Southwest Economy, Fourth Quarter 2019
Rising Demand, Renewables Generate New Challenges for Electric Utilities
On the Record: A Conversation with Paula Gold-Williams
Paula Gold-Williams is president and CEO of CPS Energy, San Antonio’s municipal utility, with more than 1 million electricity and natural gas customers. She serves on numerous boards, including those of the Texas Public Power Association, the Electric Power Research Institute and the San Antonio Branch of the Federal Reserve Bank of Dallas. She offers her perspective on the electricity market in Texas.
Q. How do the issues your public utility faces differ from those confronting your privately owned counterparts?
The only real difference is since San Antonio citizens own the assets, including those that generate power, our job is to ensure their electricity needs are met first. Public and private utilities are all producing the same product, but we know who our customers are for the majority of our megawatts. It’s like you own a house versus you staying overnight somewhere. If you own a home, you know it will be there every day, and if you are a nomad, you must figure out your situation each night.
Essentially, we generate electricity and send it out to the grid, and then we match our customers’ electricity requirements with generation. The Electric Reliability Council of Texas (ERCOT) functions as the exchange for this matching. Through ERCOT’s system, we are able to sell any excess power to wholesale customers outside of San Antonio at market-based prices.
When you’re a municipal entity, you don’t think about opportunistic activity. We do not build capacity to chase scarcity pricing. We build capacity to satisfy the demand of our customer base. Whatever the power costs to produce and transmit, we basically sell it to our customers at that cost.
Q. What are the most significant changes the electric power generating industry in Texas has faced over the past 10 years?
The biggest change is investment in renewables. There are about 25,000 megawatts of wind capacity in Texas; that’s huge. Twenty years ago, nobody was really doing it since it was excessively expensive. Now the technology has gotten better, and you see a whole lot more investment.
The challenge, though, is that renewables are “intermittent sources.” They are dependent on the weather and time of day and have actually introduced a whole lot more instability into the market. A long time ago, variability was due to demand. Now, variability happens on both the supply and demand side.
Traditional power plants are what we call “baseload sources.” You put them online, it takes a good amount of time to safely bring up the plant all the way to full load, and once it’s up it doesn’t matter what the weather is. Baseload generation is very consistent.
Now, you also need units that can respond very quickly to changes in intermittent supply and demand. These “peaking” units are smaller plants that usually sit in reserve to produce additional electricity to meet peak demand and can be brought online quickly.
Power from these plants is more expensive, but with more renewables in the system, you need these fast-response plants to compensate for intermittency. San Antonio has about 1,000 megawatts of wind power capacity, and so we also have eight peaking units to fill in for their intermittency.
We are also starting to implement and invest in energy storage because it complements the renewable intermittency so well. We have a site in San Antonio, on property leased from Southwest Research Institute, where we are testing 17,000 solar panels along with four stationary trailers of batteries. Even so, storage can only last for about four hours.
Without storage and peakers, if you’re relying on the wind and if it stops blowing, you would be without power for hours while the traditional plants were brought to full operating load.
Every type of generation has its benefits and its limitations. Traditional baseload plants produce all of the time on a very consistent basis—but they emit CO2. Wind is clean and renewable, but it produces power intermittently.
Why should we build another plant if the market won't pay us back for that? So a situation arises where Texas continues to grow and energy demand is eking up all the time, but energy supply is not.
Q. How does the variability of supply and demand affect the uncertainties and costs of power generation?
San Antonio has about 7,000 megawatts of total capacity. At the peak, customers generally demand about 5,000 megawatts of power in the summer. So, our reserve margin capacity is about 2,000 megawatts. Still, if a plant goes offline unexpectedly, we can immediately move from a supply-rich environment to a deficit, which then exposes the community to higher and more erratic prices. We do a lot of maintenance and prep to ensure our generation units are available, but plants are mechanical and can still break down from time to time.
Even if the wind is blowing, peak generation time does not correlate with how people live their lives. The peak of consumer demand is typically 3–7 p.m., when most people are transitioning from work to home, their houses are revving up, business are going and manufacturing is happening.
Some people will say, “OK, we get it. Wind doesn’t produce at peak, so go after solar. It’s so cheap.” Solar actually peaks around 3 p.m., earlier than customer demand peaks.
Efficiency is typically lower for renewables. Efficiency is measured by the ratio of system output to system capacity, or the capacity utilization rate. A gas plant is typically considered efficient if the rate is in the 80 to 90 percent range. Solar units may in the summer reach 50 to 60 percent efficiency but on average produce at less than 30 percent efficiency. Wind is about the same. So for all of the renewable capacity you build, you generate a fraction as output.
Average energy prices across the globe, but especially in Texas, are depressed right now. Even so, a $1 billion plant must still cover the cost of what it took to finance it.
As plants get old, they need to be taken offline and maintained through reinvestment. However, since energy prices are so low, the incentive is not there right now. Why should we build another plant if the market won’t pay us back for that? So a situation arises where Texas continues to grow and energy demand is eking up all the time, but energy supply is not.
Right now, the Texas market has more than enough capacity to meet total customer demand. At our annual state peak, our reserves can dip to around 2,000 megawatts, which is favorable. Except things happen. Plants can trip and stop producing, and the tighter the reserve margin gets, the more we have to worry about these trips.
It could happen that we have more demand than available supply on a particular day. Until more capacity is built, these are things we have to worry about. Right now, that reserve is getting tighter and tighter, which is why prices in the ERCOT market can spike some days.
The bottom line is that the variability of supply and demand means that we need more baseload power plants built to ensure reliability. Constructing new baseload plants does not make economic sense yet since demand is greater than supply for only a short time out of the year.
Q. What about greater use of peak-load pricing and customer awareness of it?
We have one of the biggest and most successful demand response programs in the state, probably in the nation. Demand response is a program where we offer rebates to industrial and commercial customers to reduce their energy usage from June to September, typically the peak months.
We also have a big residential thermostat program called “Reduce My Use.” Participation is voluntary, and on days with unusually high demand, we push out notifications to participants to reduce energy usage. We have 326,000 customers participating who receive messages like, “Tomorrow will be a high heat day; please join your neighbors in reducing energy use tomorrow.”
The real benefit to the customer is that management of usage will ultimately translate to savings on their overall energy bill. We are trying to lower energy demand on a large scale by incenting behavior changes. If people get used to conserving, then over time it becomes natural.
As for time-of-use rates, we currently don’t use them in San Antonio. Instead, it’s all about usage. The less you use, the lower your bill is. Pretty simple.
People argue that if consumers took a bigger hit to their wallets during peak times, they would use less energy. We know there is merit in this, but we also know that San Antonio has a challenged economic position in terms of a high population of low-income families. We have many people here who are challenged just to make a living, and I personally believe that if we implemented time-of-use rates, it would inflict social injustice immediately.
Southwest Economy is published quarterly by the Federal Reserve Bank of Dallas. The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.
Articles may be reprinted on the condition that the source is credited to the Federal Reserve Bank of Dallas.
Full publication is available online: https://www.dallasfed.org/research/swe/2019/swe1904.
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