Resource Adequacy Hype Doesn’t Fit the Facts

The big question in the Texas electricity market today—at least in the region of the market known as ERCOT (Electric Reliability Council of Texas)—is if we are going to run out electricity. More precisely, the debate is over whether or not prices are high enough to incent enough new generation to keep the lights on and the air conditioners running during the heat of the summer.

The Foundation’s answer to this question can be found in a series of paper we have released this year examining the subject. In particular,a paper by economists Robert Michaels and Andrew Kleit and a new paper we released today, The Reliable Texas Electricity Market: Resource Adequacy Hype Doesn’t Fit the Facts, offer the answer that the market has enough existing and planned generation to power Texas’ growing economy well into the future.

The answer comes in two parts. First, Michaels and Kleit do some groundbreaking work on evaluating the current generally accepted calculations on peaker net margin and show that the potential for profitability is much greater than seen in the standard calculations. As they put it, “Computations that assume an ancillary services option and rational bidding behavior cast new light on the viability of ERCOT’s energy-only market.” They contend, based on a careful analysis of the data, that new investment in generation can indeed be profitable.

The second part of the answer comes from evaluating the soundness of their academic findings by observing the market. If the findings by professors Michaels and Kleit are accurate, then we will find that there is in fact sufficient investment in generation taking place to maintain future resource adequacy and reliability. If their findings are inaccurate, then we won’t.

In our new paper, we examine the estimates of peak load in forecasts of demand from 2006 through 2013 and find a significant bias toward overestimation throughout the forecasts. About 79 percent of the forecasts for 2008-13 overestimated the load. If the record peak load caused by the record heat and drought of 2011 is adjusted for, the rate of overestimation rises to 87 percent.

Taking this bias into account results in the reserve margin forecasts that show sound reserve margins through 2019:

Our paper also  looked at the resource side of the past forecasts. This essentially involved looking at new announced generation that is likely to occur but hasn’t been added to the forecasts. Adjusting the Resource forecast for this again results in sound future reserve margins:

It looks like Texas has adequate reserves of electricity for the next five to six years.  

The market itself has actually affirmed this conclusion with recent announcements of 5,731 MW of new generation. While not all of the projects may come online, the level of new investment makes it obvious that companies themselves see opportunities for profit in the market—especially since the increases in the offer price cap.

All this doesn’t mean the market is in perfect shape. It’s not, and it could be improved. But the main problem is not the competitive market; it is excessive government intervention in the market. There are three main challenges: 1) renewable energy subsidies, 2) excessive regulation of the wholesale market, and 3) the regulatory uncertainty created by the PUC’s willingness to entertain a move to a capacity market.

The competitive market is forever pushing for increased efficiency. So while there are challenges in the Texas market, the market is addressing them. We should let it do its work.