AUSTIN, Texas — Industry insiders last week gathered here for the Gulf Coast Power Association’s 31st Annual Fall Conference, which featured presentations on ERCOT pricing and the effect of market forces, as well as discussions on distributed generation, Mexico’s reformed energy market, wholesale market design and efficiency improvements, new developments on ERCOT’s seams, current cyber threats and cross-border transmission issues with Mexico.

Future Market Prices in the Texas Market

Taking a look at current market conditions, the opening panel discussed what the future will hold. Sam Newell, a principal with The Brattle Group, said should solar costs continue to drop, it could replicate what ERCOT saw in the early years of the 21st century.

“At the beginning of the market, we built out [gas-fired combined cycle plants] in spades, and that’s why prices were so low,” he said. “I think that could happen with solar. [If I] were thinking about investing in traditional power gen in this market, I’d be worried because of that prospect. If we get 25-MWh, all-in solar, that will just kill prices for everybody else.”

“I think [pricing] is as big an issue for the coal,” said Bob Helton, director of market design and policy for ENGIE. “If you look at capacity factors, a baseload coal plant runs at 88, 89%. They’re running today down in the 30s. I think you will potentially see some changes in operations. It’s like my car is not running, but I’m not about to put new tires on it. You’re going to see some of those issues in maintenance that are going to change for coal plants with large capital expenditures.”

“Many generators [in ERCOT] have another revenue stream from their integrated retail side,” pointed out Charles Griffey, president of Peregrine Consultants. “Retail margins are very, very high right now in certain sectors of the market.”

ERCOT Stakeholder Process and Market Efficiency

“It’s in the best interest of the ERCOT market for us to be constantly moving forward, whether it’s real-time co-optimization, which is brought up by the [Independent Market Monitor] from time to time, or something else,” said ERCOT COO Cheryl Mele during her panel’s discussion on balancing efficient markets with economics. “We need efficiency, we need reliability and we need people to get behind us and support us when we have reliability issues.”

“We all put ERCOT in a tough spot,” Market Monitor Beth Garza said. “We want the highest and best and most impartial decisions out of that organization, but they’re also responsible to their members. Sometimes those interests aren’t always advocated for. … We expect the highest and best, but that’s never good enough. There is a role for the [Public Utility Commission of Texas] in some of these decisions that is even higher and broader than ERCOT and its stakeholder organization. It seems like that’s at a level at which disparate interests can be effectively adjudicated.”

“If ERCOT is a democracy, then the PUC is a benevolent dictator,” responded Barbara Clemenhagen, vice president of market intelligence for Customized Energy Solutions. “If the recommendations are coming from ERCOT and IMM, they should be based on perfect information. It may not always be correct, but the stakeholders have the right and the opportunity to weigh in on those things.”

Randa Stephenson, vice president of wholesale markets for the Lower Colorado River Authority, also defended ERCOT’s stakeholder process. “Even though there are different advocates, the voting structure is very balanced within ERCOT. Our communications and structure ensures there’s equal weighting of all the market participants,” she said. “We have to find ways to work together to find the best solution. When you have the pull and tug, we’re going to come out with very different compromise solutions.”

The Mexican Market’s Progress and Future

Two panels were devoted to the newly deregulated and competitive Mexican market, a sign of the growing relationship between Texas and its neighbor below the Rio Grande. (See Energy Wildcatter Hopes to Make His Mark in Emerging Mexican Market.)

Mexican market participants can buy and sell power, ancillary services, financial transmission rights and clean energy certificates (CELs). The first auction of energy and CELs last year saw an average price of $48/MWh, which decreased to $33/MWh in this year’s second auction. Regulo Salinas, vice president of Ternium Mexico, said he is optimistic about the third auction.

“That is where the private sector will come in,” he said, welcoming their expertise. “We need more specialized people that understand the markets. We have hardly any of them in Mexico … traders, meteorologists, pricing, financial and accounting specialists. … It’s an opportunity for intelligent communication types to come into Mexico.”

“I’m confident we are on the right path. There’s plenty to be done, but plenty has already been achieved,” said Eduardo Andrade, a member of the advisory board for Mexico’s Energy Regulatory Commission. “We have a framework based on competition. As a country, we’re moving away from having the government looking over your shoulder and determining who should generate the electricity and at what price.”

Panelists credited Jeff Pavlovic, managing director of electric industry coordination for Mexico’s Ministry of Energy, with much of the market’s success, though he politely declined to accept their praise. “Our guiding principle has been to make as many decisions as possible and not give any more control to the government than is absolutely necessary,” said Pavlovic, who left Xcel Energy eight years ago to work on the Mexican market.

