Here’s a bit of interesting news for Texas energy consumers. It’s a bit wonky, so stick with us.
On April 14th, an independent expert announced that wholesale electric prices in Texas have dropped this year, as compared to what they were in 2014.
Lower wholesale prices mean generators make less money, but also probably mean lower retail prices. So the announcement — which was made during a board meeting of ERCOT, the organization that oversees the state’s primary power grid — should come as good news for ratepayers.
Here’s where it gets wonky. The announcement also prompted an important discussion at ERCOT about the assumptions it uses when monitoring the state’s power market. Changing those assumptions could impact how much we all pay for electricity.
The independent expert who addressed ERCOT said the drop in wholesale power prices means that certain key generators make less money. The relative profitability of these generators is described with the term “Peaker Net Margin.” A high Peaker Net Margin means the key generators — “peaking” plants — are making lots of money. A low Peaker Net Margin means they’re making less.
Historically, some experts have deemed a relatively high “Peaker Net Margin” as an indicator of a healthy wholesale power market. But as a consequence of the announcement on April 14th, ERCOT board members have begun questioning that assumption.
That is, how is it possible that wholesale prices are down, and Peaker Net Margin has been relatively low in recent years — and yet the ERCOT market has remained consistently healthy? The independent expert who addressed ERCOT raised similar questions, and even acknowledged that Peaker Net Margin is a “simplistic look-back tool.”
Why should you care? Because big generation companies who have clamored for very expensive changes to the wholesale power market point to the state’s relatively low Peaker Net Margin to bolster those claims. They want regulators to approve a system whereby they can collect billions of dollars in subsidies from ratepayers. In theory, these subsidies would increase Peaker Net Margin.
So it should come as good news if ERCOT places less emphasis on this “simplistic look-back tool” when judging the relative health of the power market. Placing a lower emphasis on Peaker Net Margin also coincides with views held by the Texas Coalition for Affordable Power, which has previously questioned PNM’s validity as an indicator of market health.
For instance, TCAP has noted that Peaker Net Margin does not account for various other ways power companies make money, such as selling power through private “bilateral” contracts. Additionally, Peaker Net Margin fails to consider that many generation companies own fleets of plants that include non-peaking, low-cost plants that provide cost benefits that peaking plants do not.