AUSTIN, Texas -- The Texas Public Utility Commission is likely to double the price cap on wholesale electricity to encourage more generation.
PUC chairwoman Donna Nelson told the House State Affairs Committee on Wednesday that raising the maximum price that a generator can charge is needed to make sure there is enough electricity available during peak periods plus a 13.75 percent reserve.
"A $9,000 cap will only result in a reserve margin of 8-10 percent," Nelson said. The wholesale price is currently $4,500 a megawatt hour, and that price could go up to $9,000.
The commission will vote on the proposal Thursday, she said.
The Texas electricity market pays only for electricity provided, not for generating capacity. Officials say that low prices have kept generators from adding capacity while demand has gone up. A shortage in generating capacity could result in a shortage if something unexpected happens, such as an unplanned breakdown or inclement weather.
Customers experienced outages in early 2011 because of cold weather and the grid experienced extremely high demand that summer, forcing the Electricity Reliability Council of Texas to take emergency steps.
Trip Doggett, CEO of ERCOT, said that the agency is considering a higher reserve margin after the problems in 2011. He said that ERCOT needs to be careful about how it acts in a deregulated market.
"We want to ensure that the steps we take during times of high demand do not send price signals that discourage new generation development," Doggett said.
The PUC hired the Brattle Group to analyze the market and make recommendations. Sam Newell, who led the analysis, said the Texas market has a structural problem in how it pays generators.
"Investment is not keeping up with load growth," he said. "Generators are not currently earning enough to make an investment worthwhile."
Only when power becomes scarce and prices go up during peak periods do generators make a profit, he explained. That means the generators have no financial incentive to supply more than an 8 percent reserve, otherwise they lose money. But with only an 8 percent reserve, the state is at double the risk of power cuts.
Newell said lawmakers have two options, either accept more outages or redesign the market to encourage more generation. One option, he said, was moving to a market that pays for installed capacity rather than the electricity supplied.