“We know a lot of companies are interested in the market,” he said. “We’re asking them to make big investments, and that takes information. We’ve been doing this one step at a time, but until all rates are public, it will be hard to get that investment.”

Enrique Giménez Sainz de la Maza, managing director of The Blackstone Group affiliate Fisterra Energy, said the “next challenge” is developing a retail market. “Without a robust retail market, I have my doubts about the wholesale market.”

Fisterra owns the 524-MW combined cycle Frontera plant in Mission, Texas, just 2 miles from the Mexican border. Frontera only recently withdrew from the ERCOT system and dispatches power into Mexico through a DC tie and a 400-kV line. “We now have something very interesting. We have a market on both sides … one is an energy market, the other is an energy capacity market. At the end of the day, we have managed to develop the reality of a market in Mexico thanks to this interconnection.”

Gerardo Serrato, InterGen Mexico’s commercial director, said future interconnections will only help the price convergence between the two markets. “Theoretically, those prices have to converge, but reliability issues might stop that convergence. Not all the Mexican systems are interconnected. If they can interconnect the whole system, we can see convergence between the Mexican and U.S. system.”

Genscape’s Rick Margolin said strengthening the energy infrastructure between Mexico and the U.S. will only feed further economic development. The senior natural gas analyst pointed to the NET Mexico Pipeline that connects the Agua Dulce Hub in South Texas with Monterrey in northern Mexico as an example.

“Gas prices aren’t what Mexican consumers can get by tapping into the U.S. market, so there’s a major push to gain access to the international markets, which means primarily the U.S.,” Margolin said. “Consumers are insanely frustrated by the level of service they get from [Mexico’s national gas supplier] Pemex. Global manufacturers are very interested in expanding operations into the Mexican market. Mexico has more trading partnerships than the U.S., but they’re hesitant … because of the lack of service or reliable service. We’re seeing a massive buildout of both gas and power infrastructure to the border.”

Dynegy CEO Shares Thoughts

Dynegy CEO Robert Flexon celebrated his company’s emergence from bankruptcy in 2012 and its entry into ERCOT earlier this year with the acquisition of almost 4,000 MW of ENGIE combined cycle gas turbines. Fifteen percent of Dynegy’s capacity is part of the Texas ISO.

“ERCOT’s view around generating assets tends to be fuel neutral. They’re not trying to create winners and losers; they’re trying to create a competitive market,” Flexon said. “We like our position, we like the assets we have. The market is going to continue to have need for flexible resources. The way wind affects price formation and with solar shaving peak pricing, it’s just going to be a really difficult environment for non-flexible resources to survive that.

“Is the price signal going to be there to change the resources?” he asked. “Will it force Texas into a situation where we’re doing out-of-market things? We hope Texas doesn’t do that.”

Anil Kumar, a senior research economist and adviser for the Federal Reserve Bank of Dallas, said the regional economy is expanding at a moderate pace, thanks to “robust” job growth in services and goods-producing sectors overcoming oil prices in the $40s. “Sharp drops in oil prices used to drop us into a recession, but that’s no longer the case,” he said, pointing to an unemployment rate of 4.7%, slightly below the national average. “We are probably looking at the worst of the energy bust being over.”

Cybersecurity Risks Included ‘Uninformed User’

October being National Cyber Security Awareness Month, it was only appropriate one of the GCPA panels examine the growing cyber threats to electric utilities and how to fend them off. Renee Tarun, deputy director of the National Security Agency’s Cyber Task Force, warned attendees that external cyberattacks are growing increasingly sophisticated.

But she also said not to ignore the dangers from inside.

“We’re seeing these attacks surface as more and more technologies are connected to the Internet. We’ve seen ransomware becoming more prevalent. We’re seeing nation actors develop specific harmful code. These different types of malicious actions can range from hackers in their basement to sophisticated nation actors,” Tarun said.

“But there’s also the uniformed user, someone accidentally clicking on a phishing link that introduces malware to the network. It’s important we leverage our technologies to be more automated in our defenses, but also the user being educated in the system as well. Security needs to be built in at the beginning, not as an afterthought.”

“I would say 50% [of cyberattacks] are pure human negligence,” said Boris Segalis, a partner with Norton Rose Fulbright. “Vendors can lose track of hard drives that include critical customer data … small companies may not vet the vendor … not having your anti-virus up to date … you can’t really prevent hackers, but humans can take measures to mitigate the effects of these incidents.”

