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Luminant’s Announced Plant Closures Raise Concerns In ERCOT Over Reliability, Prices

December 19, 2017

Luminant’s announcement that it would cease operations at three coal-fired power plants has raised some alarms over whether ERCOT will be able to maintain its targeted reserve margins — and what the effect will be on customers if system reliability is jeopardized.

The Vistra Energy subsidiary said it would shutter the 1,800 MW Monticello facility in northeastern Texas in January. Soon afterwards, Luminant disclosed that it also plans to shut down Big Brown, southeast of Dallas, and Sandow, northeast of Austin in early 2018 — accounting for an additional loss of 2,400 MW. 

Coming on the heels of other recent coal plant retirements, the Texas grid operator is looking at a loss of more than 4,600 MW of generating resources.

At a board meeting last week, ERCOT’s stakeholders were told that the closures would likely cause reserve margins to fall below the 13.75 percent level needed to meet peak demand. Bill Magness, president and chief executive officer of the grid operator, said that staff was working to see if any of the retirements were necessary for system reliability, which could result in ERCOT’s negotiating reliability must-run contracts to ensure sufficient capacity. The assessment should be finalized in mid-December.

In the wake of the Luminant’s announced closures, which account for 12 percent of the Texas coal power plant capacity, there are clear indications that challenges may be looming for ERCOT. 

In its “Seasonal Assessment of Resource Adequacy” report issued in May, ERCOT forecasted that reserve margins would drop from 18.9 percent next year to 16.8 percent in 2022. Since then, however, Beth Garza of Potomac Economics, ERCOT’s independent market monitor, calculated that the margins would fall to 15 percent in 2018 and 13.1 percent in summer 2022 — an assessment that did not factor in the latest moves by Luminant.

However, Garza said that when those three retirements were taken into consideration, the 2018 figure could fall to 12 percent. “We’ve had really two years of clearly unsustainably low prices with high reserve margins,” she told the ERCOT board, adding that the market could be facing “a much different situation going into the summer of 2018 than the fat and happy times” of recent years.

A separate analysis by S&P Global Platts concluded that the margins could drop to 12.4 percent in summer 2018 and 10.6 percent in summer 2022.

But there is some optimism that the Lone Star State’s growing wind generation capabilities could potentially fill the gap left by coal plant retirements.

The Energy Institute at the University of Texas Austin reported that 4,000 MW of wind capacity will come online by 2018 and will total 24 GW — more than the expected 20.3 GW of coal-fired capacity. That led institute research fellow Joshua Rhodes to conclude “it’s conceivable that energy generation from wind could possibly overtake coal in the near future.”

Although the actual impact of the closures on prices remains to be seen, there are concerns that they could create an environment for increases. Some market participants expect that a decline in available resources would likely lead to price volatility, and customers would face more scarcity-related pricing events more frequently.

Meanwhile, the day after the Monticello announcement, calendar heat rates rose and remained firm driven by sharp increases in summer heat rates. E&E News also raised the possibility that any increase in power prices “might encourage other aging plants to hang around.” It added, “Some generators see a need to improve how prices are formed, but not everyone in the market is certain of the problems or solutions.”

Last August, the authors of a Harvard study — funded by generators — looked at some possible answers on how ERCOT might move forward. Those proposals were discussed with the Public Utilities Commission of Texas in August, and an Oct. 13 PUCT workshop was designed to advance the process to consider adjustments to the market.

But the Texas Industrial Energy Consumers indicated that the existing market is working well and that decision-makers should take a conservative approach in making any potential changes. Katie Coleman, who represents the group, told E&E News that terms like “price formation” and “energy-only market” — both of which populate the Harvard study — are being used to support proposals “that really are not premised on anything” with a sound economic foundation.

Although regulators may be able to affect reserve margins and wholesale power prices, one challenge they have little control over is energy economics.

CreditSights Research reported that the plants Luminant plans to close have been “crushed by cheap shale gas.” Wholesale power prices have plummeted since 2014, when the average real-time energy market price was around $40.64 per MWh. By 2016, that had fallen to $24.62, and prices averaged $28.64 in the first eight months of 2017.

ERCOT has said that the rapid decline in prices is due in part to the efficiency of the competitive wholesale market, but attributed the drop primarily to “very low natural gas prices.”

Luminant, which also cited low natural gas prices as a driving factor in its closure decisions, said that if ERCOT concludes the units are not needed for reliability, Monticello will close on Jan. 4, 2018; Sandow on Jan. 11; and Big Brown on Feb. 12.