Legislative Staff Briefing: Update on the Texas Electric Industry

Update on the Texas Electric Industry

Legisla)ve Staff Briefing

January 23, 2014

Legislative advertising paid for by: John W. Fainter, Jr. • President and CEO Association of Electric Companies of Texas, Inc. 1005 Congress, Suite 600 • Austin, TX 78701 • phone 512-474-6725 • fax 512-474-9670 • www.aect.net

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AECT Principles

• AECT is an advocacy group composed of member companies commiHed to:

-‐ Ensuring a modern, reliable infrastructure for the supply & delivery of electricity.

-‐ Suppor)ng efficient compe))ve markets that are fair to customers and market par)cipants.

-‐ Suppor)ng consistent and predictable oversight and regula)on that will promote investment and ensure the stability of Texas’ electric industry.

-‐ Promo)ng an economically strong and environmentally healthy future for Texas, including conserva)on and efficient use of available resources.

• AECT member companies remain dedicated to providing Texas customers with reliable service and are commiHed to the highest standards of integrity. The Associa+on of Electric Companies of Texas, Inc. (AECT) is a trade organiza+on of investor-‐owned electric companies in Texas. Organized in 1978, AECT provides a forum for member company representa+ves to exchange informa+on about public policy, and to communicate with government officials and the public. For more informa+on, visit www.aect.net.

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AECT Companies Within ERCOT

Transmission and Distribu)on U)li)es

Retail Electric Providers

Genera)on Companies Total ERCOT Capacity:

>74,000 MW

4

AECT Companies Outside of ERCOT

Western Electricity Coordina)ng Council (WECC)

Southwest Power Pool (SPP)

Midcon)nent Independent System Operator (MISO)

Total ERCOT Capacity:

>74,000 MW

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ERCOT Market Update

Retail Market

Cold Weather

Need for Power Genera)on Resource Investment

6

Texans In Major ERCOT Compe))ve Areas Have A Wide Array Of Choices Available To Meet Their Needs

Note: Customers in the Sharyland U)li)es LP-‐McAllen and Nueces Electric Coopera)ve service areas also have mul)ple offers to choose among. Source: Power to Choose, January 2, 2014

AEP Texas North Service Territory

291 offers

Texas-‐New Mexico Power Co. Service Territory

290 offers

AEP Texas Central Service Territory

311 offers

Oncor Service Territory

335 offers

CenterPoint Energy Service Territory

334 offers

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Service Area Average Fixed-

Price Offer (12-month term)

Lowest Fixed-Price Offer

(12-month term)

Lowest Price Offer

Available

Dec. 2001 prices, not adjusted for

inflation

Dec. 2001 prices, adjusted for inflation

AEP Texas Central

10.8¢/kWh 8.6¢/kWh 5.8¢/kWh 9.6¢/kWh 12.5¢/kWh

AEP Texas North


CenterPoint Energy


Oncor


TNMP


Lower Prices Available Today than Before Compe))on Began

Sources: PUC Historical Data, Bureau of Labor Statistics - Consumer Price Index (32% inflation since December 2001), www.powertochoose.org offers as of January 2, 2014

January 2014 December 2001

While ERCOT compeMMve offers have dropped significantly, the latest average U.S. residenMal electricity prices are up 48% since 2001.

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Electric Price Offers Compared With Other Retail Products

Sources: Public Utility Commission of Texas, U.S. Energy Information Administration, Bureau of Labor Statistics, Zillow

Gallon of Gas 187%

Dozen Eggs 108%

Ground Coffee 73%

Ground Beef 67%

Hourly Legal Services 52%

U.S. Average Residen)al Electricity 48%

Loaf of White Bread 38%

Aus)n Energy Average Residen)al Electricity 22%

Gallon of Milk 21%

Aus)n Rent 15%

ERCOT Average Lowest Fixed Price Offer -‐17%

ERCOT Average Lowest Available Offer -‐46%

Price Change: December 2001 to Today

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ERCOT Compe))ve Market Has Helped Drive Lower Retail Electricity Offer Prices

1 Average electric offers across the 5 TDSP’s for residential customers using an average of 1,000 kWh per month. Excludes any 0.0¢/kWh introductory offers. Sources: NYMEX; www.powertochoose.org

10

ERCOT Compe))ve Market Price Offers Below Aus)n Energy Rates

Sources: Austin Energy Residential Electric Rates, calculated based on 1000 kWh/month unless otherwise stated; Power to Choose, data reflects average price across major areas open to competition as retrieved January 2, 2014

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ERCOT Market Update

Retail Market

Cold Weather


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Texas Faced Several Cold Spells Thus Far This Winter

Source: Weather Underground

Two out of every three days below historical average

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Response to High Winter Electricity Use in ERCOT

•  ERCOT Energy Emergency Alert (EEA) issued on January 6 –  ERCOT dispatched available demand

response resources and called all available genera)on online to avoid rota)ng outages

