National

Demand for air conditioning across Texas helped drive wholesale electricity prices to the market cap of $9,000/MWh earlier this week, testing both the grid's capacity and the public's response to price spikes under the state's wholesale electricity market.

The big picture: ERCOT, the grid operator for most of Texas, operates an “energy-only” market that pays power plants only when they produce energy, and not merely for being available to do so. Many ERCOT plants thus rely on high-priced scarcity events to stay profitable in the otherwise low-cost grid, where prices are kept down by cheap natural gas prices and, to a lesser extent, renewables.

How it works: ERCOT boosts the wholesale market price when reserves are low, sending a market message that capacity is valuable. But this process has been criticized for not providing enough scarcity pricing to drive new investment across the electricity system.

The Public Utilities Commission of Texas responded this summer by accelerating the rate of price increases during high demand. Undesirable as they may appear, these high seasonal prices are a crucial part of how energy-only electricity markets work.

Flashback: ERCOT has seen this situation before. For the past two summers, its grid has had a lower reserve margin (power plant capacity beyond projected peak demand) than is considered economically optimal (8.6% this year vs. 10.25% optimal).

Where it stands: The grid has so far survived summer with no real damage, and the weather forecast promises near-term relief.

Some emergency response services were deployed, but there was still plenty of room in the system to maneuver.

Demand response has played an increasingly important role in the market: When prices spiked, demand dropped, helping the system keep lights on and air conditioners humming.

What they're saying: Some groups have tried to attribute higher prices to changes in Texas' electricity mix — including greater reliance on wind power, which this year could surpass coal in the #2 energy generation spot, behind natural gas.

Yes, but: Low natural gas prices have a bigger effect than renewables. And over the course of the year, a few high-priced days provide needed revenues in an otherwise efficient market.

The bottom line: Texas' energy-only market is still a relatively new concept. Some refinements may be needed, but the recent high electricity prices are a feature of the system, not a bug.

Joshua Rhodes is a senior energy system modeler and analyst at Vibrant Clean Energy and a research associate in the Webber Energy Group and the Energy Institute at the University of Texas at Austin, where he has served as the principal investigator of an ERCOT–sponsored research project.

Summer price spikes are a feature of Texas' power market, not a bug

Electricity prices hit their market cap earlier this week amid high air conditioning demand.

electric transformers next to an office building

Transformers at an electrical substation in Houston. Photo: George Rose/Getty Images

Energy

Electric grid

Expert Voices

Demand for air conditioning across Texas helped drive wholesale electricity prices to the market cap of $9,000/MWh earlier this week, testing both the grid&#x27;s capacity and the public&#x27;s response to price spikes under the state&#x27;s wholesale electricity market.The big picture: ERCOT, the grid operator for most of Texas, operates an “energy-only” market that pays power plants only when they produce energy, and not merely for being available to do so. Many ERCOT plants thus rely on high-priced scarcity events to stay profitable in the otherwise low-cost grid, where prices are kept down by <a class="gtmContentClick" data-vars-link-text="cheap natural gas" data-vars-click-url="https://emp.lbl.gov/sites/default/files/lbnl_anl_impacts_of_variable_renewable_energy_final.pdf" data-vars-content-id="29638cbc-524c-4ff0-8604-9414a22fe89b" data-vars-headline="Summer price spikes are a feature of Texas&#x27; power market, not a bug" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://emp.lbl.gov/sites/default/files/lbnl_anl_impacts_of_variable_renewable_energy_final.pdf" target="_blank">cheap natural gas</a> prices and, to a lesser extent, <a class="gtmContentClick" data-vars-link-text="renewables" data-vars-click-url="https://theconversation.com/are-solar-and-wind-really-killing-coal-nuclear-and-grid-reliability-76741" data-vars-content-id="29638cbc-524c-4ff0-8604-9414a22fe89b" data-vars-headline="Summer price spikes are a feature of Texas&#x27; power market, not a bug" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://theconversation.com/are-solar-and-wind-really-killing-coal-nuclear-and-grid-reliability-76741" target="_blank">renewables</a>.

