ERCOT blames inaccurate wind predictions for February emergency event

The Electric Reliability Council of Texas (ERCOT) recently released its Operations Report to explain why it was forced to cut electric supply to interruptible customers on February 26, 2008. The emergency event was caused largely by the convergence of the normal rapid load growth that occurs around 6:00 p.m. and a simultaneous unexpected and sudden drop in wind that decreased the power output from windfarms.

ERCOT was primarily relying on day-ahead schedules to judge wind capacity, which predicted 1294 MW. However, only 335 MW were actually available during the relevant hour. To address this problem, ERCOT stated it would try to adopt in the near term the generation forecasting model it will use when the market transfers to a nodal operating system in 2009, since that model creates more accurate short term planning values for wind generation.

Managing reliable integration of wind generation is a high priority for ERCOT, since Texas is now the state with the largest wind energy production in the United States and has almost 3000 MW of additional wind development with signed interconnection agreements waiting to come online.

FERC Preserves ERCOT Independence, Even as Texas Congressman Pushes for FERC Regulation

Finding that two proposed transmission lines did not jeopardize the jurisdictional arrangement that keeps ERCOT outside of FERC regulation, on March 15, the Commission approved new transmission lines proposed by Cottonwood Energy Co. and Brazos Electric Power Cooperative.  Cottonwood plans to build an approximately 100-mile high voltage transmission line from a 1200 MW natural gas-fired generating facility in Deweyville, Texas (on the Texas-Louisiana border), which Cottonwood will interconnect with CenterPoint Energy Houston.  FERC's order disclaimed jurisdiction of the new line, because it would not interconnect with any non-ERCOT utilities and would not intermingle any ERCOT electricity with electricity from the Eastern Interconnection.

In a separate order issued the same day, FERC also approved Brazos's proposed transmission project.  Late last year, Brazos had proposed to construct a 345 kV, 70-mile alternating current transmission line from a planned new 750 MW coal-fired generating unit in Hugo, Oklahoma (which it originally planned to co-own with the Western Farmers Electric Coop ("WFEC")).  Brazos also planned to build a 375 MW high voltage direct current line to provide a connection between the Hugo generating unit and the Southwest Power Pool.  FERC's March 15 order approved the new intertie, directed interconnection of the Brazos line with local utility TXU, and directed TXU and CenterPoint Energy to provide transmission services to Brazos.  FERC made clear that its order would not make TXU, CenterPoint, or ERCOT a FERC-jurisdictional "public utility."  Interestingly enough, Brazos filed just a few days later asking FERC essentially to rescind these authorizations and terminate the proceeding.  Brazos explained that after continued negotiations with WFEC, the parties determined that Brazos will no longer own any part of the Hugo generating unit, and thus, Brazos no longer plans to build the approved transmission line.

Meanwhile, Texas Congressman Joe Barton (R), former chairman and current ranking member of the House Committee on Energy and Commerce, continued on his warpath that FERC should have jurisdiction over ERCOT.  Congressman Barton's concerns about ERCOT's independence arose in the wake of a proposed buyout of TXU.  Barton had posed several questions to FERC Chairman Joseph Kelliher (a former Barton Capitol Hill staffer) regarding the TXU buyout, many of which Kelliher stated he was unable to answer because no information has been filed with FERC regarding the proposed transaction.  Kelliher stated that FERC currently has only limited jurisdiction over utilities like TXU whose operations are confined to ERCOT, but made clear that he does not believe any expansion of FERC’s jurisdiction is needed.  If Congress did grant FERC authority to regulate ERCOT utilities, Kelliher stated he envisioned that FERC would have much the same jurisdiction over those utilities as it currently exercises over utilities that transmit and sell power across state lines — namely, regulating all rates, terms, and conditions of transmission and wholesale rates by investor-owned utilities, and overseeing certain corporate transactions, including mergers and acquisitions of jurisdictional facilities.  Whether Barton will continue to demand FERC jurisdiction over ERCOT remains to be seen.