–  The alert was cancelled at around 10 AM

•  Several usage records set this winter –  New winter peak demand record of 57,277

set on January 7 –  ERCOT net system demand met new

monthly record peaks in October, November and December

–  ERCOT app for iPhone and Android helps consumers stay up-‐to-‐date on ERCOT weather alerts and calls for conserva)on

14

ERCOT Market Update

Retail Market

Cold Weather


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Texas’ Popula)on and Economy Con)nue to Grow

0

0.5

1

1.5

2

2.5

3

01 02 03 04 05 06 07 08 09 10 11 12 13

US Texas

0.0

2.0

4.0

6.0

8.0

10.0

12.0

06 07 08 09 10 11 12 13

US TX

PopulaMon Growth Rate (%) Unemployment (%)

•  Texas’ popula)on has grown by 1.5 to 2.5 percent per year over the last decade

•  Unemployment has been at or below the na)onal rate for 84 consecu)ve months

•  On average, the state adds 1,190 new Texans per day

•  Compared with 2012, ERCOT electricity usage grew 2.1 percent in 2013

Sources: U.S. Census Bureau, 2012; ERCOT

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13.2 13.8 11.6 10.4 10.5 9.4

7.4 6.5

35.6

26.7 25.2

16.5 16.4 14.6 13.8

16.8

21.4

17.5

13.9

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Resource Adequacy: Investment S)ll Needed in ERCOT

ERCOT summer reserve margin1

2002-2020E; percent

13.75% target reserve margin provides a buffer against de-‐rates, forced outages, wind variability, forecast error, and weather related spikes

1 Based on ERCOT Capacity, Demand and Reserves (CDR) Reports, as amended 2 Historical reserve margins based on projections for each year prior to summer peak season, based on the formula in effect at the time 3 Reference 2012 ERCOT Loss of Load Study, March 8, 2013; using 2016 curve as proxy for series.

Historical forecasts2

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Latest forecast (May 2013)

Implied Loss of Load Events (LOLEV) per year3

0.2 0.9 2.4 5.6 8.0 1.6 1.6

Note: ERCOT is con+nuing to study its load forecas+ng methodology, which may impact the future reserve margins shown.

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NERC Highlights Concerns About Lack of Resource Adequacy in ERCOT

“As iden)fied in the assessment, one area of concern requiring immediate a^enMon is the projected Planning Reserve Margin levels in the ERCOT assessment area.”

“ERCOT should consider addiMonal potenMal soluMons to address resource adequacy and provide a plan outlining the measures it is taking to increase reserve margins and ensure reliability.”

LeOer from Gerry Cauley, President and CEO of NERC, to ERCOT CEO Trip DoggeO, January 7, 2013

Emphasis added

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ERCOT Has the Lowest Reserve Margins in NERC’s Most Recent Long-‐Term Assessment

37.2%

32.9%

31.3%

29.4%

25.9%

21.7%

21.4%

20.8%

16.7%

15.4%

15.2%

9.3%

Target Margin

Prospective Margin

10% 20% 30% 0 40%

ERCOT Has Lowest Reserve Margins in NERC’s Most Recent Long Term Assessment

Summer 2018 Prospective Reserve Margin (%)

2

FRCC: Florida

SERC-SE: AL, GA, MS

WECC-DSW: AZ, NM

SPP: AK, LA, etc. SERC-N: TN, KY, etc.

WECC-CALS: So. Calif.

NPCC-NY: New York PJM: PA, NJ, MD

SERC-E: NC, SC

MISO: Midwest

ERCOT: Texas

NPCC-NE: New England

Source: NERC 2013 Long-Term Reliability Assessment, Dec 2013 (pg 16); 12 largest US NERC assessment areas

Reserve margins based on NERC methodology

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ERCOT Restructuring Spurred New Genera)on Investment In ERCOT

1.8

0.2 0.6

1.2 1

0.3 0.4 0.5

0.2 0.6

4.7

6.6

5.7

4.9

2.8

1.4

0.8

2.3

3.8

5.8

2.1

3.0

1.0

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Year

In rate base Not in rate base

Enabling legislaMon

90-‐97 addiMons=6 GW 98-‐10 addiMons=46 GW

Capacity addiMons 1990-‐2012; GW

Sources: Energy Velocity, NERC, PUC, IHS CERA

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However, the Condi)ons that Led to Previous Eras of Genera)on Investment in ERCOT are No Longer Present

  Federal and state subsidies, along with high electricity prices due to high natural gas prices, provided economic support for the wind build out.

  Economic support has eroded: •  State mandate has been achieved; •  Federal subsidies are uncertain; •  Long period of lower electricity prices due to low natural gas prices.

CondiMons Then… Now…

 Most, if not all, of the poten)al replacements have already occurred.