Ominous forecasts about the impact of climate change serve as the backdrop for the world — led by U.S. lawmakers and companies — to debate big action on the problem, which could upend energy systems and our way of life.

Energy & Environment

One of the biggest losers this past election day was the carbon tax. Environmentalists hoped that Washington might become the first state in the country to pass such a tax through a ballot measure, but the proposal failed by nearly 13 points.

The big picture: The carbon tax, which would effectively increase the cost of producing,  distributing or using fossil fuels, has emerged as a theoretically promising compromise to people on both sides of the aisle, as it would create a market-based incentive for companies to pursue aggressive action on climate change. But in practice — and even in a solidly Democratic state — the public appears unwilling to pay for it, at least in the  iteration that was on the ballot in Washington.

Yes, but: There are many ways to enact a carbon tax, and it's possible a different version  could pass.

One is a simple tax on carbon emissions that funds other projects — in Washington’s case, other environment-related programs and projects.

Another is a revenue-neutral tax, whereby the cost is offset by reductions in some other tax. 

The third and perhaps most promising option is the carbon fee and dividend, whereby the government places a tax on carbon emissions and then returns most, if not all, of the revenue to citizens as a dividend to offset the tax.

Between the lines: The carbon fee and dividend would likely have sticking power, given that it already has something of a precedent: In the current fiscal system, the U.S. government taxes our income and then, if it takes too much, cuts us a check every April. Because people love the idea of getting a check in the mail, the program would likely gain popularity as soon as people got their first carbon dividend, as it did in Canada. But enacting such a scheme would still be an uphill battle. 

The bottom line: The U.S. has managed to deploy low-carbon technology with sub-optimal market incentives, such as Renewable Portfolio Standards, federal R&D support  and tax credits. Putting a price on carbon, however, remains, at least for now, out of reach. 

Joshua Rhodes is a research associate in the Webber Energy Group and the Energy Institute at the University of Texas at Austin.

Despite the blue wave, the U.S. failed to pass its first carbon tax

Even in a blue state, voters seem unwilling to put a price on carbon.

Democratic Senator Maria Cantwell, left, speaks at Cal Anderson Park during the March for Our Lives rally on March 24, 2018 in Seattle, Washington.

Democratic Sen. Maria Cantwell, left, speaks during the March for Our Lives rally on March 24 in Seattle, Washington. Cantwell was re-elected on Nov. 6. Photo: Lindsey Wasson via Getty Images

Carbon tax

Politics

One of the <a class="gtmContentClick" data-vars-link-text="biggest losers" data-vars-click-url="https://www.technologyreview.com/s/612392/people-will-never-vote-for-a-carbon-tax-so-lets-stop-asking/" data-vars-content-id="5973f142-362f-4fec-9445-5d4bfeff0c2c" data-vars-headline="Despite the blue wave, the U.S. failed to pass its first carbon tax" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.technologyreview.com/s/612392/people-will-never-vote-for-a-carbon-tax-so-lets-stop-asking/" target="_blank">biggest losers</a> this past election day was the carbon tax. Environmentalists hoped that Washington might become the first state in the country to pass such a tax through a ballot measure, but the <a class="gtmContentClick" data-vars-link-text="proposal failed by nearly 13 points" data-vars-click-url="https://www.seattletimes.com/seattle-news/politics/voters-rejecting-carbon-fee-in-first-day-returns/" data-vars-content-id="5973f142-362f-4fec-9445-5d4bfeff0c2c" data-vars-headline="Despite the blue wave, the U.S. failed to pass its first carbon tax" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.seattletimes.com/seattle-news/politics/voters-rejecting-carbon-fee-in-first-day-returns/" target="_blank">proposal failed by nearly 13 points</a>.The big picture: The <a class="gtmContentClick" data-vars-link-text="carbon tax" data-vars-click-url="https://www.bloomberg.com/opinion/articles/2018-11-08/2018-midterm-results-is-the-carbon-tax-dead" data-vars-content-id="5973f142-362f-4fec-9445-5d4bfeff0c2c" data-vars-headline="Despite the blue wave, the U.S. failed to pass its first carbon tax" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.bloomberg.com/opinion/articles/2018-11-08/2018-midterm-results-is-the-carbon-tax-dead" target="_blank">carbon tax</a>, which would effectively increase the cost of producing, distributing or using fossil fuels, has emerged as a theoretically promising compromise to people on both sides of the aisle, as it would create a market-based incentive for companies to pursue aggressive action on climate change. But in practice — and even in a solidly Democratic state — the public appears unwilling to pay for it, at least in the iteration that was on the ballot in Washington.

