Texas Energy Fund projects could cut scarcity pricing, boost gas demand, prices

Texas regulators’ decision to pursue possible Texas Energy Fund financing for about 9.8 GW of new dispatchable generation projects, almost all using natural gas, may reduce scarcity pricing if they are approved, industry observers said Sept. 3, but it could increase natural gas demand and prices.

The Public Utility Commission of Texas approved a portfolio of 17 dispatchable generation projects recommended by PUC staff, out of the 72 applications for financing to help build about 38 GW of capacity. The Texas Legislature approved in May 2023 Senate Bill 2627 to establish the TEF with a goal of adding about 10 GW of dispatchable generation with about $10 billion estimated cost across both Electric Reliability Council of Texas and non-ERCOT areas. The legislature appropriated $5 billion to implement TEF for fiscal year 2024-25, but Texas voters had to approve the creation of the fund, which they did in November.

The applications were filed confidentially, but 11 of the 17 portfolio projects have already been submitted for the ERCOT generation interconnection queue with projected commercial operation dates before the end of 2028.

Power prices could weaken

Asked about the likely power price impact of so much gas-fired capacity coming online, Morris Greenberg, S&P Global Commodity Insights senior manager for North American power analytics, said they “should be lower, assuming net capacity increases, which appears likely.”

“The required energy prices for new peaking capacity will decline with the value of the subsidies (low interest loans and performance payments),” Greenberg said in a Sept. 3 email. “I’d think maybe $3-$5/MWh on average.”

Siva Josyula, a PA Consulting energy and utilities expert, said, “All else constant, the subsidies mean a reduced need for scarcity pricing to cover the costs for new entry, so we expect the Operating Reserve Demand Curve … to be lower because the TEF is filling part of the gap in revenues.”

However, Evan Caron, a founding partner in the Dallas-based HGP Storage battery development firm, expressed doubt that all projects would be built.

“Even with this lower cost of financing these assets would need to see nearly 70% of their capital stack be this type of financing, which just gets these assets to break even,” Caron said Sept. 3. “It seems challenging that any of these projects will actually go forward to make money.”

Gas demand impact

Caron noted that the addition of so much capacity could boost natural gas demand in ERCOT, which, other things equal, could boost natural gas prices.

As of the end of July, ERCOT had 68.5 GW of gas-fired capacity, and it burned 220.6 Bcf, or 7.1 Bcf/d in August. Assuming a power burn increase proportional to the planned 9.8-GW increase in gas-fired capacity, August’s power burn would have totaled 252.1 Bcf, or 8.1 Bcf/d.

But Commodity Insights’ Greenberg said the addition of the TEF projects will likely result in “some offsetting reductions in other capacity, mainly battery capacity – possibly additional retirements of existing capacity, as well.”

PA Consulting’s Josyula said Aug. 30 the TEF program “will be the primary driver of thermal generation investment during the second half of this decade.”

“However, the opportunity from the projected load growth in ERCOT, and the demand for clean energy will continue to support renewable generation & storage investment given the resource quality in Texas,” Josyula said.