  New, more-‐efficient combined cycle gas-‐fired generators replaced gas-‐fired steam generators that were costly to run.

  Higher electricity prices, due to high natural gas prices, provided economic support for the coal build out, along with a reasonable environmental regime.

  Economic support has eroded: •  Long period of lower electricity prices due to low natural gas prices;

•  Challenging federal environmental regime.

CCGT Build-‐out (1998 – 2002; over 25 GW)

Wind build out (2005 – 2010; approx. 9 GW)

Coal build out (2007 – 2010; approx. 3 GW)

Era

21"

ERCOT Forward Markets Do Not Reflect The Prices Necessary To Support New Investment

1 Energy Informa)on Administra)on, Annual Energy Outlook 2013, January 28, DOE/EIA-‐0383 (2013); hHp://www.eia.gov/forecasts/aeo/electricity_genera)on.cfm; ‘Advanced’ version of technology without CCS

$0

$20

$40

$60

$80

$100

$120

$140

Gas (CT)

Gas (CCGT)

Coal Nuclear Wind Geo-thermal

Biomass

US Average Levelized Costs for Plants Entering Service in 20181

2011 $/MWh Levelized Capital Cost

Fixed O&M

Variable O&M (including fuel)

Transmission Investment

2015 ERCOT Forward Electricity Price Range ~$36-‐42/MWh

Fossil Renewable

Forward Power Prices Do Not Support New Genera)on Investment In ERCOT

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Long-‐Term Difficul)es AHrac)ng Investment in Genera)on

$73

$55 $56

$77

$34

$39 $37

$28 $34

'05 '06 '07 '08 '09 '10 '11 '12 '13

$53 in ‘11 with

extreme events2

Wholesale Power $/MWh, ERCOT Real Time Average1

Drivers of lower wholesale power prices

  Lower natural gas prices (over $8/mmbtu in 2008 versus ~$4/mmbtu today)

  Newer, more efficient genera)ng units compe)ng to set price

  Subsidized wind entering market

  Limited hours in scarcity condi)ons

1 Annual average of ERCOT-wide load weighted average real time prices (balancing energy prices thru 11/30/10; real-time prices for 12/1/10 to Dec ‘13). 2 2011 average pricing excluding all intervals priced ≥$1000/MWh (primarily extreme weather events of February and August 2011). Sources: 2003-2011 ERCOT State Of The Market Reports, ERCOT data, Luminant.

23"

Capacity Mechanisms vs. Energy Only Market: Comparison of Costs and Reliability

Energy Only Equilibrium

10% Reserve Margin

Requirement

14% Reserve Margin

Requirement

Reliability Reserve Margin 8% 10% 14%

Reserve Margin Certainty Uncertain More Certain More Certain

Annual Average Loss of Load Hours 4.1 2.2 0.3

Customer Costs Energy Costs ($billions) $18.3 $16.3 $14.0

Capacity Costs ($billions) $0 $2.1 $4.7

Total Costs ($billions) $18.3 $18.4 $18.7

Cost Increase over Energy-‐Only Equilibrium (%) NA 0.7% 2.4%

Rate Increase over Energy-‐Only Equilibrium (%) NA 0.4% 1.4%

Notes: 8% energy-only equilibrium reserve margin based on The Brattle Group’s simulations with a $9,000 price cap and gradually sloping scarcity pricing function. Rate impacts assume generation costs comprise 60% of total retail rates. Source: Brattle Project No. 40000 Filing September 4, 2013

The market could achieve current reliability objecMve over the long term for $400 million per year (~1.4% on retail rates or less than 0.15 cents/kWh across enMre market)

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Capacity Mechanisms Reduce Vola)lity and Promote Investment

Energy Only Prices (One week in August 2012)1

Energy + Reliability Prices (Illustrative for same week)

Vs.

One week One week

Energy component Reliability component

  All revenues from single energy component   Higher vola)lity, especially in )mes of scarcity   Revenues uncertain; thus, investment is harder to finance and a high level of reliability cannot be ensured

  Two revenue components: energy + reliability   Lower vola)lity   Revenues more certain; thus, investment is more financeable and a high level of reliability can be delivered for only slightly higher revenues than an energy-‐only construct with lower reliability

1Week of July 29 - August 4, 2012; actual peak at $678/MWh on July 30; scale shown is 0-200 $/MWh Source: ERCOT

25"

Resource Adequacy: Key Takeaways

•  Electricity is an important part of Texas’ infrastructure

•  The PUC has the authority and the obligaMon to address this issue.

•  The conMnued growth of the Texas economy drives need for acMon on resource adequacy

•  Doing nothing is not an opMon

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Web: AECT.net Blog: AECTnet.wordpress.com

Twitter: twitter.com/AECTnet Facebook: AECT Advocacy Email: [email protected]

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Legislative Staff Briefing: Update on the Texas Electric Industry