Facing more than $30 billion in potential liability claims for wildfires sparked by its electric system, Pacific Gas and Electric (PG&E), the largest utility in California, plans to file for bankruptcy by the end of the month. Consumers' lights will stay on regardless of what happens in court, but the future of California’s energy policy might be a bit dimmer.

Why it matters: To meet California’s ambitious climate goals, PG&E has entered into dozens of power purchase agreements (PPAs) with wind and solar farms, for thousands of megawatts, all over the West Coast. If PG&E enters into bankruptcy court, it might not have to pay those contracts, some of which extend past 2040, in full. While that might help PG&E’s balance sheets, it could hurt renewable suppliers that own the assets.

Background: Wind and solar project developers usually are required to have a PPA in place before they can obtain financing. These PPAs, usually contracts for differences — whereby project owners get paid a certain rate regardless of the market clearing price for electricity — are often long term and act as hedges against fluctuating wholesale electricity prices.

California aims to attain 60% renewable energy by 2030 and 100% carbon-free energy by 2045. While solar and wind are some of the cheapest sources of electricity today, some of the earlier renewable PPAs, entered into over a decade ago, are priced much higher than ones entered into more recently.

The stronger the credit rating of the project developers buying the PPA, the better the financing terms they are able to obtain from banks. But at this point, PG&E’s credit rating has been lowered to junk status.

The bottom line: If an entity as large as PG&E cannot make good on 30-year contracts, lenders’ faith in such projects might be shaken. As a result, banks might offer developers worse terms on the financing of future projects, which could put upward pressure on future PPAs. On the other hand, if these contracts are able to survive, as they have in the past — and California still has its climate and energy goals on the books — they might still prove a good investment.

Possible PG&E bankruptcy could spell trouble for California renewables

Lenders’ faith in power purchase agreements might be shaken.

The Pacific Gas & Electric (PG&E) logo is displayed on a sign in front of the PG&E Service Center on January 15, 2019 in San Rafael, California.

A Pacific Gas and Electric (PG&E) Service Center in San Rafael, California. Photo: Justin Sullivan via Getty Images

Pacific Gas and Electric Company (PG&E)

Business

Alternative energy

Facing more than $30 billion in potential liability claims for wildfires sparked by its electric system, Pacific Gas and Electric (PG&amp;E), the largest utility in California, plans to <a class="gtmContentClick" data-vars-link-text="file for bankruptcy" data-vars-click-url="https://www.wsj.com/articles/pg-e-initiates-chapter-11-reorganization-for-utility-11547465293?mod=searchresults&amp;page=1&amp;pos=5" data-vars-content-id="6175b542-aeb6-4528-9197-5eb676331410" data-vars-headline="Possible PG&amp;E bankruptcy could spell trouble for California renewables" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.wsj.com/articles/pg-e-initiates-chapter-11-reorganization-for-utility-11547465293?mod=searchresults&amp;page=1&amp;pos=5" target="_blank">file for bankruptcy</a> by the end of the month. Consumers&#x27; lights will stay on regardless of what happens in court, but the future of California’s energy policy might be a bit dimmer.Why it matters: To meet California’s <a class="gtmContentClick" data-vars-link-text="ambitious climate goals" data-vars-click-url="https://www.npr.org/2018/09/10/646373423/california-sets-goal-of-100-percent-renewable-electric-power-by-2045" data-vars-content-id="6175b542-aeb6-4528-9197-5eb676331410" data-vars-headline="Possible PG&amp;E bankruptcy could spell trouble for California renewables" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.npr.org/2018/09/10/646373423/california-sets-goal-of-100-percent-renewable-electric-power-by-2045" target="_blank">ambitious climate goals</a>, PG&amp;E has entered into dozens of power purchase agreements (PPAs) with wind and solar farms, for thousands of megawatts, all over the West Coast. If PG&amp;E enters into bankruptcy court, it might not have to pay those contracts, some of which extend past 2040, in full. While that might help PG&amp;E’s balance sheets, it could hurt renewable suppliers that own the assets.