Texas Bill Would Help Non-Wind Renewables

The Texas legislature is considering a bill that would carve out a greater role for renewable energy other than wind energy under the state's renewable portfolio standard.  The RPS currently requires that the cumulative installed capacity of renewable energy reach 5,880 MW by 2015.  There is currently no requirement that a given amount of capacity be of any particular type of renewable energy generation.  As a result, wind energy, with its relatively low costs, has an advantage over other sources such as solar power and geothermal power.  The bill would remedy this and encourage growth of these other types of renewable generation by carving out 500 MW for non-wind renewable energy technologies. 

Other states, such as Nevada and Arizona, previously have addressed this issue by creating set-asides within their RPS rules for technologies such as solar power.   

Texas Legislature Considers Tax Incentives Aimed at Greenhouse Gas Emissions

On the heels of efforts in California to reduce greenhouse gas emissions by limiting the amount of coal-generated power that in-state utilities may purchase, members of the Texas Legislature are similarly aiming to provide incentives for energy companies to reduce greenhouse gas emissions and use cleaner technologies.  Proposed House Bill 270, introduced by Rep. Rafael Anchia (D-Dallas), would impose a 7.5 percent tax on coal purchased in Texas for use in the state.  The revenue raised from the new tax would be used to promote new energy technologies.  Currently, H.B. 270 is pending in the House Regulated Industries Committee.  Another proposed bill, H.B. 3431, introduced by Rep. Mark Strama (D-Travis Co.) and currently being considered by the House Ways and Means Committee, would exempt from property taxes any pollution controls installed to reduce carbon dioxide emissions in enhanced oil recovery projects.  This bill would also reduce by half the tax on oil produced in the state if carbon dioxide is used in the recovery.  The current Texas legislative session ends May 28.

Texas Coop Plans New DC Tie Between ERCOT and SPP

Brazos Electric Cooperative (Brazos) applied to FERC in October and again in November for the interconnection of a new 70-mile, 345 kV transmission line that would connect generation in Oklahoma with load in Texas.  The proposed line would be built in conjunction with Brazos's plans to construct a new 750 MW coal-fired generating unit near the Western Farmers Electric Cooperative's (WFEC) existing Hugo generating facility in Hugo, Oklahoma.  Brazos, an electric coop located in 68 counties across north Texas, and WFEC, which has service areas throughout Oklahoma, will jointly own the new Hugo unit.  In order for Brazos to bring this power from Hugo to the Electric Reliability Council of Texas (ERCOT), Brazos is planning to build the new DC intertie between ERCOT and the Southwest Power Pool (SPP), which will have an approximate capacity of 375 MW.  Accordingly, Brazos has asked FERC to order TXU Electric Delivery (TXU) to allow it to interconnect with TXU's system at the Valley South substation in north Texas.  Brazos also asked FERC to require TXU and CenterPoint Energy Houston Electric to offer transmission service for power flows over the new line into or out of ERCOT.  Brazos has asked FERC to issue a decision on its application by January 31, 2007.

The proposed DC intertie would be the third such interconnection between ERCOT and SPP.  In its application, Brazos took pains to emphasize that its proposed interconnection would maintain the fiction that ERCOT is outside of the interstate grid and not subject to most forms of FERC regulation.  To that end, Brazos specified that the intertie and the generating unit's switching station would be engineered such that the generating facility could generate only into either ERCOT or SPP, but not both at once.

ERCOT Report Lays Groundwork for Transmission to Support Wind Development

Texas moved closer to developing the additional transmission needed to deliver wind power to loads when the Electric Reliability Council of Texas (ERCOT) issued a report identifying geographic areas that the Public Utility Commission (PUCT) could designate as competitive renewable energy zones (CREZ) under Texas law.  After the CREZ are established, the law then requires construction of the necessary transmission facilities between the CREZ and urban areas.   

