Postcard from the Future: Texas

Change is blowing through Texas


Wind power is booming in Texas, the number-one state for wind. That’s thanks to great wind resources, an early policy commitment by then-Governor George W. Bush, and a deregulated market that creates few barriers to new power companies.  Wind provides about 7 percent of the state’s power, and employs more than 10,000 workers. And when a new set of transmission lines come online later this year, wind capacity will increase by at least 50 percent.

For Milton Howard of Duke Energy Renewables, which has almost 1,000 MW of wind in Texas, it’s simple. “There’s great wind resources here, and Texas is an easy state to do business.”

But there is trouble brewing that will require big changes in the market rules. Texas is facing capacity shortages now, thanks in part to a market that pays only for energy, and not for capacity.

First, a little background: wholesale markets, where power companies buy and sell power, typically have three components. Energy is the kilowatt-hours that keep our lights on and our beer cold.  Capacity is the ability to generate the energy, measured in MW. Ancillary services are all of the technical things needed to run the grid, and are usually a small part of the cash flow.

In an energy-only market, power generators are paid only for the energy they produce, and are not paid to stand by to be available to produce energy if needed (for their capacity). Power companies bid into the market every hour, and their bids are ranked from lowest to highest (called the “merit order”). The market operator, called ERCOT, accepts all the bids up to what is needed to meet demand, then pays all the bidders the price of that last bidder (called the “market-clearing price”).

Because wind and solar power have very low operating costs and will produce power regardless of the market clearing price, they bid into the market at a very low price to make sure their power is sold. They take whatever the market-clearing price is.  Nuclear plants are usually next in the merit order, since they are difficult to switch off if their bid is not accepted. Coal, biomass, and gas plants follow. Typically, the most expensive plants are “peakers,”  like gas combustion turbines, which run only a few hours per year to meet peak demand, but that need to recover all their costs in those few hours.

The market operator buys as much power as needed to meet demand in each hour.  As shown in the chart, the market on the left has low levels of wind and solar power, which has little effect on market prices. But as renewables grow, as shown on the right, they push other plants farther down the merit order, driving down prices and excluding higher-priced fossil plants.

This is great for consumers, since wind is displacing higher priced generators and lowering costs for everyone.  Every time the wind blows in Texas, consumers save money.


But Texas still needs enough capacity even when wind is not blowing or the sun is not shining. One solution is to make payments for capacity to ensure that these power plants are available when needed. If they aren’t going to run as often, they need to make their living more from capacity payments than from energy payments.

But not just any kind of capacity is needed — with so much wind on the system, Texas needs flexible capacity. Big nuclear and coal power plants that can’t ramp up and down quickly will only create problems as wind and solar sources grow. Rapid-acting gas generators, like the GE FlexEfficiency 60 turbines, along with demand response, energy efficiency, more transmission connections and storage, can bridge the gaps, smooth out fluctuations in demand or supply, eliminate congestion and reduce demand during peak hours, all at a lower cost than peaking generators.

The challenge for Texas, and for other places that see growing amounts of wind and solar, is to tweak their market design to encourage flexibility. There are a host of options, such as accepting bids every 15 minutes or less (instead of hourly), better forecasting of both wind speeds and demand, consolidating the number of operating areas, and new types of ancillary services, such as payments for ramping generators up and down.

In some ways this system will be more complicated, with both supply and demand fluctuating, more market activities, and constant change. But constant change is par for the course with electricity. You don’t have to notify the utility when you turn on your TV, but the utility has to be ready to meet that demand. More renewable energy is just another variable, and one that grid operators with modern information technologies can easily handle. The trick is matching markets with technologies.