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TEPA's Roylance Seeing Greater Demand Response Offers from Texas REPs, Calls Capacity Market Inconsistent with Customer Choice

April 22, 2013

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Copyright 2010-13
Reporting by Karen Abbott •

More Texas retail electric providers are offering customers demand response solutions in light of higher ERCOT price caps, David Roylance, Vice President of The Energy Professionals Association (TEPA) and Principal at Prism Energy Solutions, told in an interview.

"There has been an increase from the retail community in offering demand response solutions," at both the residential and C&I level, Roylance said.

At the residential level, in addition to "no-risk" plans paying residential customers for called reductions first rolled out over the last 24 months (see Reliant, Bounce, etc.), Roylance reported that REPs are now offering customers compensation, usually in the form of a flat fee, for allowing the REP to cycle the customer's air conditioner or pool pump.

The number of companies considering participating in demand response is three to four times higher than it was in 2011, Roylance said.

Other market trends in light of the higher ERCOT price caps include a shift in customer appetite away from indexed products and towards fixed products, Roylance reported. Of course, the risk of providing a full requirements fixed rate has increased given the higher price caps, and pricing is reflecting such increased risk (which REPs are also trying to mitigate with the assembled load response portfolios noted above).

Additionally, Roylance said that in advance of the higher price caps, C&I customers are contracting 12-18 months prior to the expiration of their current contracts, for delivery dates starting as late as 2015, compared to contracting only three to four months prior to delivery, which was previously predominant.

Based on forward pricing, the market is ascribing most of the risk of potentially clearing at or near the new price cap to August, with the other summer months also showing higher pricing.

Concerning the potential for a capacity market in ERCOT, Roylance said that a capacity market is, "going to raise rates."

Moreover, customers will not have any control over these rates, Roylance confirmed. "My experience with capacity markets is that it [the capacity charge] is predominantly a pass-through," Roylance said.

"The consumer does lose some control," under a capacity market, Roylance said, stating that less than 10-15% of customers would be in a position to hedge capacity costs.

Roylance noted that in Texas, about 30-40% of a customer's electric bill, depending on the customer, consists of, essentially, regulated charges from transmission and distribution. Adding a capacity market could push that to near 50%.

"It's difficult for me to call this a competitive market," when close to 50% of the bill would be set administratively," Roylance said.

"Raising rates through a regulated charge is inconsistent with allowing competition to work," Roylance said.

Roylance also expressed some concern that a capacity market could create an uneven playing field for larger capitalized retail providers who also have access to generation.

"The other problem that I see with a capacity market in Texas is there is no direct line of sight that [the capacity payment] builds generation. Just raising everyone's rates by invoking a capacity market does not guarantee that generation gets built," Roylance said.

"Any conversation about a surcharge or a capacity market should be accompanied with line of sight commitments to build generation," Roylance said.

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