Change to Scale Will Let Free Market Drive New Power Generation

Over the years, Texas’ deregulated electricity system has proven to be a state treasure, helping Texans enjoy some of the nation’s lowest wholesale rates and continuing an established record of reliability. However, the state’s ongoing, extensive growth has expanded its appetite for electricity and underscored the importance of ensuring that we have enough power during times of highest usage — usually during the summer and winter months.

ERCOT and the Public Utility Commission of Texas are rightly concerned about our state’s increasingly problematic demand and supply balance and are taking steps to make the market more transparent while encouraging the construction of new power plants.

The most critical first step is a relatively simple one.

ERCOT’s primary tool to price the demand and supply balance is the Operating Reserve Demand Curve (ORDC). When it works, the ORDC provides incentives for energy producers to make as much capacity as possible available to meet peak demands and to increase capacity over time.

Unfortunately, the ORDC — as currently formulated — has not provided the incentives necessary to build new capacity from reliable generating sources. At the same time our state is growing — peak load forecasts exceed existing capacity by as early as 2021 — Texas producers have canceled plans for three gas-fired projects that would have added thousands of much-needed megawatts to the grid.

A correction to the ORDC would reflect a more realistic picture of the Texas power supply and return the market to balance. Just as the Federal Reserve tweaks interest rates to reflect the needs of a changing economy, the ORDC needs to be modified to reflect the changing power needs in Texas. It’s important to understand that this kind of modification is not like flipping a switch. Adding generation takes time. As with the Fed’s interest rate tweaks, it can take a while for the changes to pay off; the sooner we make this correction, the better.

Regrettably, as the recognized need for market adjustments has increased, so has the rhetoric. Opposing parties are depicting any change in the ORDC as some sort of “tax” and a massive price increase on consumers.

The truth, however, is far different:

  • According to an independent study by The Brattle Group, reliability could be meaningfully increased with only a modest increase in the average price of electricity; and
  • Without action, increased demand and relatively smaller supply would create higher risks of outages and ultimately cost consumers more.

Far from being a tax, an adjustment to the ORDC would simply allow the free market to function as it is meant to do — keeping prices competitive and electricity generation reliable.

By sending investment signals now, Texas can maintain a supply of reliable energy that matches the state’s growth, which should keep prices more stable and avoid disruptions on the state’s electric grid. However, financing for that new production has not been available under the current formulation of the ORDC.

An adjustment to the ORDC by the Public Utility Commission would help Texas provide reliable power generation for future growth and also provide the best prices for Texas consumers.

Texas Competitive Power Advocates (TCPA) is a trade association representing power generators, wholesale power marketers and retail providers with investments in Texas and the Electric Reliability Council of Texas (ERCOT) wholesale and retail electric markets. TCPA members are dedicated to helping ensure a successful energy future for Texas by investing in and operating clean and diversified energy sources to ensure ample, reliable and affordable electricity for Texas consumers. 

TCPA members and their affiliates provide a wide range of important market functions and services in ERCOT. We develop, operate, and manage power generation assets, schedule and market power, provide energy management services and in some cases, act as the retail electric supplier for consumers.