Mild summer discouraging new electricity generation

Lower than expected summer temperatures in Texas have pushed down forward wholesale electricity prices, which may dampen future generation construction, financial firm Tudor, Pickering, Holt & Co. wrote in a report this week.

July temperatures for both 2013 and 2012 have pushed peak power prices to an eight-year-low, reducing the financial incentive for investment in new construction.

“Our belief is that mild Texas weather this summer has irrationally lowered forward prices along with the urgency for market reform even though market fundamentals remain unchanged,” Tudor Pickering Holt wrote in their report.

The report encourages policy makers to adopt a capacity market structure, saying that the pricing structure of electricity in Texas does not encourage the needed construction of new generation.

Air conditioning: Texas power bills dwarf electricity use in other states

Since the early 2000s, most of Texas has operated in a competitive electricity market, in which competing generators sell power wholesale to retailers, which then compete for residential and business customers.

Under a capacity market, generators are paid to build and maintain some excess capacity for the hottest days or other emergencies, such as a major plant failure.

“Texas is a perfect example of when a capacity market should be applied,” Tudor Pickering Holt wrote in their report. “Texas is trying to adhere to the nationwide standard of maintaining adequate capacity such that the probability of a blackout from insufficient capacity during peak hours is 1 in every 10 years.”

Texas grid planners are currently considering whether to increase the electricity reserve margin from its current target of 13.75 percent to 16.1 percent, in an effort to increase reliability. The Texas Public Utility Commission plans to meet in September to discuss the proposal.

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