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Texas REP: NRG's Actions Show Energy-Only Market Driving Investment in Capacity; REP Also Says Legislature Did Not Intend for ERCOT to Run "Capacity" Market
Actions undertaken by NRG Energy belie NRG's claims that the energy-only market does not support investment in new capacity and that the energy-only market does not provide economically viable returns, retail provider Source Power & Gas LLC said in comments to the Public Utility Commission of Texas.
Although various challenges have been alleged to be hindering generation development in ERCOT, "Source further contends that despite current conditions, new generation activity is occurring, demand-response (more importantly price response) activities are occurring and that this activity, based on free market principles, is the natural market response in an energy-only market. This is the type of activity envisioned by Legislature when it enacted SB7 and the energy-only market."
While noting "more than 20,000 MW of new generation announced and set for deployment within the next few years," (most of which was previously detailed by TIEC, click here), Source, in particular, cited the actions of NRG Energy as showing that investors, including NRG, have confidence in the energy-only market to undertake investment, contrary to NRG's public claims.
Specifically, Source pointed to NRG Texas Power LLC's desire to construct a super-peaking asset at its P.H. Robinson Generating Station in Galveston County by re-locating six, 65 MW gas fired turbines currently located in Mississippi to the Robinson Station.
NRG has had to make various pleadings with the U.S. EPA regarding this project, and Source notes that in doing so, NRG had stated (in a pleading made prior to the PUCT announcing its intent to adopt a mandated reserve margin) that the ERCOT market, "relies entirely on the willingness of generation owners and developers to deploy capital to meet the desired reserve targets."
"A generation developer such as NRG Texas must have a view that it can meet its capital return based on its forward market views," NRG told the EPA.
NRG specifically states in the letter to the EPA that using the relocated turbines makes the project, "economically viable," due to the turbines' capital cost.
Source contended that these assertions by NRG prove several things:
1. New and enhanced generation activity is occurring in the ERCOT market despite current market conditions and various allegations made in PUCT Project 40000;
2. "Since NRG is making its second request of the EPA to approve the project then it can be argued that NRG believes this project will meet its capital return (profitability) test," Source said
3. "Since it is NRG's intent to utilize these turbines during super-peak times then it can be argued that NRG believes that the SWOC increases implemented last year around this time are working to incentivize investors to enter the ERCOT market or increase their investment stake," Source said, and
4. "The bottle-neck hindering completion of this NRG project is not inadequate financing due to lack of a capacity market, but due to technical issues involving the EPA," Source said.
Aside from active generation development, Source noted that the impact of price-responsive loads and other demand response was not captured in the utilized Loss of Load Expectation analysis. "[T]his unrecognized/unmeasured demand response casts further doubt on claims that ERCOT faces a capacity shortage," Source said.
Source further contended that if the Commission does in fact institute a mandatory reserve margin which leads to a centralized capacity market, "then it will create a situation where retail electric providers with affiliated generation companies will have, collectively, unfettered market power, the abuse of which should be guarded against by the Commission in order to maintain the competitive retail market structure which has made this market what it is today."
"Generators with retail affiliates will be able to use these capacity payments to lower their retail prices to eliminate competitors without generation affiliates and then only retailers with generator affiliates will remain active in the retail market. This will result in stifled innovation, less product offering diversity, and retail prices reflecting increased market concentration and market power. Moreover and worse, this scenario would give retailers with affiliated generation companies market power which should not go unchecked. Further regulatory intervention may be necessary to safeguard Texas retail customers," Source said.
Source also said that the energy-only market was intended to be the market structure of choice by the Legislature, and questioned whether ERCOT was granted authority by the Legislature to run a "capacity" market.
Source provided the following analysis:
The Legislature demonstrated that it understood the difference between energy and capacity. While several statutory provisions concern "power" or "capacity," it carefully used only the term "electricity" in defining the role of the Independent Organization and the markets that it would administer. See Texas Util. Code sec. 39.151 (a)(1) and (4) ESSENTIAL ORGANIZATIONS (an independent organization must ensure transmission and distribution access for all buyers and sellers of "electricity" and ensure that "electricity" production and delivery are accurately accounted for), (d) (requiring Commission to adopt rules on the accounting for production and delivery of "electricity") (emphasis added). Compare with: Tex. Util. Code sec. 39.154 LIMITATION OF OWNERSHIP OF INSTALLED CAPACITY (limiting ownership and control of installed generation "capacity" to 20 percent and defining "capacity"); Sec. 39.152 QUALIFYING POWER REGIONS (requiring that a recognized power region is one where no person owns or controls more than 20 percent of the installed generation "capacity"); sec. 35.002 RIGHT TO COMPETE AT WHOLESALE (a provider of generation "may compete for the business of selling power"); sec. 35.102 STATE AUTHORITY TO SELL OR CONVEY POWER OR NATURAL GAS (the State may "sell or otherwise convey power or natural gas generated from royalties"). (emphasis added).
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November 13, 2013
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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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