Developers wait for Texas power supply to tighten

OREANDA-NEWS. A hot, dry summer, the early shutdown of coal plants to cut regional haze or a day when the wind does not blow and key power plants are off line could expose the fragility of Texas' electric supply, the state's largest generators said.

Mild summer weather and completion of a few new power plants in the Electric Reliability Council of Texas (ERCOT) territory have served to mask potential supply risks in the state where power use rose by 2.5pc in 2014.

Lower oil prices have shifted the Texas story from a demand story to a supply story, Calpine chief commercial officer Steven Pruett said.

Calpine's analysis of ERCOT's reserve margin for 2015 and 2016 shows the cushion falling below 12pc, tighter than in 2011 on a weather-normalized basis and well below the grid agency's official 15.7pc forecast.

ERCOT's energy-only market has a target reserve margin of 13.75pc. A lower reserve margin increases the risk of load-shedding or blackouts when generation is strained.

"The market is balanced on a razor's edge," Pruett told analysts last week. An unforeseen event could push the market into scarcity, sending wholesale prices as high as \\$9,000/MWh this summer, he said.

Despite this, falling gas prices have pummeled spark spreads, indicating a "lack of fear in the market," Pruett said.

Peak hour summer 2015 spark spreads at the ERCOT North hub dropped by 27pc so far this year, reflecting low expectations for high scarcity prices.

NRG Energy has a more dire analysis, saying ERCOT's "precarious" reserve margin could drop to single digits by 2018 as the little-publicized regional haze rule forces Texas coal-plant owners to close some units years before the federal carbon rule takes effect.

Exelon Generation president Kenneth Cornew told analysts the company is "very comfortable" with its plan to build two 1,000MW gas plants in ERCOT by 2017, based on the project's turbine technology and Exelon's growing industrial customer base. "We did not make a bet on massive load growth in Texas," Cornew said.

Calpine, NRG, Tenaska and other developers are taking smaller steps or simply waiting in the wings for wholesale prices to climb to a level to justify new construction or to see long periods of high scarcity prices.

Nineteen proposed gas-fired plants, totaling 9,500MW, have signed interconnection agreements with ERCOT with 2018 in-service dates while 40 more gas projects, totaling 32,000MW, are in interconnection studies.

Calpine is working to finalize 400MW of peaking capacity at its Guadalupe power plant while air permits have been issued to NRG for two 750MW gas plants at existing sites.

"We are prepared to build if we can see the value there for our shareholders," NRG gulf coast regional president John Ragan told investors last month.

Newcomer Competitive Power Ventures has taken over development of the proposed Pondera King Energy Center. The Houston-area project has faced numerous obstacles since it was proposed in 2007. The developer has cut project capacity by one-third to 900MW.