Update	
  on	
  the	
  Texas	
  Electric	
  Industry
	
  
	
  
Legisla)ve	
  Staff	
  Briefing
	
  
January	
  23,	
  2014
	...
AECT	
  Principles	
  

•	
  AECT	
  is	
  an	
  advocacy	
  group	
  composed	
  of	
  member	
  companies	
  commiHed	
 ...
AECT	
  Companies	
  
Within	
  ERCOT	
  

Retail	
  Electric	
  Providers
	
  

Transmission	
  and	
  Distribu)on	
  U)l...
AECT	
  Companies	
  
Outside	
  of	
  ERCOT	
  

Midcon)nent	
  Independent	
  
System	
  Operator	
  (MISO)
	
  

Southw...
 
ERCOT	
  Market	
  Update	
  
	
  
	
  
Retail	
  Market
	
  
	
  
Cold	
  Weather
	
  
	
  
Need	
  for	
  Power	
  
	
...
Texans	
  In	
  Major	
  ERCOT	
  Compe))ve	
  Areas	
  
Have	
  A	
  Wide	
  Array	
  Of	
  Choices	
  Available	
  To	
 ...
Lower	
  Prices	
  Available	
  Today	
  than	
  Before	
  
Compe))on	
  Began	
  

January 2014

December 2001

Service A...
Electric	
  Price	
  Offers	
  Compared	
  
With	
  Other	
  Retail	
  Products	
  
Price	
  Change:	
  December	
  2001	
 ...
ERCOT	
  Compe))ve	
  Market	
  Has	
  Helped	
  Drive	
  	
  
Lower	
  Retail	
  Electricity	
  Offer	
  Prices	
  

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

Sources: Austin Energy Residenti...
 
ERCOT	
  Market	
  Update	
  
	
  
	
  
Retail	
  Market
	
  
	
  
Cold	
  Weather
	
  
	
  
Need	
  for	
  Power	
  
	
...
Texas	
  Faced	
  Several	
  
Cold	
  Spells	
  Thus	
  Far	
  This	
  Winter	
  

Two	
  out	
  of	
  every	
  three	
  d...
Response	
  to	
  High	
  
Winter	
  Electricity	
  Use	
  in	
  ERCOT	
  
•  ERCOT	
  Energy	
  Emergency	
  Alert	
  (EE...
 
ERCOT	
  Market	
  Update	
  
	
  
	
  
Retail	
  Market
	
  
	
  
Cold	
  Weather
	
  
	
  
Need	
  for	
  Power	
  
	
...
Texas’	
  Popula)on	
  and	
  Economy	
  
Con)nue	
  to	
  Grow	
  
Unemployment	
  (%)	
  

PopulaMon	
  Growth	
  Rate	
...
Resource	
  Adequacy:	
  
Investment	
  S)ll	
  Needed	
  in	
  ERCOT	
  
ERCOT summer reserve margin1
2002-2020E; percent...
NERC	
  Highlights	
  Concerns	
  About	
  Lack	
  of	
  
Resource	
  Adequacy	
  in	
  ERCOT	
  

	
  
“As	
  iden)fied	
 ...
ERCOT	
  Has	
  the	
  Lowest	
  Reserve	
  Margins	
  in	
  
NERC’s	
  Most	
  ERCOTong-­‐Term	
  Assessment	
   Margins
...
ERCOT	
  Restructuring	
  Spurred	
  New	
  
Genera)on	
  Investment	
  In	
  ERCOT	
  
Capacity	
  addiMons	
  
1990-­‐20...
However,	
  the	
  Condi)ons	
  that	
  Led	
  to	
  
Previous	
  Eras	
  of	
  Genera)on	
  Investment	
  in	
  
ERCOT	
 ...
ERCOT	
  Forward	
  Markets	
  Do	
  Not	
  Reflect	
  The	
  Prices	
  
	
  
