CDR 2013At least twice a year, generally in winter and summer, ERCOT releases an analysis known as the Capacity, Demand and Reserves report.  The CDR report forecasts both electricity demand and future supply.  It lies at the heart of the ongoing debate over our state’s energy future.

And the reports are almost always wrong.

Reviews by several outside parties have shown that CDRs consistently overstate future peak demand, and consistently understate future generation growth. That is, the reports typically predict that Texans will consume more power than they actually consume, and likewise predict less generation than that which actually shows up. As a result, the reports have been consistently wrong about the state’s energy reserves.

ERCOT, the state’s grid operator, now acknowledges the limitations and says it will issue a revised report based on new methodologies later this year. This is an important move, given the reports’ significance to the ongoing policy debate over resource adequacy. Pointing to CDRs, generation companies warn of future generation shortfalls and potential blackouts. They cite the CDRs in their lobbying efforts for multi-billion dollar subsidies — subsidies that by their very design will increase our electricity costs

But as one group of industrial consumers put it, “the CDR report systematically over projects reserve margin shortfalls that never materialize — the market does not believe these predictions and the (Public Utility) Commission should not take drastic action in response to these reports.”

Annual Energy and Peak Demand-01The reasons the reports have been unreliable are not related to any malfeasance by ERCOT, but rather relate to limitations inherent in the CDR report itself. For instance, the reports include no assumptions for future generation construction beyond those projects that already have met certain of ERCOT’s technical criteria.  Generation projects seldom meet these criteria three or four years in advance of construction. As a result, the CDRs consistently under predict new generation construction beyond a three-year or four-year horizon.

At the same time, the CDRs simultaneously over-predict peak demand. A 2007 CDR forecast peak demand in 2013 at 72,160 megawatts. In actuality, peak demand was 67,180 — about 7 percent less. The 2008 CDR similarly shot too high.  According to an analysis by the Texas Public Policy Foundation, a free-market think tank, nearly 80 percent of CDR forecasts between 2008 and 2013 overestimated peak demand. After correcting for the record heat and drought of 2011, the overestimation rate is 87 percent, according to the TPPF analysis.

TPPF conducted a separate analysis in which it adjusted for ERCOT’s over-forecasting. Instead of showing shortfalls, the analysis shows healthy reserves for several years to come. “Whether or not the data from 2011 are included, reserve margins stay strong through 2019 — within striking distance or above the 13.75 percent reserve margin target,” the TPPF concluded.

ERCOT officials will release a new report later this year that should incorporate a more robust modeling technique. The findings may play an important role in the ongoing debate over resource adequacy — and could have a real impact on how much we all pay for electricity.

— R.A. Dyer