Shrinking Reserves and Weather Push
Wholesale Power Cost Projections Higher
Predicting where the state’s wholesale electric power costs are going to be from one year to the next is a bit like forecasting Texas weather for the next 30 minutes.
Anyone who has tried either of those fool’s errands with any regularity is no stranger to disappointment.
But for electric consumers who are caught in the lurch when sudden changes in weather and electric costs materialize concurrently, those are the disappointments that tend to land squarely in the pocketbook.
Due to market tendencies still largely driven by supply and demand in a tightening Electric Reliability Council of Texas (ERCOT) market, and coupled with a recent sub-freezing holiday cold snap, Texas electric consumers, including members served by United, are going to be subjected to another dose of those weather and market-related realities when their electric bills arrive this month.
For years, the inability to attract and secure new generation resources has been the canary in the coal mine for ERCOT, which manages about 90 percent of the state’s electric load and once touted power reserve margins as high as 19 percent. Reserve margin is the percentage of available resources above peak demand. When the electricity grid does not have sufficient resources to meet demand at any period of time, the system operator (ERCOT) may call for curtailment of electricity supply within the grid to maintain reliability of the grid.
In a December 2018 report, the system operator again lowered its planning reserve margin (an estimate of resource adequacy) forecast for summer 2019 to 8.1 percent. Beforehand, multiple coal-fired plant retirements reduced ERCOT’s installed reserve margin to 11percent, as reported in May 2018—then the lowest safety margin ever recorded in the deregulated market’s history.
Though not widely reported, ERCOT’s resource adequacy is cause for growing concern among state legislators and across the market. And those worries are becoming more acute with each new record set in peak demand—a seasonal fixture in today’s market. Certainly, a lack of generation resources and capacity within the market continues to raise questions about the various outcomes that are possible because of tight supply in the ERCOT market. That’s why independent analysts say 2019 could provide myriad challenges across the grid—costs notwithstanding.
United’s distribution charge (electric service delivery from the substation to the meter) underwent an adjustment initiated in 2015 (the first United rate adjustment in more than 12 years), and doesn’t fluctuate as rates do in the wholesale energy market. However, the wholesale power cost United pays Brazos Electric Power Cooperative and passes through without markup to its members is increasing due to a power cost recovery factor (PCRF) adjustment for higher wholesale costs that are projected for 2019. The PCRF is the part of every member’s electric bill that directly reflects the fluctuating cost of wholesale power.
The change will amount to about an $8 increase on an average residential bill for 2000 kWh of usage in the upcoming billing cycle.
Members should recognize the Brazos portion of a residential member’s bill accounts for 70-80 percent of the monthly cost of electric service, while the remainder of the bill comprises United’s delivery charge.
“We’ve warned our members for a long time that, as electric consumers in this state, the tightening ERCOT supply environment that we’ve been monitoring has a lot to do with the costs of wholesale power,” United CEO Cameron Smallwood said. “Our goal is to always do what we can to position the cooperative and its members so that when market volatility happens, we have mitigated it as much as possible. While we have been very effective at managing United’s operational efficiencies and controllable expenses well on the delivery side, we have little control over the cost swings that occur within the wholesale power market. Because of this, United has focused on helping its members waste less electricity, and our energy conservation and efficiency programs have left a lot of energy dollars in our members’ pockets.
“A tight market, rather than fuel prices, is driving costs upward now, but no matter where wholesale power costs have been, United has been able to maintain its price competitiveness. That’s a testament to our relationship with Brazos Electric Power Cooperative and Brazos’ diligence in managing our power supply,” he said.
Despite the wholesale market’s pricing signal fluctuations since the deregulation of most of the Texas electric industry in 1999, Brazos’ management and deployment of generation and transmission resources, as well as its coordinated purchases of supplemental power from the wholesale market, have allowed United to remain competitive and among the area’s low-cost providers.
“For years, and throughout almost every upheaval in the ERCOT market, United has been fortunate to maintain an edge as one of the lowest cost providers in the North Texas area—even when market price levels have spiked to record levels,” Smallwood said.
As illustrated in the chart below, competing among retail service providers operating in North Texas, many of which who offer multiple plans with differing rates and terms, United’s rate has reguarly been one of the most competitive rates within the market in monthly apples-to-apples comparisons.
Even so, United still keeps seeking innovative ways to lessen the load for its members.
While limited in the amount of generation the cooperative can procure outside of its long-term power supply contract with Brazos, United has taken measures to control the wholesale energy costs its members encounter, including the 9.9 MW community solar facility (featured in the story on Page 20B) that locks in the energy cost until 2037, and is lower than the Brazos energy costs passed through to members.
“We still have a little more than 3,000 2 kW subscriptions available of the 4,950 originally provided to our membership,” said Smallwood. “Members who have subscribed are saving a few dollars each month already and the higher the Brazos energy costs rise, the more savings our members will realize by participating in our solar program. It’s a no-brainer,” Smallwood said.
Yet despite United’s overarching objective to contain costs through innovation, the tests still keep coming for providers and consumers who are left to muddle through the mayhem in a state that keeps growing by leaps and bounds, and in an energy-only market that hasn’t provided a profit mechanism that warrants investment in additional generation resources.
So if the market's price swings today are attributed to a tight market, it's anyone's guess what may cause the next round of volatility. Professional forecasters likely advise guessing often—odds are, you're bound to guess right every once in a while.