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Demand management is 'arrow in our quiver' during Texas heat wave

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Construction worker Ramiro Montez drinks water as he takes a break from working outside in the Houston heat July 23.
Source: AP Images

Market participants and other observers emphasized the rising role of demand management when evaluating the Texas power grid's performance during a recent heat wave.

Lone Star State residents saw the mercury in their thermometers rise throughout July, with some cities experiencing all-time temperature records nearing or exceeding 110 degrees Fahrenheit. While the weather has cooled by Texas standards thanks to recent scattered thunderstorms, forecasts still predict statewide highs in the high 90s and low 100s.

The Electric Reliability Council of Texas, operator of most of the state's power grid, logged back-to-back records for systemwide peak demand, topping out at 73,259 MW during the afternoon of July 19. The day before saw power prices in ERCOT's North Zone, which represents the Dallas-Fort Worth area, spike to $2,173/MWh, several dozen times higher than prices the week before.

Although prices in the North Zone settled down the week of July 23, cresting at $233/MWh on July 26, ERCOT spokeswoman Leslie Sopko said the grid was still experiencing high load.

The three daily peaks above 73,000 MW, on July 19, 20 and 22, were all higher than the 72,756-MW peak ERCOT had projected in April that it would hit this summer, a projection that was 1,600 MW higher than the previous actual peak.

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A number of factors, including economic and population growth and the October 2017 retirement of three large coal plants, had raised concerns about the grid's ability to meet demand. But during the July heat wave, "our grid did a great job," said Michael Webber, deputy director of the University of Texas Energy Institute.

Webber said this was due to the ongoing maintenance of ERCOT's reserve margin, which was further boosted by some plants postponing their retirements in anticipation of high power prices, along with others accelerating their construction timelines to go online this summer rather than the fall. The recent price spikes should encourage the construction of new plants, experts agreed.

Another reason why the grid has been stable, Webber argued, is demand reduction — be it customers conserving energy in their homes with smartphone apps or aggregators managing power usage at commercial properties and industrial sites.

"People are figuring out that demand reduction's a lot cheaper than building a power plant; it's a lot easier to turn something off," he said. "There might be more opportunity here." Plant operators are watching the market closely, Webber added, to determine whether additional capacity is needed.

Cathy Webking, a partner at Scott Douglass & McConnico LLP who represents retail electric providers in Texas regulatory proceedings, said market participants were not surprised by the recent heat, having hedged with fixed-price contracts and power purchase agreements. The most prominent retailers, she added, deliver power through bilateral contracts with one or two generators.

Still, there is volatility in the day-ahead market, which poses a challenge to even the best hedges. "It's not without cost by any means," Webking said.

Retailers' customer crunch

For retailers, the most important mandate is to hold onto one's customers, especially during market fluctuations, National Energy Marketers Association President Craig Goodman argued. "The customers are your company," he said. "If you don't treat them right, somebody else will if you don't take a piece of the risk or supply them with the right products to hedge against price volatility. You will lose them."

One example of this, Goodman said, was during the "polar vortex" cold wave of January 2014. Power prices skyrocketed to nearly $5,300/MWh in ERCOT's North Zone, and retailers reported to him that they were losing money. Despite this difficulty, the companies stuck it out because they wanted to retain their customers and not give them up to a rival.

During the recent heat wave, "Everyone who owned a power plant made money," Webber said. "They're all feeling pretty good right now." He added that while it's too early to know generators' final summer earnings, retailers this time around might be paying more for power, and thus have smaller margins. Those costs could be passed onto customers.

Webber said he wouldn't be surprised if more retailers go bankrupt, like Breeze Energy did in early June. The company, which served the Houston area, defaulted and had to transition its 9,800 customers to providers of last resort.

"It doesn't make me think that there's a fundamental problem in the grid or some sort of flaw in how the markets operate, just like it doesn't alarm me when some local business goes out of business," Webber said.

Goodman said while retailers don't always give him advance notice of their bankruptcies, "I do get calls virtually every week" from companies looking to scoop up customers of on-the-brink companies. "They actually call and ask, 'Do you know anybody who wants to get out of the business?'"

Webking said a trend retailers are starting to face is the rising cost of ancillary services, which she added are hard for them to hedge against.

'Arrow in our quiver'

Going forward, demand management will continue to play an important role in the ERCOT market, according to experts. "Demand reduction and efficiency programs have been an important arrow in our quiver, and that kept our peak load to date from being as high as what people thought it would have been a decade ago," Webber said.

"This summer is a testament not to the balance of supply and demand because of the number of generators we have, but because we've become so much more effective at managing the demand side," he added. "I think that's really exciting."

Webking said once the summer ends, the market will have a "much better feel for how much we really do have price-responsive loads and what that response looks like."

Chris Amstutz, a risk management associate at Houston-headquartered energy management firm Choice Energy Services, said demand reduction can be attributed to both interruptible power contracts and residents' smart meters, but that the latter is likely more responsible "since it makes up a larger piece of the demand pie and is less bound by stubborn business behavior."

Even with the prevalence of energy efficiency, Amstutz said, "The real question [for generators] is not who wins or loses on this heat wave, but rather if producers are able to provide an overall lower price to consumers over many years by letting the market forces act."