Last week I published two articles on a recent presentation on the ERCOT market, which was held by a few of our analysts at ZE. Thus far, I have provided an overview of the market, as well as an analysis of congestion revenue rights. For my third and final installment of this series, I will now cover some of the factors affecting the ERCOT market and will take a brief look at emerging trends.
Electricity Consumption in Texas
Using US Energy Information Agency numbers, our team found that electricity consumption has steadily risen over the past 20 years (figure 1). Over this time period, residential and commercial power consumption has nearly doubled. One interesting trend has been the decline in the Industrial category as a percentage of total consumption.
Figure 1: Increases in Electricity Consumption in Texas from 1990 to 2011
Over the past decade or so, there have been some fairly large shifts in electrical generation. Data from ERCOT (Figure 2) indicates that in a relatively short span of time, wind energy has become a major source of capacity for the market. As well, natural gas has declined as a proportion of total generation. Gas and coal generation still account for most of the power generation in Texas, but it’s clear that wind will be a larger player in the market’s future.
One reason for the decreasing share of gas plants is because of older plants being closed. Like most other states, Texas coal and gas generation has faced increasing environmental regulation. Interestingly, Texas coal plants tend to be newer than gas plants, something you don’t see in most other regions. Because of this, coal plants haven’t faced as many problems or closures due to environmental regulations.
Figure 2: Generation Stack 2002 and 2011 Reserve Margin Challenges in Texas
With a rising population and a growing appetite for power, generation capacity has become a widely discussed issue in recent years. Currently, reserve margin targets are being met, but this is expected to change starting in 2014, when reserve amounts will not be adequate to meet reserve margin targets for the state.
Figure 3: Reserve margin forecast until 2022 (Source: ERCOT)
What these forecasts don’t take into account are some of the unconfirmed, but probable developments in Texas such as increased Liquefied Natural Gas (LNG) export activity. With seven terminals currently being proposed, more terminals will mean increased demand for power. As well as this, the development of the Keystone XL pipeline will continue to increase the amount of refining activity along the Gulf Coast, another large consumer of power. Since these new terminals haven’t been approved as of yet, they aren’t taken into account in Figure 3, meaning the reserve margin challenge may be even greater than it seems.
With all of these increasing power requirements, there are plans on how to tackle the looming reserve margin issue:
- New power plant approvals: As of December 2012, there are 12 new plants that have already been slated to begin operations over the next five to eight years. These include two natural gas plants, two coal plants and three wind plants.
- Demand side management initiatives: Over six million smart meters are expected to be installed by the end of 2013 in Texas, which will be used to try and manage demand more efficiently. As well, there are additional energy efficiency goals in place to try and reel in power consumption to a manageable level.
Future Outlook for the ERCOT Market
As we move into 2013 and beyond, there are a few trends that are likely to continue.
- Wind development capacity will rise with several new plant approvals. With this market still being highly dependent on government incentives and subsidies, the January renewal of wind energy tax credits should result in more development in this market.
- Power consumption continues to grow with population and industrial growth. Although the industrial sector has made up a smaller portion of total consumption in recent years, this trend may reverse with more LNG and crude oil refining activity along the Gulf Coast.
- Generation will continue to increase in response to rising demand. New plant approvals will likely continue as reserve margin targets loom overhead.
The ERCOT market has undergone some dramatic changes in recent years, and continues to evolve in order to meet power supply and demand requirements. Much of the analysis our team conducted was completed using ZEMA Market Analyzer. If you would like to see the work we did in ERCOT, or another market you’re operating in, our team would be happy to arrange a personalized demonstration. As ERCOT undergoes further changes, we’ll be sure to keep an eye on the trends and factors discussed in this series.