The Electric Reliability Council of Texas’s (ERCOT’s) energy-only market has worked well for many years to support efficient operations and to attract sufficient generation investment to maintain resource adequacy. Now, despite reserve margins declining with load growth and retirements, investment appears to have stalled. Many projects have been postponed or cancelled and no major new generation projects are starting construction. As a result, ERCOT projects that
reserve margins will fall to 9.8% by 2014, substantially below its current reliability target of 13.75%. Reserve margins will decline even further thereafter unless new resources are added. Generation investors state that a lack of long-term contracting with buyers, low market heatrates, and low gas prices in ERCOT’s energy-only market make for a uniquely challenging investment environment.

In response to these concerns, the Public Utility Commission of Texas (PUCT) has implemented a number of actions to ensure stronger price signals to add generation when market conditions become tight. The PUCT has enabled prices to reach the current $3,000/MWh offer cap under a broader set of scarcity conditions and is considering raising offer caps to as high as $9,000/MWh, among other measures. Following the PUCT’s initiatives, forward prices have increased and more than 2,000 MW of relatively low-cost capacity additions have been announced, including uprates and reactivations of mothballed units. The critical question
remains whether the recent and proposed reforms will be adequate and what other measures might be necessary to attract sufficient investment. Read the rest of the Brattle Report here.