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Don't Mess With Texas

America’s energy competition laboratory prepares to build.

Fortnightly Magazine - October 2006

coal-fired capacity development. To date, developers in ERCOT announced plans to build about 11,500 MW of coal-fired plants. Around 8,700 MW of these planned additions reflect TXU’s recent announcement to augment ERCOT’s baseload resources by 8,000 to 10,000 MW.

In Global Energy’s Spring 2006 Reference Case forecast for ERCOT, of the announced coal-fired additions we include only CPS’s J.K. Spruce, consistent with our methodology of only including defined-addition units that are under construction. In the long term, we have added about 5,500 MW of generic coal-fired capacity to reflect the coal-fired development activity currently taking place and the undeniable economics of new coal-fired generation.

Many states have established targets for generation by renewable supply resources. In this instance, Texas leads the way with a renewable capacity target of 2,880 MW by 2009, enforceable through various incentives and penalties for non-compliance. In July 2005, the Texas legislature boosted the renewable portfolio standard (RPS) targets to 5,880 MW by January 2015. To fully meet these targets, significant amounts of new renewables still would be required, although interim targets currently are being met. At the same time, it is becoming more and more obvious that new renewables will require new transmission lines. Curtailment and other schemes to pay wind generators for lost generation attributable to transmission congestion have been applied and proposed. The West Texas area has been affected especially by transmission congestion and draws attention to the need to coordinate new RPS standards with new transmission.

A recent ERCOT report indicates that to accommodate the higher RPS targets of 5,880 MW, more than $1 billion of additional transmission investment in West Texas would be needed during the next few years. Another $700 million to $2 billion would be required should the RPS be extended further to achieve a proposed target of 10 percent by 2025.

In Global Energy’s Spring 2006 forecast, we expect that after 2009—when the initial RPS target is hit—an additional 3,300 MW of capacity will be built in ERCOT. This level of additional building is in line with the recently passed Texas RPS expansion law. In total, about 5,922 MW of renewables are being added over the forecast time frame.

Congestion costs in August 2001 set the record when they reached $137 million. These significant congestion costs triggered the direct assignment of interzonal congestion costs to all market participants, leading to the current interzonal transmission congestion rights (TCR) congestion-management model. As a result of the direct assignment, interzonal congestion costs have declined significantly. On the other hand, local congestion costs—including payments for out-of-merit energy (OOME), out-of-merit capacity (OOMC), reliability must run (RMR), and resource specific instructions—have risen dramatically between 2001 and 2004. Between January 2002 and September 2004, local congestion costs averaged more than $25 million per month, while interzonal congestion costs averaged $2.6 million per month. Local congestion is managed by ERCOT by requesting generators to adjust their output.

Since August 2001, ERCOT congestion costs have totaled $1.5 billion. Of this amount, $1.2 billion has been caused by local congestion. This represents more than three times as much as the