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Competitive Suppliers: Outlook for Dire Resource Adequacy Consequences in Texas "Wholly Overstated"

August 20, 2013

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Copyright 2010-13
Reporting by Paul Ring •

The "outlook for dire consequences" with respect to resource adequacy in Texas, "appears to be wholly overstated," a coalition of competitive electric suppliers has conceded, raising the question of why some of these same suppliers (or their affiliates) are pressing for costly administrative mechanisms (such as a capacity market) in Texas to resolve the purported crisis.

Specifically, Constellation NewEnergy, Inc., Direct Energy Services, LLC, Noble Americas Energy Solutions LLC, and the Retail Energy Supply Association (collectively, the competitive suppliers) made the concession in reply comments concerning an investigation of retail choice in Arizona.

Opponents of retail choice in Arizona, noting the recent cries of crisis (notably, from capacity owners and not customers) in nearby Texas with respect to "reliability" (meaning resource adequacy), have rightfully parroted such concerns to Arizona regulators, positing that it would be foolish to embrace restructuring given that competitive capacity suppliers in Texas are screaming that the current restructured market in Texas cannot support reliability, and administrative intervention is needed to keep the lights on.

This, naturally, has created a conundrum for so-called competitive market advocates, at least those who are in favor of administrative intervention in the Texas energy market. Specifically, such advocates are trying to create a crisis mentality in Texas such that government intervention is needed to keep the lights on given Texas' growing economy, and that the current natural market interactions among buyers and sellers is inadequate to attract sufficient capacity investment. However, this professed failure of competitive market forces to assure reliability also hinders suppliers' desire to expand electric deregulation, because why would states with sufficient capacity under the vertically integrated model wish to copy a system purportedly as flawed as Texas, which is allegedly at risk of rolling outages and, as one leading executive at a Texas capacity owner has put it, merely "bet[ting] on the Texas weather" by relying on the energy-only market.

Pressed on this issue, the competitive suppliers have conceded what has been clear for the last several years in Texas -- "the outlook for dire consequences in Texas appears to be wholly overstated."

Note that this rebukes the position taken by several of these same suppliers (or their affiliates) in Texas, where the suppliers are urging administrative intervention in the form of a capacity market as essential to maintain reliability.

The competitive suppliers specifically dispute Arizona Public Service's statement that, "For the second year in a row, Texas faces the prospects of blackouts since adequate generation is no longer being built in spite of dramatically rising electricity prices."

The competitive suppliers also conceded that the Texas energy-only market has, "attracted over $25 billion [in] generation investment for the construction of 39,000 MW of new capacity."

In contrast, in Texas, the story told by similar parties is different. For example, Direct Energy, L.P. told Texas regulators in September 2012 that it supported introduction of an administrative capacity market in Texas because, "The Brattle Group report concludes that the ERCOT market will not consistently sustain an adequate level of reserves even if the Commission increases the offer cap to $9000 per MWh" (emphasis added). Now its affiliate Direct Energy Services is telling Arizona regulators that this outlook for dire consequences in Texas, "appears to be wholly overstated."

Similarly, the ERCOT "Reliability Advocates" (a name that itself conjures up a Texas crisis in need of fixing) said in September 2012 comments to Texas regulators that their centralized capacity market proposal, "is the only mechanism that will guarantee the desired result [of a 'stable, reliable electric grid']" (emphasis added). The Reliability Advocates include Calpine Corporation, Exelon Generation Company, LLC, and NextEra Energy Resources, LLC, the latter two of whom have affiliates which are members of RESA, which as an organization is telling Arizona that concerns about Texas resource adequacy are overstated.

Matters stresses that RESA's Arizona comments reflect the views of the association and not individual members; however, the fact that RESA is framing Texas' resource adequacy concerns as overstated in comments to Arizona, while some of its members are crying crisis in Texas in the hopes of extracting favorable market design changes, cannot be ignored.

NRG Energy, also a member of RESA, has perhaps been the most vocal in describing the dire consequences facing Texas that have been noted by opponents of retail choice in Arizona.

In August 2012, NRG Energy told Texas regulators that: "In an energy-only market, to support investment developers must have a reasonable assurance of sufficient scarcity pricing frequency and levels to generate adequate revenues. But once the market responds with additional resources, scarcity pricing and the corresponding revenues will decline precipitously - thus halting new investment. Power supplies are again constrained, reducing grid reliability. ERCOT is then unable to maintain its chosen reserve margin for extended periods (as is the forecast situation for ERCOT) because new supplies take years to come into service. This 'boom and bust' cycle simply cannot sustain a stable reserve requirement and the level of reliability that ERCOT has historically required."

An op-ed in the Houston Chronicle by an NRG Energy executive went further, stating that Texas had two choices to keep the lights on, since the current market design was not working -- either, "[h]ope for mild weather or move to a capacity market."

Again, RESA's Arizona comments repudiate this argument, stating, "the outlook for dire consequences in Texas appears to be wholly overstated."

Also of note, the competitive suppliers reference in their Arizona comments, "comments of APS and several other opponents of retail choice that point to ongoing deliberations in Texas about the need for a wholesale capacity market to ensure the availability of the right amount of generation supply, and their claims that these deliberations are proof that reliablity [sic] in retail competition states is compromised."

"These arguments have no merit. The wholesale market design modifications under discussion in Texas are not required because of retail competition in that state," the competitive suppliers (including RESA) affirm (emphasis added).

However, this affirmation directly contradicts an argument made by NRG Energy (again, a RESA member) that administrative intervention in Texas is needed (such as through a capacity market) because the customer switching inherent in a retail choice environment does not support long-term contracting for capacity (absent an administrative mandate).

Specifically, NRG Energy told Texas regulators, in comments alleging the need for a capacity market (mandate), that:

"The success of retail competition in ERCOT results in relatively short-duration products (mostly less than two years). This creates an absence of natural buyers in the long-term bilateral market needed to support long-term market fundamentals and the corresponding forward price valuations required to enable investment in generation assets with a multi-decade life ... The inability to execute hedges at forward prices reflective of long-term supply and demand removes the economic support for operation of existing generation capacity and interferes with the process to obtain financing for the construction of new generation capacity." (NRG Energy Inc. comments in PUCT Project 40000, May 31, 2013)

So which is it? Is Texas facing dire consequences unless it radically changes its market design, as capacity owners in Texas would have us believe. Or are the competitive suppliers seeking retail choice in Arizona correct -- that these doomsday scenarios in Texas are overblown?

Given the decade-plus record of the energy-only market in Texas reliably meeting resource adequacy, we think the record is, and always has been, clear -- the competitive suppliers are correct that dire predictions of ERCOT rolling blackouts are overstated, and again affirm that administrative intervention is not needed in the market. As has been noted previously, the only two occasions since restructuring during which ERCOT has had to implement rotating outages came at periods when ERCOT had resource adequacy well above the target reserve margin. Out-year projections of resource adequacy shortfalls are notoriously unreliable, because the energy-only market incents generation to come online when needed -- not three years ahead of time when uneconomic and when it must be subsidized by administrative payments. As history has consistently shown, prompt year reserve margins coalesce at the target reserve margin -- the efficient economic outcome, despite prior-year warnings of shortfalls. Investors have responded to price signals in ERCOT, and continue to do so, with new build continuing on an ongoing basis. The competitive suppliers, in their Arizona comments, acknowledge that attempts to tear down the success of the current ERCOT market are overblown, and should not be given weight.

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