Too much energy creates a challenge for Texas electricity grid

AUSTIN - Texas produces more energy than we know what to do with, and some electricity generators say that could cause serious problems in the future.

From fossil fuels to renewable sources, the state has an embarrassment of riches. The huge energy surpluses drive electricity prices so low that most of Texas's coal-fired power plants are losing money, nuclear power is struggling, and new wind farms will be hard to finance when tax credits expire in 2020, according to experts who spoke at the Texas Renewable Energy Summit in Austin last week.

With little or no profits, generators say they have no incentive to build new power plants, which they say could lead to a future electricity shortage. Many want an overhaul of the wholesale electricity market so they can make higher profits.

The Texas Public Utilities Commission and Legislature should hold steady.

Last week, I wrote about the huge increase in Permian Basin oil drilling, and while we don't use oil to generate electricity in Texas, those wells are crushing the electricity market because they also produce natural gas, which is used to generate 40 percent of the state's electricity.

Since the gas is a byproduct, Permian drillers sell it at a 20 percent discount to the Henry Hub benchmark. Even then, the wells are producing more gas than the state can use, said Neel Mitra, director of utilities and power research at Tudor, Pickering and Holt, a Houston energy investment bank.

Cheap gas means cheap electricity, but not high profits for generators. There is excess generation capacity for most of the year, which means natural gas generators compete for market share by bidding very low prices into the wholesale electricity market. Low margins on low prices mean low profits.

Natural gas generation is much cheaper than coal- or nuclear-fueled plants, which can't shut down when demand is low or start only when prices spike the way natural gas can. Those plants take days to ramp up and will run for weeks or months nonstop, accepting whatever price the wholesale market is paying.

Prices are so low that only two out of Texas' 15 coal-fired power plants are making enough money to cover costs, Mitra said.

Big coal plant operators like Vistra Energy Corp. have said they are considering retiring older, less efficient plants. But even if every coal plant in North Texas were shut down, there would still be a surplus of natural gas in the Texas market for years to come, Mitra added. That means extended low natural gas prices.

Texas is also rich in wind, which is how the state became the nation's largest wind energy producer. Thanks to the federal production tax credit, Texas went from almost no wind energy in 2000 to 20 gigawatts in 2017, enough to power 14 million homes. Wind generates about 15 percent of the state's electricity.

Congress, though, is phasing out the tax credit by 2020. And though new wind farms are cheaper than new coal plants, they can't compete with natural gas that costs less than $3 for a million British thermal units.

Therefore, investment in new Texas wind projects will likely screech to a halt in 2020, according to a financial analysis by Kevin Hanson, lead market analyst for ERCOT, the nonprofit operator of the grid that covers 95 percent of Texas customers.

Texas also has abundant sunshine, particularly in the west. Congress is phasing out the federal investment tax credit for solar projects much more slowly, which means Texas companies can profitably add a huge amount of solar capacity over the next three years, Hanson said.

The amount of solar generation is expected to rise to 21 gigawatts by 2021, according to ERCOT projections. And all of that new electricity is being added to a market with minimal demand growth as customers become more energy-efficient.

That's why electricity companies are screaming in pain and demanding that politicians save them rather than learning how to compete better.

Coal and nuclear power plant operators want extra pay for operating 24 hours a day. Renewable energy companies want more power lines out of West Texas so they can sell to more markets. Natural gas operators want more pay for ramping up and down as needed to meet demand and compensate for the intermittent nature of wind and solar energy.

These companies, though, should remember that this is the competitive market they asked for in the 1990s. And if their power plants can't compete, then they should simply shut them down.

Five of Texas' money-losing coal plants are more than 40 years old, and six are more than 30 years old. They've had plenty of time to generate a return on investment. If they shut down, that would tighten supply and improve pricing for the remaining plants and encourage construction of more efficient facilities.

Texas led the nation in doing away with government-regulated monopolies and introducing less-regulated competition. That has led to some of the lowest power prices in the country and a boom in industrial construction.

The state should not abandon its faith in the competitive market by fixing the game to protect incumbents. Driving out the old and inefficient is what the market is all about, and we should welcome the creative destruction created by our enormous energy potential.