Bernard Weinstein: Will the lights and AC go out this summer?

Last summer’s heat wave, the longest on record, pushed Texas’ electric power grid to its limit. For example at 5 p.m. on Aug. 3, power demand approached 70,000 megawatts, or 96 percent of the state’s generating capacity. Had a major plant gone offline that afternoon, many businesses and households would have experienced brownouts or blackouts. Luckily, as a result of voluntary curtailments by large electricity consumers, that did not happen.

Summer 2012 isn’t even officially here yet, but on June 11, an unusually warm day, ERCOT — the state’s grid operator — requested that large power consumers reduce electricity usage. In view of last year’s heat wave and the resulting strain on the power grid, ERCOT will likely issue many more curtailment requests.

All power grids seek to maintain “reserve capacity margins” to meet spikes in demand. The problem with Texas’ power market today is that the reserve margin has been shrinking since 2010, when it reached 21.4 percent. ERCOT tries to reserve 13.75 percent of available power generation capacity to ensure the grid won’t overload in cases of unplanned power plant outages or severe weather. However, to meet anticipated electricity demand in 2014, the grid operator will be able to maintain just a 9.8 percent reserve during peak demand; by 2015, the reserve will drop to 6.9 percent.

Texas has been adding people and jobs at a faster clip than any other large state, which has boosted the demand for electricity. Deregulation has been partly responsible for Texas’ tight electricity market, as merchant power companies are no longer guaranteed a fixed return on their capital investments. In addition, some generators claim that due to falling natural gas costs, wholesale power prices are too low to justify investments in new plants. At present, natural gas accounts for more than 70 percent of the state’s power generation capacity.

Texas, with its trillion-dollar economy, is projected to continue growing faster than the nation. ERCOT estimates we’ll need more than 100,000 megawatts of new power over the coming 10 to 15 years just to keep up with expected demand. Therein lies the challenge: In a deregulated environment, what policy changes or incentives can be adopted to enhance the likelihood of a competitive rate-of-return on new facilities?...