As part of an ongoing effort to address future resource adequacy, Texas utility regulators yesterday voted to raise system-wide price offering caps for generators in 2013 through 2015. The commission members took an incremental approach, raising the limit each year rather than simply doubling it from $4,500 per Megawatt hour (MWh) to $9,000 per Megawatt hour, as had been expected. The highest price at which electricity can be offered into the ERCOT grid is now set as follows:

• 2013 $5,000/MWh
• 2014 $7,000/MWh
• 2015 $9,000/MWh

The intent of the increase is to incentivize power plant developers to increase generation capacity in order to prevent ERCOT reserve margins from falling below the target of 13.75%. Another means to achieving that goal would be the establishment of a “capacity market” (currently, the Texas electricity market is an “energy-only” market), which would provide payments to generators to offset the costs of providing additional capacity (whether it is used or not). With only two scheduled PUCT meetings left this year, it is unlikely that a debate and eventual decision about implementing a capacity market will be undertaken any time soon.

Tradition’s View

The move to raise offering caps by the PUCT comes the same week that ERCOT (the grid operator) revised its estimate for reserve margins for 2013 through 2018 to reflect additional resources (mostly available from mothballed existing facilities) and lower forecasts for load growth in the state. The updated numbers project margins falling from 16.4% in the summer of 2013 to 13.4% in 2014 and then remaining below the target of 13.75% in subsequent years. This is a much more comfortable forecast than previously pronounced and, as such, the incremental approach taken yesterday probably makes sense. Forward power markets have predictably moved higher in the wake of the announcement, with heat rate contracts for summer 2013 jumping from $21.5 to $22 and summer 2014 increasing a similar amount, from $23.5 to $24. The greatest impact was in summer 2015 heat rates, which jumped $3.00, from $21.75 to $24.75. The impact was muted for 2013, because the offering cap was already set at $4,500, so the move to $5,000 was not as dramatic. We expect forward heat rate prices to continue to move higher as this news is digested, and would not be surprised to see a bullish over-reaction in 2013 prices, in particular.

The potential implementation of a capacity market should be of greater concern to Texas electricity consumers. If adopted, all rate payers will be required to pay for the availability of incremental generation through “capacity adders” to their electric bills. Commissioner Kenneth Anderson pointed out that Texas faces generation emergencies only 160 hours per year (four hours per weekday for eight peak weeks of summer), which calls into question whether a capacity market that will raise costs for consumers is needed at all. Consumers should also now be mindful that some financially weaker suppliers may try to add charges to previously-agreed contracts in order to protect themselves from the new, higher rate caps.

About Tradition Energy

Tradition Energy is one of the world’s largest energy management and procurement advisors to commercial, industrial and governmental organizations with over 300 energy specialists in 11 offices covering both the wholesale and retail energy markets since 1986. Tradition Energy is part of the Tradition Group, a leading global institutional broker of financial and commodity products. Tradition employs over 2,500 people in 27 countries around the world and is publically listed on the Swiss stock exchange (CFT).
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