Forward	
  Power	
  Prices	
  Do	
  o	
  ot	
...
Long-­‐Term	
  Difficul)es	
  
AHrac)ng	
  Investment	
  in	
  Genera)on	
  
Wholesale Power
$/MWh, ERCOT Real Time Average1...
Capacity	
  Mechanisms	
  vs.	
  Energy	
  Only	
  Market:	
  
Comparison	
  of	
  Costs	
  and	
  Reliability	
  

10%	
 ...
Capacity	
  Mechanisms	
  Reduce	
  Vola)lity	
  	
  
and	
  Promote	
  Investment	
  
Energy Only Prices
(One week in Aug...
Resource	
  Adequacy:	
  
Key	
  Takeaways	
  

•  Electricity	
  is	
  an	
  important	
  part	
  of	
  Texas’	
  infrast...
Web:

AECT.net

Blog:

AECTnet.wordpress.com

Twitter: twitter.com/AECTnet
Facebook: AECT Advocacy
Email:

info@aect.net
2...
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Legislative Staff Briefing: Update on the Texas Electric Industry

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Update on prices in the competitive market, cold weather response and the ongoing resource adequacy challenges facing ERCOT.

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Legislative Staff Briefing: Update on the Texas Electric Industry

  1. 1. 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
  2. 2. 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.   2
  3. 3. AECT  Companies   Within  ERCOT   Retail  Electric  Providers   Transmission  and  Distribu)on  U)li)es   Total ERCOT Capacity: >74,000 MW Genera)on  Companies   3
  4. 4. AECT  Companies   Outside  of  ERCOT   Midcon)nent  Independent   System  Operator  (MISO)   Southwest  Power  Pool  (SPP)   Total ERCOT Capacity: >74,000 MW Western  Electricity  Coordina)ng   Council  (WECC)   4
  5. 5.   ERCOT  Market  Update       Retail  Market     Cold  Weather     Need  for  Power     Genera)on  Resource  Investment   5
  6. 6. Texans  In  Major  ERCOT  Compe))ve  Areas   Have  A  Wide  Array  Of  Choices  Available  To   Meet  Their  Needs   AEP  Texas  North   Service  Territory   291  offers     Texas-­‐New  Mexico  Power   Co.  Service  Territory   290  offers     Oncor   Service  Territory     335  offers     CenterPoint  Energy   Service  Territory       AEP  Texas  Central   Service  Territory       334  offers   311  offers   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     6
  7. 7. Lower  Prices  Available  Today  than  Before   Compe))on  Began   January 2014 December 2001 Service Area Average FixedPrice 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 10.5¢/kWh 8.5¢/kWh 5.7¢/kWh 10.0¢/kWh 13.1¢/kWh CenterPoint Energy 10.4¢/kWh 8.2¢/kWh 5.0¢/kWh 10.4¢/kWh 13.6¢/kWh Oncor 9.8¢/kWh 8.1¢/kWh 4.9¢/kWh 9.7¢/kWh 12.7¢/kWh TNMP 10.5¢/kWh 8.7¢/kWh 5.6¢/kWh 10.6¢/kWh 13.9¢/kWh While  ERCOT  compeMMve  offers  have  dropped  significantly,  the  latest  average  U.S.   residenMal  electricity  prices  are  up  48%  since  2001.   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 7
  8. 8. Electric  Price  Offers  Compared   With  Other  Retail  Products   Price  Change:  December  2001  to  Today   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%   Sources: Public Utility Commission of Texas, U.S. Energy Information Administration, Bureau of Labor Statistics, Zillow 8
  9. 9. ERCOT  Compe))ve  Market  Has  Helped  Drive     Lower  Retail  Electricity  Offer  Prices   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 1 9
  10. 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 10
  11. 11.   ERCOT  Market  Update       Retail  Market     Cold  Weather     Need  for  Power     Genera)on  Resource  Investment   11