Texas currently has more installed wind generation, 2508 MW, than any other state, and this number is expected to rise to approximately 4850 MW by the end of 2007.  However, as in many other parts of the country, the areas where wind power has the greatest potential are far from energy-thirsty population centers.  Texas legislation enacted in 2005 is intended to facilitate the development of needed transmission infrastructure to support future wind power development.  To that end, ERCOT’s analysis concludes that most wind farms would likely be located in the Gulf Coast region, the Panhandle, central-western Texas (along the Abilene-Odessa corridor), and in the McCamey region in west Texas.  Each area has different strengths and weaknesses regarding expected production and transmission costs, capacity characteristics, and daily and seasonable variability of winds.  The report states that several new high-voltage 345-kV transmission lines and associated grid upgrades would be needed to support expected wind farm development.

The PUCT is expected to make CREZ determinations in early 2007.  Any designations will be based on a wide range of factors, including costs of transmission construction and ancillary services, wind energy strength and benefits, and the financial support for proposed projects.

PUCT Approves Increased Bid Cap, Disclosure Requirements for ERCOT

In order to encourage the development of new generating capacity and to make the Electric Reliability Council of Texas's (ERCOT) operations more transparent, on August 10 the Public Utility Commission of Texas (PUCT) unanimously approved a wide-ranging PUCT staff proposal to address the projected decline of generation reserve margins in ERCOT.  To encourage investment in new generating facilities, the PUCT plan proposes to gradually increase ERCOT's energy bid cap to $3000/MWh (up from $1000/MWh) by 2009, after ERCOT implements a nodal pricing market.  In addition, during the development of the proposal, PUCT staff considered establishing formal capacity markets, but rejected that approach in favor of an energy-only market, after determining that installed capacity markets do not offer market-based incentives for investment and would impose an unwanted layer of regulation.  The PUCT also cited the high costs of capacity markets to consumers, a fight that is currently being played out in other regions of the country [See, e.g., Capacity Market Redesign: New England Settlement Approved, PJM Proceeding Continues].

Related to the increased bid cap, the PUCT plan also increases and expedites the amount of market information that is publicly disclosed.  In approving the plan, the PUCT expressly linked increasing publicly available information with the increase in the bid cap.  The PUCT expects greater transparency in information flows will help police market power abuses that may accompany the increased bid cap.

The PUCT plan also adds several other features to the ERCOT market, including a definition of the term "market power" consistent with the definition commonly used by courts, and a requirement for more frequent reports from ERCOT on supply and demand issues.

ERCOT Develops Renewable Energy Zones

The Electric Reliability Council of Texas (ERCOT) has begun the process of developing competitive renewable energy zones (CREZs) intended to deliver wind power to population centers throughout the state.  The CREZs will identify areas of Texas with the highest potential for wind power development.  Harvest areas of interest thus far include rural West Texas and the Panhandle, as well as in the Rio Grande Valley and along the Gulf Coast.

State law requires the Public Utility Commission of Texas (PUCT) to identify the CREZs.  Lending its technical expertise to the project, ERCOT is working in conjunction with consultants to identify the zones and perform cost-benefit analyses of their generating potential.  ERCOT will also analyze transmission options necessary to connect the various production areas with load centers, as well as initiate a study of ancillary service requirements, such as reactive power.  Once ERCOT completes the various studies, estimated to be in October or November 2006, ERCOT will provide all its data to the PUCT, which will make a final determination of CREZs in early 2007.  Identifying these zones will help Texas achieve its renewable portfolio standard of 5,880 MW of renewable energy online by 2015 [See Texas Ups Renewable Energy Requirements].

Seven States Vie to Host FutureGen Alliance "Clean Coal" Power Plant

Seven states have reportedly submitted bids to host a proposed zero-emissions coal-fueled generation facility, the developer FutureGen Industrial Alliance announced on May 9.  The proposed 275 MW plant would burn gasified coal to produce electricity and transportation-grade hydrogen for use in fuel cells.  Carbon dioxide waste generated by the plant, normally vented into the air, would either be sequestered or stored underground.  See Alliance Starts Site Selection for Zero-Emissions Coal Plant.  FutureGen reported that Illinois, Ohio, Texas, Kentucky, North Dakota, West Virginia, and Wyoming all submitted bids; some of the states submitted bids for more than one site, bringing the total number of sites under consideration up to twelve.  FutureGen indicated it would review the proposals, come up with a short list of candidates by this summer, and make a final site determination by late summer 2007.

