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Texas moves to bolster state power reserve; generators' shares rise

By Eileen O'Grady

HOUSTON (Reuters) - Texas regulators on Friday moved to create a mandatory reserve margin for electricity to reduce the prospect of blackouts, a change that may signal market reform that benefits the bottom line of power suppliers while raising costs for end users.

Two of the three members of the Texas Public Utility Commission (PUC) on Friday said they support a mandatory reserve margin, rather than a "target" reserve margin that doesn't encourage companies to invest in new power plants to supply the $29 billion wholesale market.

The state's primary grid, the Electric Reliability Council of Texas (ERCOT), currently has a 13.75 percent "target" reserve margin, a generating surplus as a cushion against blackouts.

Electricity use in Texas has been growing faster than generation is being built, shrinking the reserve margin and increasing the prospect of rolling outages when supplies are stretched, the grid operator has warned.

The signal that Texas will have a mandatory reserve margin is viewed by market watchers as a likely first step toward creation of a so-called "capacity market" where generators and others are paid to be available in the future.

That would be a major change from the existing "energy-only" market that only pays generators when they produce power.

Generating companies generally favor a capacity market. Shares of power producers NRG Energy and Calpine Corp rose 7 percent after Friday's PUC meeting.

Loans related to companies that own Luminant, the state's largest generator, also traded higher on the PUC news.

Large industrial power consumers and other groups oppose the additional cost that a capacity market may create.

NO FORMAL VOTE TAKEN

The PUC has been studying the state's electric "resource adequacy" problem for more than two years.

On Friday, Brandy Marty, the newest member of the three-member commission, backed Chairman Donna Nelson to support the move to a mandatory reserve margin although no formal vote was taken.

"I would support a mandatory reserve margin," Marty said, in her first decisive comments since joining the agency in August.

Marty's action appeared to end a stalemate between Nelson and Commissioner Ken Anderson over the resource adequacy question.

Anderson said he opposed a mandatory reserve margin and was upset that Nelson pushed a decision at Friday's open meeting with little notice.

Nelson said the commission needed to move forward on policy questions even as they debate options and wait for additional information from consultants.

Nelson likened the increased danger of having a blackout by relying on a target reserve margin as similar to having a flat tire while driving on bald tires.

"When my tires have low tread, I replace them with new tires," Nelson said. "It doesn't mean I won't ever get a flat tire, but it does reduce the probability."

Anderson labeled a capacity market an "energy tax" on consumers that "would not ensure reliability." He said more information is needed to determine how much reserve supply the region actually needs to avoid a lengthy blackout.

"We don't know if we have an issue," he said.

While Nelson and Marty insisted Friday's signal doesn't lock the commission into a capacity market down the road, Anderson called it the start of a "very, very slippery slope with the potential to destroy the economic engine that is Texas."

Nelson said she wants to strike the "right balance" between improving reliability and higher power prices.

A Barclays analyst also viewed Friday's action as likely leading to a Texas capacity market. "This supports our view that Texas is the only power market that supports investment," said Daniel Ford in a note to clients.

However, Marty said she has not seen a capacity model "that fits Texas. Whatever this commission develops, it will be unique to Texas," she said.

Power plant owners in the state include Luminant, a unit of Energy Future Holdings, which is owned by Kohlberg Kravis Roberts & Co LLP and other private equity firms; NRG Energy, Calpine, NextEra Energy Inc and Exelon Corp.

(Editing by Steve Orlofsky and Lisa Shumaker)

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