet peak demand. As a consequence, grid reliability issues are perhaps more critical here than in any other state. What’s more, in our deregulated “energy-only” price environment, utilities are leery about investing in new base-load power plants because of uncertainty about recovering their capital investments.
Eliminating policies that cause market distortions — in particular, the subsidies to wind and solar projects — would be one way to promote new investments in base-load generation. But because renewables have widespread political support, some form of subsidy is likely to remain in place for an extended period.
An alternative would be to allow base-load power plants to include a “capacity payment” in addition to the current energy-only charge to cover part of their fixed costs. This is a common practice in other deregulated states. However, in Texas, power companies are literally rolling the dice if they invest in new base-load generation. In addition, some generators claim that because of falling natural gas costs, wholesale power prices are too low to justify investments in new plants. For example, Panda Temple Power, a relatively new 758-megawatt, gas-fired, combined-cycle power plant, filed for bankruptcy last year because the facility couldn’t generate enough cash to service its debt.
With Texas projected to continue growing much faster than the rest of the country, the demand for power will increase in tandem. Indeed, ERCOT estimates we’ll need more than 100,000 megawatts of new power over the coming 10 to 15 years just to keep up with expected demand.
Therein lies a challenge: In a deregulated environment, what policy changes or incentives will encourage new investment in base-load power plants? A capacity charge that would allow companies to recapture part of their capital expenditures offers the most promise and would also enhance grid reliability. Absent new investments in base-load power, another hot summer like 2018 could stress the grid to the breaking point and derail the dynamic Texas economy.
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