POWER August 2013 - 58

ENERGY POLICY
Certain regulatory changes being considered,
along with other commercial innovations,
might be just enough to deliver to ERCOT the
additional power generation resources that
it so desperately needs.
problem. However, detractors suggest that
while a capacity market may help to keep
existing power generation units online, it
may not provide the necessary incentives
to construct new generation.
This is because most envision the development
of a capacity market similar to the
one that currently exists in PJM (a regional
transmission organization that coordinates
the movement of wholesale electricity in
all or part of 13 northeastern states and the
District of Columbia). PJM uses a " reliability
pricing model, " which is based on
the use of capacity auctions to obtain a
one-year capacity commitment three years
ahead of the delivery period. Though this
model does provide some increased certainty
around project revenues, that certainty
is fairly limited because pricing beyond
the near term cannot be predicted and, in
fact, is subject to myriad factors that could
potentially cause volatility in prices.
As an example, the recent 2016/2017
reliability pricing model auction for PJM
resulted (in many areas) in significantly
lower prices than those obtained in its
2015/2016 auction, leading many market
participants to be concerned with the reliability
of the capacity market to be able
to support new development. Given the
recent events in PJM, questions remain
as to whether implementation of a similar
capacity market in ERCOT would provide
the necessary incentives to both retain
existing generators and incentivize new
sources of supply.
Bridging the Pending Supply
Gap
Though the challenges of power generation
facility development abound, all hope is
not lost. Certain regulatory changes being
considered, along with other commercial
innovations, might be just enough to deliver
to ERCOT the additional power generation
resources that it so desperately needs.
Some new generation is being constructed,
and efforts are being made to reduce demand
and potentially increase revenues for
power generators in ERCOT. Additionally,
developers are working to find creative
ways in which to make new projects economically
feasible.
58
New Generation. Even with the challenges
affecting developers of new generation,
wind power remains economically
viable in ERCOT. Through a combination
of federal production tax credits and various
financial and physical hedging, certain
skilled wind power producers have been
able to obtain the necessary capital to start
construction of new wind farms.
Moreover, the regulatory approval process
for wind generation is far less arduous
than it is for fossil-fired power generators.
While wind energy adds to the available
supply in ERCOT, it produces other problems
of its own. Intermittency is a material
problem, as is the timing of much of the
wind generation. Because the wind typically
blows strongest at night, it results in a
spike in supply when demand is generally
at its lowest point. In addition, as the wind
cannot be predicted with any certainty,
other sources of more reliable power generation
must also be included as part of the
incremental supply of generation.
Another source of potential supply-energy
storage-is being considered by many
both because of its ability to balance the
timing of power supply and demand and
because of its ability to provide another
source of revenue (in the form of ancillary
services) to the investors in such products.
Demand Response. Demand response
is a meaningful way to help address ERCOT's
pending supply shortfall. The ability
to reduce demand through voluntary conservation,
however, is limited by the availability
of willing participants during peak
periods of the day. At some point, though,
even full conservation by willing participants
will not prevent shortfalls in supply.
Although demand response may help ERCOT
in the near term, new power generation
facilities will ultimately be needed.
Raising the Price Cap. In October
2012, the Public Utility Commission of
Texas voted to double the cap on wholesale
electricity prices over the succeeding three
years. The commission stated that raising
prices was necessary to encourage more
plant construction and prevent power outages
in areas served by ERCOT. Although
this may encourage more interest in the
ERCOT market, the continual increase in
www.powermag.com
the price cap does not guarantee that prices
at those higher levels will actually be
achieved. It may actually give rise to potential
concerns for investors, because a facility
that experiences an outage when it is
committed in the day-ahead market could
see significant penalties if there is a spike
in power prices in the hourly market.
Capacity Market. As described above,
though there are significant issues to consider
with the development of a capacity
market in ERCOT, such a regulatory
solution may be critical to spawning the
much-needed construction of new power
generation facilities. In the short term, a
capacity market could induce generators to
keep existing generation resources online
or remove them from mothball status.
Though this may provide a short-term
solution, the uncertainty of future pricing
remains an impediment to new development.
It is also worth mentioning that
keeping older generation around, while
effective, may be costly in the short term
because older units are generally less efficient
and more expensive to operate.
Other Solutions. Creative structuring
has also been used to get new projects built
in ERCOT. In addition to the wind facilities
discussed above, at least one company
has been able to begin new construction
on two different gas-fired projects. Panda
Energy is currently building two large
power generation facilities-Sherman and
Temple-and each is being partially funded
with project debt. By using revenue put
options in lieu of a long-term power purchase
agreement, Panda was able to assure
its investors of a stable stream of revenues
sufficient to obtain the necessary commitment
of capital.
Reason for Hope
Although the challenges facing developers
in the ERCOT market today are significant,
new and creative solutions are emerging
that have the potential to provide ERCOT
with the energy supply that it needs in the
coming years. Energy demand is expected
to grow significantly because of the high
population growth rate anticipated for the
state of Texas. As a result, finding viable
solutions to ERCOT's supply shortage is
extremely important.
Many of the short-term fixes mentioned
above may be helpful in alleviating the
problem, but some regulatory changes may
be necessary in order to allow ERCOT to
be certain that it can meet the demands of
its end users over the long term. ■
-Stuart Zisman is a partner and
Katherine Milton is an associate with
Bracewell & Giuliani LLP in Houston.
POWER | August 2013
http://www.powermag.com
POWER August 2013

Table of Contents for the Digital Edition of POWER August 2013
