The state’s primary electricity grid serving Central Texas is expected to tightrope between hot weather and tight power supplies again this summer.
Power providers — from the city-owned Austin Energy to private retailers who serve the competitive market — will be risking greater losses if they can’t meet their obligations and are forced to buy electricity in the wholesale spot market.
The state-mandated cap on wholesale electricity prices — at $3,000 per megawatt hour in 2011 — rises to $5,000 on June 1, on its way to $9,000 by 2015, as an attempt by the Public Utility Commission of Texas to encourage investors to build new power plants.
That has huge implications of risk for power providers.
For example, Austin Energy lost $4 million when it had to buy power on the wholesale spot market after one of its generating units tripped off for four days during the summer of 2011. At the time, the wholesale price cap was $3,000 per megawatt hour. That cost escalates proportionately as the wholesale cap triples by 2015.
More than ever, the industry is trying to encourage customers to curb power usage during the summer afternoon hours to hedge its financial bets — as well as prevent rolling blackouts.
Austin Energy next month is unveiling a new smart thermostat program. Central Texas’ electric co-ops have tested customers’ willingness to control their power usage in pilot programs. And retail companies that serve the competitive markets, including Round Rock and Pflugerville, are offering financial incentives to encourage customers to curb their usage during peak afternoon hours.
In industry parlance, changing a customer’s behavior due to prices is called demand response.
It can be a tough sale, though, as was evident at a recent industry workshop sponsored by the utility commission.
“There is not a pent up demand among customers for demand response,”said Scott Burns with Reliant Energy Retail Services. “They are not waiting for a program to roll out so they can take advantage of them.”
Although the state’s electricity consultants, the Brattle Group, recommended the creation of a demand response program almost a year ago, it is mired in the ponderous process at the utility commission as lawyers for various industry segments debate how it would work and who would pay for it.
Some argue that demand response is a safety net for a state facing power shortages. Others, particularly among power generators, say they worry that demand response could depress prices and further delay construction of new power plants for a growing economy.
The state’s primary electricity grid, managed by the Electric Reliability Council of Texas and serving three-fourths of the state, typically doesn’t face power shortages except for about 100 hours a year — most on summer afternoons between 4 p.m. and 6 p.m.
Blame air conditioning, which accounts for half of the peak demand for power at that time.
In other parts of the country, customers are paid to consume less during times of peak demand. With smart thermostats, advanced meters and other equipment, utilities can remotely adjust power usage and reward customers who volunteer for the programs.
More important, pilot projects in Texas have shown that a customer’s comfort isn’t affected by small adjustments.
It’s been estimated that ERCOT could shave 10 percent off its summer power peaks with a vigorous demand response program.
At the utility commission, the issue is economics.
ERCOT already makes standby payments to a combination of power plants and large industrial customers to provide emergency power and other reserves — either by generating more power or, in the case of the customers, shutting down operations. The costs are indirectly part of everyone’s rates.
Advocates for demand response want to expand that idea to large groups of residences, smaller businesses and office buildings as a means of providing more grid reliability and jump-starting the program until customers become aware of the benefits of demand response.
Companies that aggregate customers willing to curb their consumption would split the standby payments, just as with the existing program.
Brett Perlman, a former utility commission member, is now a consultant in the field. He said the owner of a large office building, for example, might be offered $20,000 to $40,000 per year to agree to curb usage fewer than six times a year, depending upon their usage.
“That gets their attention,” Perlman said.
But commission members Donna Nelson and Ken Anderson Jr. expressed concerns at that recent workshop.
Nelson objected to using standby payments as difficult to stop once they are started.
“The concept of setting up a program for (demand response) where a payment is made and then, at some later point, it’s taken away?” Nelson said. “Wow. That’s big.”
Without standby payments, however, advocates of demand response argue that the Texas market is not expected to grow rapidly enough to provide a backstop to help ERCOT keep the lights on.
There are several hurdles to customers embracing demand response based solely on responding to prices.
To begin with, electricity prices remain relatively low because natural gas, which is used to generate power, remains cheap with the recent boom in gas discoveries.
“Spending a lot of time trying to figure out how to save money is less important to people when prices are low,” Nelson said.
Furthermore, customers in Texas are not accustomed to the idea, in essence, of selling electricity back to the grid and it’s not their focus.
“Demand response is secondary to their business or keeping their home comfortable,” said Michael Jewell with the Demand Response Provider Coalition.
More important, most customers in ERCOT are protected from the immediate impact of price spikes in the wholesale market with fixed rates in their contracts with private retail providers.
In the competitive market, the electricity retailers typically absorb the price spikes, but customers could see higher rates in the future as their contracts expire — if wholesale prices rise as expected.
Austin Energy customers, however, get billed for any losses in the wholesale market in their fuel surcharge. That $4 million loss for four days in 2011, for example, was shared by all of Austin Energy’s 420,000 customers.
That gives Austin Energy an incentive for creating a vibrant demand response program.
Austin Energy already has the nation’s largest program for cycling thermostats off and on for a few minutes during times of peak demand. But that is older technology _ 90,000 installations _ with only one-way communication.
Next month, the utility plans to unveil smart thermostats with two-way communication. That would allow Austin Energy to verify the energy that it is saving by adjusting thermostats up a couple of degrees.
Those energy reductions, with changes in ERCOT’s rules, could be sold in the wholesale market at a profit. A megawatt saved has a value, just as a megawatt generated does.
Scott Jarman, a consulting engineer at the utility, said the new program would pay volunteers $85 once to allow Austin Energy to adjust the thermostat during times of peak prices.
The $85 helps offset the costs of buying new thermostats that range from $100 to $250, depending on the features the customer wants.
The thermostats are part of the fast-changing world of home energy management where customers have greater control and knowledge of what they are spending for electricity. Studies have shown that informed customers reduce their bills.
Austin Energy has an advantage over private electricity retailers: A captive market. It can afford to subsidize the thermostats because the customer isn’t leaving Austin Energy for a competitor after a few months.
In the competitive market, Reliant Energy is trying to create demand response that relies on the customer — as opposed to the utility — to adjust the thermostat.
When the forecast is for peak power demands, Reliant will text or email customers to curb their usage between 3 p.m. and 5 p.m. The customer gets a credit on his or her bill.
“It’s important to show them what they saved,” Burns said.
But Burns acknowledged its limits, saying demand response “without equipment is not the same as DR with equipment.”
Advocates of demand response say the utility commission is moving too cautiously as it waits for its higher wholesale price caps to change the economics of the ERCOT market.
Frank Lacey with Comverge Inc., a demand response provider, summed up the change the industry is advocating: “We feel demand response should be viewed as a market change, not tweaking existing market systems.”