A poster child for the Bush administration's energy policy, the project will receive significant funding from the federal government.  In 2004, Congress appropriated up to $700 million to build and operate the plant through 2018 and to sequester its carbon emissions.  Further financial support will be provided by a coalition of industry participants, including two foreign-owned companies, representing Australian and Chinese coal interests.  The governments of India and China also have each agreed to provide $10 million for the development of the prototype.  Both countries are desperately in need of energy, and are hoping their investment will pay dividends in the form of relatively clean future coal plants in their respective countries.

EPA, Midwestern Blue Skyways Collaborative to Promote Renewable Power

The US EPA and several Midwestern states have formed a collaborative to begin curbing polluting emissions through voluntary measures.  The "Blue Skyways Collaborative" held its inaugural meeting last month, welcoming a diverse group of participants including representatives from EPA, the Departments of Defense and Energy, state and local officials, and corporate representatives.  It is spearheaded by the Central States Air Resource Agencies (CenSARA), the regional air planning organization for the Midwest, comprising Minnesota, Iowa, Nebraska, Kansas, Missouri, Oklahoma, Arkansas, Louisiana, and Texas.   

The Collaborative hopes to reduce emissions along major Midwestern transportation corridors and in various sectors, including aviation, water and rail transport, on-road diesel vehicles, and heavy off-road equipment, through retrofitting diesel-powered vehicles and encouraging renewable energy and energy efficiency projects.  A focus on renewable power sources sets this initiative apart from other regional voluntary emissions-reducing efforts, and reflects the regional economic interest of Collaborative participants in spurring use of ethanol and biodiesel, both of which derive from corn and other regional crops.   

While it has yet to establish numerical emissions reduction targets, the Collaborative's first meeting showcased the types of voluntary efforts and public-private initiatives that it hopes to foster.  For example, railroad industry representatives described their efforts to replace diesel-burning switch-engines with battery-operated engines.  The EPA has promised a modest $9 million to finance the Collaborative's projects this year, and the group anticipates several times that amount for 2007 financing.  Whether Blue Skyways proves successful likely will depend on whether this federal funding materializes ¾ a questionable proposition in light of the Administration's and Congress' recent failures to adequately fund the clean energy initiatives that they only recently enacted in the Energy Policy Act of 2005.

Retail Competition Reported to Benefit Texans

The Public Utilities Commission of Texas (PUCT) released a report on February 2, 2006, detailing to the state legislature the benefits of retail competition in the state.  The Texas House of Representatives asked the PUCT in December 2005 for an "apples to apples" comparison of what prices are now, given retail competition, and what they would have been under regulation.  The PUCT concluded that rates are substantially lower four years after switching to a competitive retail market.  Specifically, the PUCT estimated that customers in the Houston and Dallas areas would have saved $1450 and $800 respectively by switching annually to the lowest cost provider.  The report also emphasized other benefits of competition, including a variety of service and pricing options and mechanisms for encouraging renewable and efficient energy. 

The Texas House had also asked about the impact of the sale of Texas Genco, first in 2004 from CenterPoint Energy to a consortium of new owners for $3.65 billion and again in 2005 to NRG Energy for $8.3 billion.  Despite this dramatic increase in value in a relatively short period of time, the PUCT found the sales would not negatively affect Texas electricity markets or Texas retail rates because NRG did not own any other generating assets in ERCOT and therefore lacked market power and the ability to elevate market prices.  Finally, the PUCT report responded to consumer advocate claims that retail competition has resulted in higher prices as opposed to several selected cooperative and municipal utilities' prices.  The report argued it was inapt to compare utilities that had adopted retail competition with those that had not, pointing out that many utilities had started out with different rates and that the Senate bill deregulating rates had included a rate freeze that prevented many regulated investor-owned utilities from changing their rates.

First Gulf of Mexico Wind Project Advances in Texas

Wind developers have long had their eyes on offshore sites for future development of wind energy, but no offshore projects to date have been completed in the U.S.  That may soon change.  A major step was taken towards establishing the first windfarm in the Gulf of Mexico when the Texas General Land Office signed an agreement with a wind developer that plans to construct a windfarm approximately seven miles off Galveston Island. 