  12. 12. Texas  Faced  Several   Cold  Spells  Thus  Far  This  Winter   Two  out  of  every  three  days   below  historical  average   Source: Weather Underground 12
  13. 13. 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   13
  14. 14.   ERCOT  Market  Update       Retail  Market     Cold  Weather     Need  for  Power     Genera)on  Resource  Investment   14
  15. 15. Texas’  Popula)on  and  Economy   Con)nue  to  Grow   Unemployment  (%)   PopulaMon  Growth  Rate  (%)   3 12.0 2.5 10.0 2 8.0 1.5 6.0 1 4.0 0.5 2.0 0 01 02 03 04 05 06 US   07 08 09 10 11 Texas   12 13 0.0 06 07 08 09 US   10 11 12 13 TX   •  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 15 "
  16. 16. Resource  Adequacy:   Investment  S)ll  Needed  in  ERCOT   ERCOT summer reserve margin1 2002-2020E; percent Latest forecast (May 2013) Historical forecasts2 35.6 Note:  ERCOT  is  con+nuing  to  study  its  load  forecas+ng   methodology,  which  may  impact  the  future  reserve   margins  shown.   26.7 25.2 21.4 16.5 16.4 14.6 13.8 16.8 17.5 13.9 13.2 13.8 11.6 10.4 10.5 9.4 7.4 6.5 13.75%  target   reserve  margin   provides  a  buffer   against  de-­‐rates,   forced  outages,   wind  variability,   forecast  error,  and   weather  related   spikes   '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 Implied Loss of Load Events (LOLEV) per year3 0.2 0.9 1.6 1.6 Based on ERCOT Capacity, Demand and Reserves (CDR) Reports, as amended 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. 2.4 5.6 8.0 1 2 16 16 "
  17. 17. 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     17 "
  18. 18. ERCOT  Has  the  Lowest  Reserve  Margins  in   NERC’s  Most  ERCOTong-­‐Term  Assessment   Margins Recent  L Has Lowest Reserve in NERC’s Most Recent Long Term Assessment Summer 2018 Prospective Reserve Margin (%) 0 10% 20% 30% FRCC: Florida 40% 37.2% SERC-SE: AL, GA, MS 32.9% WECC-DSW: AZ, NM 31.3% SPP: AK, LA, etc. 29.4% SERC-N: TN, KY, etc. 25.9% NPCC-NY: New York 21.7% PJM: PA, NJ, MD 21.4% WECC-CALS: So. Calif. 20.8% SERC-E: NC, SC 16.7% Target Margin NPCC-NE: New England 15.4% Prospective Margin MISO: Midwest 15.2% Reserve  margins  based  on     NERC  methodology   ERCOT: Texas 9.3% Source: NERC 2013 Long-Term Reliability Assessment, Dec 2013 (pg 16); 12 largest US NERC assessment areas 2 18 "
  19. 19. ERCOT  Restructuring  Spurred  New   Genera)on  Investment  In  ERCOT   Capacity  addiMons   1990-­‐2012;  GW   98-­‐10  addiMons=46  GW   90-­‐97  addiMons=6  GW   6.6   Enabling   legislaMon   5.8   5.7   4.7   4.9   3.8   3.0   2.8   2.3   1.8   1.2   0.6   0.2   Year   1   1.4   0.6   0.5   0.3   0.4   0.2   0.8   2.1   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   In  rate  base   Sources:  Energy  Velocity,  NERC,  PUC,  IHS  CERA   Not  in  rate  base   19 "
  20. 20. However,  the  Condi)ons  that  Led  to   Previous  Eras  of  Genera)on  Investment  in   ERCOT  are  No  Longer  Present     Era   CCGT     Build-­‐out   (1998  –  2002;   over  25  GW)   Wind     build  out   (2005  –  2010;   approx.  9  GW)   Coal     build  out     (2007  –  2010;   approx.  3  GW)     CondiMons  Then…     New,  more-­‐efficient    combined   cycle  gas-­‐fired  generators   replaced  gas-­‐fired  steam   generators  that  were  costly  to   run.   Now…     Most,  if  not  all,  of  the  poten)al   replacements  have  already  occurred.       