This week the EPA released its long-awaited proposed revision to part of the Obama administration's Clean Power Plan (CPP). The new Affordable Clean Energy (ACE) rule is less stringent than the current policy and could result in increased carbon emissions.

The big picture: The EPA is claiming to meet its mandate to regulate carbon emissions, while critics say ACE is yet another coal bailout scheme. Yet market forces might ultimately make the new rule moot.

The details: It appears that the only power plants ACE might affect are coal plants that are currently profitable but need capital investment to keep operating. Under the current rules, such investment triggers a provision requiring new pollution permits that limit the plant's carbon emissions, but wouldn’t under ACE.

Yes, but: Because coal is seen as a risky investment, few financial institutions are likely to extend credit to invest in coal plants. Instead, the capital would likely have to come from utilities in areas where they can rate-base — i.e., include the costs of upgrades directly into rate-payer’s bills — their investment.

But rate-based investment would likely require approval from regulators, who, since they are charged with keeping costs down, might find it hard to justify, given the current low prices of renewables and 5-year natural gas futures. Decisions to pursue life-extending upgrades for existing coal plants will be made on a plant-by-plant basis, but extending the life of plants would also subject them to more regulatory uncertainty. Even regulated, coal-heavy utilities like Southern Company say the rule does not change its plans to retire its coal fleets.

The bottom line: ACE might strengthen the hand of a few coal-fired power plants, but won’t fundamentally change where the market is heading. Low-cost natural gas and renewables are already winning on price. For coal, ACE is just too little too late.

Joshua Rhodes is a research associate in the Webber Energy Group and the Energy Institute at the University of Texas at Austin. 

New EPA rule unlikely to stem the tide against coal

Investment in coal plants will no longer trigger emissions limits.

The Longview Power Plant, a coal-fired plant, stands on August 21, 2018 in Maidsville, West Virginia.

The coal-fired Longview Power Plant in Maidsville, West Virginia. Photo: Spencer Platt via Getty Images

Coal

This week the EPA <a class="gtmContentClick" data-vars-link-text="released its long-awaited proposed revision" data-vars-click-url="https://www.axios.com/epa-obama-climate-policy-rule-carbon-f4204c22-996d-4eb2-9fcb-b227c23ae0b1.html" data-vars-content-id="d51f616b-302d-43e8-b866-62c14c31f21c" data-vars-headline="New EPA rule unlikely to stem the tide against coal" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/epa-obama-climate-policy-rule-carbon-f4204c22-996d-4eb2-9fcb-b227c23ae0b1.html" target="_self">released its long-awaited proposed revision</a> to part of the Obama administration&#x27;s Clean Power Plan (CPP). The new Affordable Clean Energy (ACE) rule is less stringent than the current policy and <a class="gtmContentClick" data-vars-link-text="could result in increased carbon emissions" data-vars-click-url="https://www.washingtonpost.com/national/health-science/new-trump-power-plant-plan-would-release-hundreds-of-millions-of-tons-of-co2-into-the-air/2018/08/18/be823078-a28e-11e8-83d2-70203b8d7b44_story.html?noredirect=on&amp;utm_term=.d2e4e2ed8f82" data-vars-content-id="d51f616b-302d-43e8-b866-62c14c31f21c" data-vars-headline="New EPA rule unlikely to stem the tide against coal" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.washingtonpost.com/national/health-science/new-trump-power-plant-plan-would-release-hundreds-of-millions-of-tons-of-co2-into-the-air/2018/08/18/be823078-a28e-11e8-83d2-70203b8d7b44_story.html?noredirect=on&amp;utm_term=.d2e4e2ed8f82" target="_blank">could result in increased carbon emissions</a>.The big picture: The EPA is claiming to meet its mandate to regulate carbon emissions, while critics say ACE is yet another coal bailout scheme. Yet market forces might ultimately make the new rule moot.

