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Don't Mess With Texas

America’s energy competition laboratory prepares to build.

Fortnightly Magazine - October 2006

the supply of generation resources, with a planned implementation of Jan. 1, 2007. The SPM would use system-wide offer caps and resource-specific offer caps ranging between $500/MWh and $3,000/MWh, and phased in between March 1, 2007, and March 1, 2009.

In its 79th session, the Texas legislature reaffirmed and strengthened the PUCT oversight over ERCOT financial and operational aspects. 3 As recommended by the Sunset Advisory Commission, the PUCT operation was extended for another six-year term. Further, the PUCT was required to select and appoint an independent market monitor to be supported and funded by ERCOT.

This came at a time when extremely high prices during the fall of 2004 caused some concerns among regulators over possible opportunities for market-power abuse in the region. ERCOT and the PUCT currently are in the process of selecting an independent market monitor (IMM) and designing related processes. In addition to resource adequacy, Rule 25.505 also addresses market-power issues. The proposed rule currently is under revision and is being discussed among market makers, regulators, and participants. Once the rule is finalized, the selected IMM would conduct the market power screen tests periodically and perform related activities.

As reserve margins are expected to fall, power-plant development activity has heated up once more in ERCOT. Currently, about 18,500 MW of new generation is being developed in ERCOT. Of this amount, almost 2,000 MW is under construction and planned to enter the market by 2010. Further, Global Energy expects that in addition to new generating entry, a few of the mothballed generators may elect to re-commission. We have analyzed the expected economic performance for all mothballed capacity in ERCOT and assume that approximately 3,300 MW of the mothballed 7,900 MW (nameplate capacity) would be re- commissioned between 2008 and 2010.

Fig. 3 shows announced power capacity in ERCOT and its construction status since 2000. Although delayed and canceled plants continue to rise, there remains more than 15,400 MW of “planned” capacity additions still in development.

The large amounts of new supply have caused spark spreads for gas-fired generation in the past few years to be lower than the levels sufficient to provide decent financial results. 4 However, high temperatures around Texas during much of last summer resulted in very high electricity prices across the region even before hurricanes Katrina and Rita hit. As a result, generators have seen somewhat higher spark spreads. Unlike other markets, such as the Midwest, merchant gas generators are not affected by competitive fuel economics between coal or oil and natural gas. This is caused by the preponderance of natural gas in setting the market clearing prices, which reaches nearly 100 percent of all on-peak hours.

A total of 55,364 MW of new generation has been announced in ERCOT since January 2000. Of this amount, 16,200 MW has been canceled or postponed. The upward pressure placed by the escalating natural-gas prices on generator costs and, eventually, on wholesale power prices and the rising concerns over resource adequacy in ERCOT, coupled with the abundance and much lower cost of coal, continue to direct attention to new