Asked by an audience member whether cybersecurity insurance is available, moderator Doug Henkin, a partner with Baker Botts, said insurance brokers do specialize in the product, but “it’s a growing market that essentially didn’t exist. It’s not a simple insurance to buy, it’s not a simple insurance to be underwriting. With respect to anti-virus software, you might be underwriting 15,000 different companies, but those companies are using five to 10 subsets of the software.”

Developers Look Beyond ERCOT’s Seams

Bill Bojorquez, vice president of planning for Hunt Transmission Services, suggested ERCOT’s DC ties with Mexico — which include a connection through Hunt subsidiary Sharyland Utilities — could provide an alternative to building more transmission in the Rio Grande Valley.

“We believe these ties … give ERCOT the ability to say, ‘Wait a minute, we have an extra tool’ and call their neighbor when there are unplanned outages,” said Bojorquez, who helped develop the ERCOT market while at the ISO in the early 2000s. “One of the things I’m most proud of is establishing relationships with Mexican utilities. They have the ability to respond in emergency situations, and they are highly motivated because it helps with trade.”

David Parquet, senior vice president of special projects for Pattern Energy, is looking eastward instead. His company’s HVDC Southern Cross Transmission Project, a project six years in development, is scheduled to connect ERCOT with the Southeast in 2021.

“If you think back 10, 15 years ago when the whole renewable business started, there was a lot of low-hanging fruit where you could find wind relatively close to load,” he said. “Those days are gone. Today’s big efficient renewable projects are a long way from load so therefore, you have to think about transmission. Sometimes, you can hook up to the local grid through a wheel, or you can put together your own project.”

But Parquet reminded his audience that transmission projects across the seam must “ensure no change in FERC jurisdiction over flows into ERCOT. [Maintaining ERCOT’s independence] is the Holy Grail. You will not change that. Period. Full stop.”

Distributed Generation a Coming Force

“In planning the future of the grid, we’re very much looking at distributed generation resources,” said Oncor’s Don Clevenger, senior vice president of strategic planning. “The numbers are still small, but they really don’t tell the whole story as far as looking ahead into the future. … Last year, only one-third of our feeds had any DG; today, it’s half. In four to five years, that [growth] is going to be astronomical.”

“If you look at overall capacity, 80% of the DG installed throughout the [ERCOT] system by the end of 2016 will be dispatchable. We’ll have close to a gigawatt by the end of the year,” said Greg Thurnher, general manager for regulatory policy with Shell Energy North America. “We’re very interested in that gigawatt as it becomes very intelligent as far as price. You will have a comparable playing field for wholesale resources when they act as true resources … and have the ability to influence the price.”

Austin’s Pecan Street Project, a collaboration between the University of Texas at Austin, Austin Energy, city officials and industry and environmental representatives, has been testing DG’s “intelligence.”

“We can manage every single circuit in the house,” said the project’s engineering director, Scott Hinson. “It’s a rather granular management … air conditioning controls, creating an electric vehicle charging control, looking at solar controls … things as simple as pointing the solar panels west, so their peaking output is available later in the day.”

Renewables Key to Texas’ CPP Compliance

Participating in a panel discussing the Clean Power Plan’s potent effects on the Texas market, the Environmental Defense Fund’s John Hall said the state is already “90% closer” to compliance, thanks primarily to its abundant renewable resources. “We currently produce more wind power than any other state. We have more potential for solar, energy efficiency and demand response than any other state,” he said.

“From our perspective, the market in Texas and our vast, clean-energy assets are putting us in a position where the market is driving us to the use of clean-energy resources,” Hall continued. “We have an opportunity to take the massive clean-energy resources we have and we can significantly rebuild this economy.”

“There may be permanent coal-plant reductions that occur as a part of the Clean Power Plan, but fuel diversity is going to suffer,” said a more cautious Susana Hildebrand, Energy Future Holdings’ director of environmental policy. “It affects our power prices, because there may be a day where for whatever reason, you need coal or baseload plants to be available. Betting on the future of natural gas prices doesn’t always work out.”

Greg Sopkin, a partner with Wilkinson Barker Knauer, warned about increased costs to rural customers. “Urban areas have a lot more customers to spread around the costs,” he said. “If you’re talking about forcing a change on rural areas in a very short period of time by shutting down baseload plants, you’re looking at real, very significant costs.”

– Tom Kleckner