Texas Risks Future Energy Shortages From Overproduction

Texas Risks Potential Energy Shortages ... By Producing Too Much of It

Thanks to the recent influx of natural gas and wind energy in Texas, the state enjoys some of the lowest power prices in the U.S. But the boom in cheap energy is making it difficult for providers of coal and nuclear power to compete. What’s more, natural gas providers must continue to sell at increasingly lower prices in order to compete with one another. Some energy providers and regulators worry that this situation could lead to an electricity shortage in Texas.

Fortunately, Texas policymakers and energy providers are working together to keep the Texas energy market strong. At the Texas Renewable Energy Summit in September, attendees discussed ways for the Electric Reliability Council of Texas (ERCOT) to prevent an electricity shortage. While they have yet to reach a consensus, experts have posed a variety of solutions, such as changing regulations and creating opportunities to distribute energy to new markets.

The flood of cheap energy into Texas is due, in part, to the increase of Permian Basin oil drilling.

Although these West Texas wells exist primarily to extract oil (which is not used to generate electricity in Texas), they are also producing another fossil fuel: natural gas. Natural gas is extremely inexpensive, costing less than $3 for a million British thermal units. And since natural gas is merely a byproduct of the process, oil drillers are able to sell it at significantly reduced rates. Permian Basin drillers are also producing far more natural gas than the state can actually use. In other words, supply is exceeding demand. If this trend continues, natural gas suppliers could stop turning profits and be forced to close, leaving Texas without enough energy to support its electricity grid.  

Coal and nuclear power plants struggle to compete with these economic headwinds. One reason for this is that the plants must operate at much longer and more regular intervals than natural gas plants. Since coal and nuclear plants don’t have the ability to start and stop energy production on short notice, they are unable to react to market forces as quickly as natural gas plants can. That has contributed to the closure of numerous coal plants in Texas. Of the state’s 15 remaining coal plants, only two earn enough money to cover the costs of operation.

Since conventional power plants are unable to compete with natural gas, operators of aging power plants are taking safety risks to reduce maintenance costs. During the summit, Bob Helton, senior director of regulatory affairs at Dynegy Inc., questioned the prudence of this decision. “You’re going to run it until it fails,” he posited. “Do you announce a retirement before that happens, or do you have a major tube leak or something that requires a high-dollar investment?”

While some traditional energy companies are fighting to stay afloat, others, including Vistra Energy Corp., plan to shutter some of their older and less efficient plants. Some Texans believe that this is a sign of a healthy, competitive market. In a recent article, Houston Chronicle columnist Chris Tomlinson argued that if failing coal plants shut down, it would help tighten supply and prompt companies to build more efficient facilities. “The state should not abandon its faith in the competitive market,” he said. “Driving out the old and inefficient is what the market is all about.”

Meanwhile, expiring tax credits are expected to affect the development of Texas renewable energy.  A federal tax credit has helped Texas become the largest wind energy producer in the nation. But this tax credit expires in 2020, and without it, wind farms could struggle to compete with natural gas. Fortunately, tax credits for solar energy will be phased out much more slowly. That means solar energy will remain profitable enough to compete with natural gas, at least for the time being.

Energy companies and policymakers at ERCOT have yet to come to an agreement about how to prevent an energy crisis in Texas. Providers of renewable energy want more power lines out of West Texas to facilitate power transmission to other states. Meanwhile, traditional power companies want ERCOT to change the way it calculates wholesale energy prices, causing natural gas prices to rise and helping traditional energy companies to compete.

Until now, the boom in natural gas has had a positive impact in Texas, leading to new development and more affordable energy. Thankfully, policymakers and energy companies are planning ahead to ensure that the energy market continues to thrive. Texas’ energy market might be experiencing growing pains, but the state’s wealth of resources has the potential to create even more economic opportunity in coming years.

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