NRG: Texas should require minimum power reserves

Texas should consider requiring additional electricity reserves to ensure that the system stays reliable, according to a new report issued Tuesday that was sponsored by NRG Energy.

Under the current system, grid managers set targets for the power reserve margin they believe is necessary to help keep the grid functioning in cases of extreme high demand. But using targets instead of requirements could cost billions of dollars if power outages become more common in the future, according to a study prepared for NRG Energy by Charles Rivers Associates, a global consulting firm.

The Texas grid currently operates under an “energy only” model, where generators are paid only for power that consumers actually use. State regulators are considering whether to modify the system. One option includes moving to a capacity market, a change that NRG has encouraged in the past. In this model, retail electric companies would pay fees for generators to keep a guaranteed amount of capacity available, whether or not it is used.

Demand response: A kilowatt saved is a kilowatt earned

Moving to a capacity market system could save the state $14 billion over the next 15 years, according to the report. The study estimates that an outage costs roughly $500 million to the total Texas economy, and predicts increasing outages as the reserve margin falls. The report also said that if Texas experiences the extreme weather of 2011, there could be thousands of additional job losses if the state remains in its current energy-only system.

“If you look at what it costs on a yearly basis to have a mandated reserve margin, which would probably include a capacity market, you can significantly reduce the impact on the market,” said John Ragan, president of NRG Energy’s Gulf Coast Region.

When Texas moved to a deregulated electricity market in 2002, its reserve margins exceeded 20 percent, but the electric system’s reserve margin is currently hovering just over the target level of 13.75 percent. And grid managers have estimated that it will continue to fall in the coming years, to 9.4 percent by 2018 and to 4.5 percent by 2023.

The report said the falling margins indicate a lack of reliability in the system, determining that the current electric market does not provide the needed financial incentives for generators to build additional power plants in Texas, the report said.

“A low reserve margin is indicative of resource adequacy failures, which lead to higher frequencies of reliability events (such as power outages) and electricity price spikes,” the report said. “These resource adequacy issues have real economic costs that could dampen the growth prospects of the Texas economy if not addressed.”

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Kenneth Anderson, one of the three members of the state Public Utility Commission, believes that projections of future reserve margin shortfalls are misleading, and do not account for the way investors make generation decisions. He also feels that the projections do not reflect various programs that encourage customers to curb their demand for electricity at peak times.

“In an energy-only market that is experiencing an increase in electric consumption, you should always be showing a shortfall four to five years out,” Anderson told FuelFix in a phone interview. “Why would anyone build power plants unless they were sure that there would be someone to sell the power to?”

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