Wholesale electricity price cap study raises questions on increase

An independent report commissioned by the Public Utility Commission found wholesale electricity prices were high enough in 2011 to support construction of new power plants in Texas.

The PUC raised the wholesale electricity price cap in June to $4,500 cap, which goes into effect today, hoping that it  will encourage companies to build more generation. Texas has struggled with growing demand over the past few years that has outpaced power generation, leaving the Lone Star State with tight reserves during peak power hours.

Potomac Economics, a consulting firm hired by the PUC, found that even without the  much-discussed price cap increase, the combination of demand and low natural gas prices were sufficient to encourage generation providers to build additional facilities.

“We find that 2011 is the first time in five years that net revenues have been sufficient to support either new gas turbine or combined cycle generation,” the ERCOT 2011 State of the Market report stated, noting that the drop in natural gas prices has made it cost effective to build new generation facilities.

Opinions differ on whether the hot, long summer of 2011 will be repeated in the near future and whether it can be used as a baseline.

Commissioners have said they are further considering a price increase to $9,000 in 2013.

“We don’t require the building of generation in Texas,” PUC Chair Donna Nelson told State Impact Texas, after she and Commissioner Rolando Pablos voted 2-0 in favor of the price increase. “We set up the market forces so that generators want to come to Texas.”

The decision has been controversial, with consumer-advocacy and environmental groups saying that high emergency prices will not address demand pressure. Instead, the groups have argued that the higher caps likely will bring higher prices to consumers.

Those groups are encouraged the PUC to explore ways to conserve and staggering prices based on time of day, saying those methods could provide a more successful and less expensive solution.