The following article was written by Polly Ross Hughes, editor of the Texas Energy Report. It is reprinted with permission.

AUSTIN (July 27) Sometimes all the numbers crunching and mathematical analyses in the world just can’t quite capture the tolerance level of Texans and their political leaders for the prospect of repeated electric blackouts.

Texas Public Utility Commission Chairman Donna Nelson made that point Friday afternoon as an expert in electric market structures and generation resource adequacy laid out options for Texas policymakers.

This report from the Brattle Group prompted an interesting exchange during a recent Public Utility Commission meeting.

Sam Newell, principal at the Brattle Group, explained at a PUC workshop how the consulting agency reached a key conclusion after studying Texas’ electricity predicament. In Texas’ deregulated “energy only” electric market, not enough new generation is being built to meet the needs of a fast-growing economy and demand expected to continuing soaring.

Either Texas needs to lower its expectations for high reserve margins that stave off electrical blackouts or it needs to change its economically efficient, market-based system for supplying electricity to business and residential customers, Newell said.

The consulting group has already determined that the PUC’s policy strategy of allowing wholesale price caps to float much higher during electrical scarcity periods of peak demand will not be enough to avoid generation-related service interruptions in the state’s energy-only electricity market.

Newell noted that energy-only markets, in which customers pay only for the energy they consume, are more economically efficient than so-called capacity markets in which regulators add into electric rates extra supply cushions to assure enough electric generation will be built. The problem with the latter is customers can be paying for a lot of excess capacity they rarely use. And, that’s expensive.

So, Newell offered charts showing the reliability implications if the Electric Reliability Council of Texas, which operates the grid for most of the state, were to set its reserve margin sights lower. This year the ERCOT reserve margin is at 13.75 percent. The standard for enduring only one rolling blackout per decade is a reserve margin of 15 percent.

But, Newell said, what happens if the reserve margin were to drop to 10 percent?

First he showed what would happen if you averaged weather for the past 15 years, 1997 through 2011, and removed the outlying year of crazy weather in 2011.  “At a 10 percent reserve margin almost nothing changes in the 14 years of weather. There’s still almost zero load-shedding events,” he said. He then discussed what would have happened in a year with extreme weather like 2011 – 90 days of 100-plus temperatures in Austin and exceptional drought, for instance.

What happened next might be called a lesson in the practical considerations, every-day considerations of what the Germans call Realpolitik.

Newell: In the event of a 2011 weather pattern, that’s when there would be more outages. Here, the average per customer rises to about 40 minutes per customer per year.

PUC Chair Donna Nelson

Nelson: How many outages?

Newell: In that year, that would be 14 events.

Nelson: Yeah, that’s a lot.

Newell: Again, at 10 percent, the worst possible weather. We are not talking about the doomsday scenario that we’ve seen described in the press that Texas is on the verge of having, you know, constant rolling blackouts. That’s just such extreme exaggeration. I would find that not helpful. Forty minutes per customer per year.

Nelson: But 14 outages. Fourteen.

Newell: But, lasting about two hours each with one 1,000 to 2,000 megawatts of depth of shedding. I don’t want to belittle it. I’m just trying to state the facts from the analysis that these are the choices. These are the choices, trying to inform the choices you have to make.

Nelson: As a state that prides itself on being one that wants to draw economic development to the state . . . and we want industrial customers, we want commercial customers, we want residential customers. We want people to move here. Although I understand what you’re saying, I don’t think that situation is one that would attract businesses.

Newell: Keep in mind it’s not 40 outages a year.

Nelson: It’s fourteen.

Newell: It’s 40 minutes of outages a year, in total, including all the events.

Nelson: For 14 outages. Fourteen outages that would most likely be over a short period of time when you’re hitting peak demand. As a policy maker, I don’t think that’s a sustainable model.

Newell pointed out that 2011 was the “worst” year, a year “a lot of people are saying was a one in 100 year.”  But it’s also a year that sobered state lawmakers about the implications of extreme heat waves and drought for future electric and water supplies and what that could mean for the Texas economic engine. Stay tuned.

Copyright July 27, 2012, Texas Energy Report, All rights are reserved. Reprinted with permission of Texas Energy Report.