ERCOT, the electricity grid that serves most of Texas, delivered more power on Wednesday than it ever had, only to deliver even more on Thursday, setting a new system-wide peak demand record of 73,259 megawatts. Friday’s demand is forecasted to be even higher, but the worst might not come until Monday. 

Why it matters: The Texas grid is an energy-only market, which, unlike capacity markets, pays power plants only when they produce energy. This summer has been seen as a make-or-break test for this market strategy, and so far it is passing. 

Background: The ERCOT market is lean, so the power plants are not typically guaranteed to make money. And because the price of natural gas has continued to stay low, some technologies, mostly coal, have had to exit the market. In just the past year, about 25% of the Texas’ coal fleet retired. This has left margins relatively tight, and more coal retirements are planned. 

During peak hours, electricity prices soared into the thousands of dollars per megawatt-hour (they’re usually in the mid to upper 20s). Almost half of ERCOT’s summer peak demand comes from residential air-conditioning. This heat wave is not over, and is only getting more intense. 

But ERCOT has yet to use all of its tools to keep the lights on. If reserves fall much lower than they did on Thursday, scarcity pricing starts to take effect, rising almost exponentially until the market hits the price cap of $9,000 per megawatt-hour. As reserves fall below 2,300 megawatts, all available resources are deployed. If reserves fall below 1,750 megawatts, ERCOT can, under prearranged contracts, reduce demand via voluntary load reduction and even transfer some load to other grids. If reserves fall below 1,000 megawatts, utilities are instructed to implement rotating blackouts. 

The bottom line: So far, ERCOT is managing the grid well. There are more tests to come, and prices are likely to be very high over the next few days, but this is normal. Energy-only markets are designed to use power plants more efficiently, and that means that lower average prices come at the cost of higher high prices.

Texas meets grid challenge during record-breaking energy demand

This summer has been seen as a make-or-break test for ERCOT's market strategy.

A natural gas power plant outside Dallas. Photo: Samuel Corum/Anadolu Agency via Getty Images

Texas

ERCOT, the electricity grid that serves most of Texas, delivered more power on Wednesday than it ever had, only to deliver even more on Thursday, setting a new system-wide peak demand record of 73,259 megawatts. Friday’s demand is forecasted to be even higher, but the worst might not come until Monday. Why it matters: The Texas grid is an energy-only market, which, unlike capacity markets, pays power plants only when they produce energy. This summer has been seen as a <a class="gtmContentClick" data-vars-link-text="make-or-break" data-vars-click-url="https://www.axios.com/texas-electricity-market-test-this-summer-18c529b0-d5a5-4ce5-a7d9-c23ec12227ad.html" data-vars-content-id="f9718091-1239-4ad5-a4ef-672b57153536" data-vars-headline="Texas meets grid challenge during record-breaking energy demand" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/texas-electricity-market-test-this-summer-18c529b0-d5a5-4ce5-a7d9-c23ec12227ad.html" target="_self">make-or-break</a> test for this market strategy, and so far it is passing.

Joshua Rhodes

Stories

Summer price spikes are a feature of Texas' power market, not a bug

Possible PG&E bankruptcy could spell trouble for California renewables

Despite the blue wave, the U.S. failed to pass its first carbon tax

New EPA rule unlikely to stem the tide against coal

Texas meets grid challenge during record-breaking energy demand