Under the arrangement, Galveston-Offshore Wind, LLC, would initially construct two 80-meter meteorological towers to gather wind data to determine where the 150 MW windfarm would be sited within the 11,355-acre leased area.  In addition, studies will be made of migratory bird patterns to attempt to minimize injuries to birds.  This is a significant issue in light of the large number of birds that migrate across the Gulf.  Once research is completed and necessary permits secured, the developer would proceed with construction of approximately 50 wind turbines, which is estimated to take up to five years and cost approximately $300 million. 

Under the agreement, the developer would initially pay the state a 3.5 percent royalty from the windfarm's total production, to increase to 4.5 percent for years 9-16, and to 5.5 percent for years 17-30.  Another benefit associated with the deal is that the state's revenues from the agreement, estimated to surpass $26 million, will be deposited in the state's Permanent School Fund, which helps fund public education. 

Entergy Rebuilding from Hurricane Damage Entails Numerous Options and Actions

The damages to large portions of Entergy’s transmission system by Hurricanes Katrina and Rita included thousands of miles of downed transmission lines and extensive damage from flooding.  The response to date has included numerous actions and proposals by the utility and governmental entities.

Within weeks of Hurricane Katrina’s landfall, which led to flooding of vast areas of the city, Entergy New Orleans filed for Chapter 11 bankruptcy protection to further insulate its finances from those of other Entergy subsidiaries and to help manage the extensive losses caused by the hurricane.  

In Washington, Entergy vice president Curt Hébert advocated at a Congressional hearing for federal financial aid for Entergy New Orleans in order to prevent already over-burdened city residents from alone shouldering the high price of reconstructing the utility's shattered network.  The former FERC Chairman argued by analogy to the financial relief the government gave to airlines following their loss of business after the terrorist attacks on September 11, 2001. 

Department of Energy Secretary Samuel Bodman invoked his authority under the FPA to order CenterPoint Energy in Texas to temporarily restore power to Entergy Gulf States and thereby provide power to the latter's customers while it repairs its broken infrastructure. 

Most recently two municipal utilities in Louisiana and Mississippi that receive transmission service from Entergy offered to help fund reconstruction of Entergy’s system in exchange for shared ownership interests in portions of the transmission network.  There is no indication yet whether Entergy is interested in such an offer.

Texas Ups Renewable Energy Requirements

Texas Governor Rick Perry has signed legislation requiring increased development of renewable energy in Texas. The legislation requires the installation of another 3,000 MW of renewable energy on top of current Texas law requirements.

Texas has taken a different approach in mandating renewable energy development compared to other states. Most states with renewable energy portfolio legislation require load-servers to include a given percentage of renewable energy in the energy they provide to retail consumers. Texas, however, mandates the construction of certain amounts of renewable energy. As Texas is relatively isolated from the rest of the nation's grid, this is in some respects inevitable because out-of-state renewable energy cannot compete in the Texas market. However, by focusing on construction rather than delivery of renewable energy, this legislative model may have, in the past, promoted construction of wind farms in west Texas before adequate transmission was available to bring this power to load centers in the eastern part of the State.

Earlier legislation, enacted when 880 MW of installed renewable energy capacity existed in Texas, required construction of another 2,000 MW by 2009. The new law calls for 3,000 additional MW by 2015, for a total of 5,880 MW, and also requires the Texas Public Utility Commission to establish a target of 10,000 MW of installed renewable energy capacity by 2025. Approximately 1400 MW of wind power generation has been installed in Texas to-date.

Congress Enacts Energy Bill

One month after the Senate approved its version of a comprehensive energy bill, see Senate Votes in Favor of Energy Bill, Tumultuous Conference Awaits, Congress enacted the Energy Policy Act of 2005.  Although maligned by energy and taxpayer watchdogs as a "piñata of perks and pork" for big oil, big nuclear and other entrenched energy industries, the 2005 Act, as it affects certain aspects of the power and natural gas industries, promises to profoundly change the structure and prospects of new energy business organizations and the viability of new liquefied natural gas and power transmission projects.