Federal  and  state  subsidies,     Economic  support  has  eroded:   along  with  high  electricity     •  State  mandate  has  been  achieved;   prices  due  to  high  natural  gas   •  Federal  subsidies  are  uncertain;   prices,  provided  economic   •  Long  period  of  lower  electricity  prices  due   support  for  the  wind  build  out.       to  low  natural  gas  prices.       Higher  electricity  prices,  due  to     Economic  support  has  eroded:   high  natural  gas  prices,  provided   •  Long  period  of  lower  electricity  prices   economic  support  for  the  coal   due  to  low  natural  gas  prices;     build  out,  along  with  a   •  Challenging  federal  environmental   reasonable  environmental   regime.   regime.   20 "
  21. 21. ERCOT  Forward  Markets  Do  Not  Reflect  The  Prices     Forward  Power  Prices  Do  o  ot  Support  New  Investment Necessary  T N Support  N ew     Genera)on  Investment  In  ERCOT     US  Average  Levelized  Costs  for  Plants  Entering  Service  in  20181   2011  $/MWh   Levelized  Capital  Cost   Fixed  O&M   $140 Variable  O&M  (including  fuel)   Transmission  Investment   $120 $100 $80 2015  ERCOT   Forward     Electricity   Price  Range     ~$36-­‐42/ MWh   $60 $40 $20 $0 Gas (CT) Gas (CCGT) Fossil   Coal Nuclear Wind Geothermal Biomass Renewable   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   21 "
  22. 22. Long-­‐Term  Difficul)es   AHrac)ng  Investment  in  Genera)on   Wholesale Power $/MWh, ERCOT Real Time Average1 $77   $73   Drivers  of  lower  wholesale   power  prices   $53 in ‘11 with extreme events2 $55   $56   $39   $34     Lower  natural  gas  prices   (over  $8/mmbtu  in  2008   versus  ~$4/mmbtu  today)   $37   $34   $28     Newer,  more  efficient   genera)ng  units  compe)ng   to  set  price     Subsidized  wind  entering   market     Limited  hours  in  scarcity   condi)ons   '05   '06   '07   '08   '09   '10   '11   '12   '13   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. 1 22 "
  23. 23. Capacity  Mechanisms  vs.  Energy  Only  Market:   Comparison  of  Costs  and  Reliability   10%  Reserve   Margin   Requirement   14%  Reserve   Margin   Requirement   8%   10%   14%   Uncertain   More  Certain   More  Certain   4.1   2.2   0.3   $18.3   $16.3   $14.0   $0   $2.1   $4.7   $18.3   $18.4   $18.7        Cost  Increase  over  Energy-­‐Only  Equilibrium  (%)   NA   0.7%   2.4%        Rate  Increase  over  Energy-­‐Only  Equilibrium  (%)   NA   0.4%   1.4%   Energy  Only   Equilibrium   Reliability        Reserve  Margin        Reserve  Margin  Certainty        Annual  Average  Loss  of  Load  Hours   Customer  Costs        Energy  Costs  ($billions)        Capacity  Costs  ($billions)        Total  Costs  ($billions)   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)     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 23 "
  24. 24. Capacity  Mechanisms  Reduce  Vola)lity     and  Promote  Investment   Energy Only Prices (One week in August Energy + Reliability Prices 2012)1 (Illustrative for same week) Vs. Energy component Reliability component One week   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     Week of July 29 - August 4, 2012; actual peak at $678/MWh 1 on July 30; scale shown is 0-200 $/MWh Source: ERCOT One week   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   24 "
  25. 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   25 "
  26. 26. Web: AECT.net Blog: AECTnet.wordpress.com Twitter: twitter.com/AECTnet Facebook: AECT Advocacy Email: info@aect.net 26 "

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