For several years the demand for relatively clean-burning natural gas has increasingly outstripped North American production, giving impetus to efforts to import liquefied natural gas ("LNG").  But concerns over the safety of LNG re-gasification facilities in this country, both on- and off-shore, have seen myriad LNG development proposals from coast-to-coast crash in the face of public opposition.  The 2005 Act will override that opposition in part by consolidating many of the needed approvals, including siting, in one agency – FERC.  State and local authorities are effectively stripped of authority to block the siting of LNG importing and processing facilities.

The 2005 Act also promises to effect fundamental changes in the future structure and operation of power markets.  It does so by repealing the Public Utility Holding Company Act of 1935 ("PUHCA") and amending the Public Utility Regulatory Policies Act of 1978 ("PURPA").  At the same time, it gives FERC the authority to certify a new Electric Reliability Organization ("ERO") that (under regulatory supervision from FERC and its Canadian counterpart) will set and enforce standards for the reliable operation of the Eastern and Western Interconnections and the Electric Reliability Council of Texas.  The confluence of these developments will be profound and will likely force further consolidation of the power industry. 

Since its enactment 70 years ago, PUHCA was amended twice to allow limited holding company investment in power generation — in qualifying facilities under PURPA and in exempt wholesale generators under the Energy Policy Act of 1992.  But otherwise PUHCA confined utility holding companies to a single integrated public-utility system and has policed intra-holding company transactions to prevent cross subsidization.  Repeal of the PUHCA will knock down the barriers to consolidation of geographically and operationally diffuse utility systems.  Pending consolidations, such as Duke-Cinergy and MidAmerican-PacifiCorp, which may well have been barred by PUHCA's single integrated public-utility system requirement, now appear to have been prescient in anticipating PUHCA's repeal.  They likely will prove to be harbingers of other consolidations.

The so-called PURPA put also falls victim to the 2005 Act.  The PURPA-imposed obligation of traditional public utilities to buy the output of qualifying cogenerators and small, renewable generators at an avoided-cost price ushered competition in wholesale power markets into the 1980s.  The Energy Policy Act of 1992 later swelled the ranks of competitive generators by creating an additional class of PUHCA-exempt competitive generators with exempt wholesale generators ("EWGs").  Going forward after implementation of the 2005 Act, qualifying facilities and EWGs will no longer exist.  There will simply be power generators selling at wholesale and, where permitted by local law, at retail.  FERC is empowered by the 2005 Act to review and approve utility acquisitions of existing generating facilities in order to prevent (among other things) undue concentrations of generation market power.  Unclear, however, is who will build new generation under the largely deregulated scheme of the 2005 Act.   Arguably, without the price support of the PURPA put and the investment restrictions of PUHCA, only a shrinking universe of highly capitalized investors or existing utilities will build new generation in the future.  Some of these may ally with Indian tribes and construct power plant on tribal lands since the 2005 Act has special provisions for encouraging Indian energy development.  These provisions include the creation of an Office of Indian Energy Policy and Programs within the Interior Department with authority to pre-approve tribal-energy-resource agreements.

The 2005 Act will also tend to consolidate markets through its introduction of an ERO.  While the stated purpose of the ERO is to standardize, and make enforceable for the first time, rules for reliably operating the bulk power systems of North America, the indirect effect of that standardization will be the consolidation of formerly balkanized markets and the facilitation of increased trading in bulk power.

The 2005 Act's provisions dealing with power transportation and transmission are also likely to be consequential.  One provision charges the Departments of Agriculture, Commerce, Defense, Energy and Interior with preparing a list designating federal land corridors that are needed for oil and natural gas pipelines and electric transmission lines.  Another provision of the 2005 Act creates, for the first time, backstop jurisdiction in FERC to permit (and confer eminent domain authority for) construction of new or upgraded power lines in transmission constrained areas.  This jurisdiction is triggered when the relevant state siting authorities are unable to act on a proposed transmission project within one year.  This federal authority, in tandem with the designation of federal energy corridors, is certain to induce new interest in major pipeline and power line developments. (H.R. 6) [UPDATE]