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United States

United States

CLEAN COMPETITION THE VITAL LINK

The huge Texas energy market is determined to retain its independence from federal regulation. Texas has excess capacity and transmission limitations reduce the potential for wind, but the desire to lower air pollution and ditch unprofitable plant is clear. Proposals for deregulation are shaping a market in which wind could fulfill its huge potential for niche application.

America's largest potential wind market is hanging in the balance. Texas -- a state blessed with good winds and a fierce desire for self determination -- is contemplating how best to deregulate its energy market, one of the most unusual in the U S. A legacy of non regulation has created a free-wheeling system where utilities have already competed head-to-head for customers in the same service area. This legacy of open markets could result in a new Texas energy boom, but based on development of clean, instead of dirty, power.

Already a number of Texas utilities are investigating wind. New World Power is moving forward with a 40 MW project selling power to Texas Utilities of Dallas. Central and South West Corporation, also of Dallas, is building a 6 MW facility with Zond Systems. And Kenetech Windpower is moving forward with plans to develop a wind project as large as 250 MW for the Lower Colorado River Authority, based in Austin.

Nicknamed "the Lone Star" state, Texas views itself as a nation and this isolationist view of the world, along with its oil industry dating back to the turn of the century, is reflected in the state's evolving energy policy. To understand what opportunities exist for new projects in Texas, it is necessary to recognise the state's uneasy relationship with regulators. Texas was, after all, the last state in the US to form a Public Utilities Commission in 1975. In fact, two nuclear reactors constructed in Texas -- the South Texas and Comanche Peak power plants -- were never officially permitted, or withstood any environmental impact assessment, by the Public Utilities Commission of Texas (PUCT).

Texas also has unique views on regulation by the federal government. It wants to avoid it at all costs. That is why most of the state's utilities belong to the Electricity Reliability Council of Texas (ERCOT), a group of utilities whose members have pledged not to sell excess capacity beyond the state's borders in order to avoid regulation by the Federal Energy Regulatory Commission (FERC). (The size of the market controlled by ERCOT is roughly equivalent to that of the UK). By not engaging in interstate transactions, these utilities are not engaged in interstate commerce, the justification for FERC's jurisdiction. Texas is the only state in the US where utilities are jumping through hoops to avoid regulation, an approach to energy policy, which for various reasons represents a major roadblock for wind developers.

To start with it has caused an over-building of power plants. If all the state's plants were up and running, they would produce 35% more power than Texans need. It is just one sign of the state's preoccupation with securing enough supply. Another negative for a potential wind market are transmission limitations imposed by ERCOT. Most of the wind resource is located in the barren expanse of west Texas, while "the markets for green energy are in central Texas," says Pat Wood, the 33-year-old PUCT chairman. Rural west Texas is a "cul de sac, a dark alley" in the words of Wood when it comes to transmission capability. Power can be exported, but only through a DC inter-tie to reach out of state markets. And wheeling power to central Texas is limited by the state's power surpluses.

Wood, nevertheless, vows to support reforms that could ultimately help the wind industry. "The key is to sop up the excess capacity by retiring our old plants," he says. He also pledges to open ERCOT to intra-state transactions, a change in market structure which would allow exports of wind power to other states within the next few years.

Controlled deregulation

Interestingly, Texas is pushing deregulation while simultaneously developing an integrated resource planning (IRP) process designed to encourage cost effective renewables such as wind power. Wood acknowledges "it is difficult to gracefully harmonise integrated resource planning and competition." Yet a few features of the state's new planning rules are noteworthy, not least a requirement for creation of local citizen advisory groups that can develop competitive solicitations earmarking portions of new capacity for wind power. This provision worked in favour of New World's project with Texas Utilities. When the PUCT questioned this 40 MW of clean power capacity, the local advisory insisted the project go forward because that is what the community wanted.

There is a strong tradition of local control of electricity policies in Texas since each city used to set its own electric rates before the PUCT was created. This could work in wind's favour as communities in rural areas, now hurting from the decline of the oil drilling business, look to new forms of local economic development. Nevertheless, Wood notes: "We don't have an explicit piece of statutory language that lets this commission select a wind farm over a gas turbine because it means extra jobs for Waco or West Texas."

Utilities are, however, instructed in a law passed in 1995 to develop a cost effective portfolio that considers "non-fuel resources." Yet another provision attractive to renewable developers is that projects under 10 MW need no PUCT certification. This exemption could foster small-scale "direct access" green pricing programmes, claims Wood. Though not an environmentalist, Wood endorses green pricing as a tool to integrate renewable resources into the Texas energy mix. "The strengths of most renewable technologies lie in niche applications," he points out.

Wood feels that renewables such as wind offer economic development benefits in West Texas. He intends to "smoke utilities out on the issue of green pricing" and get them to "go ahead and see if it works." Wood thinks efforts to promote clean power "go beyond letting one sleep better at night." There is also an economic benefit because customers are "pre-paying capacity costs" under green pricing programmes. "Variable costs will be zero and therefore rates will be less volatile," he points out. Among the key benefits of wind power is a predictable price path, he adds.

According to Wood, Texas is looking to learn from California's mistakes. Like the Pacific Northwest, the restructuring process is gathering input and developing principles before an actual proposal is on the table. "We are trying to re-orient the focus of integrated resource planning away from serving the vestiges of today's utility monopolies," says Wood. "We have the luxury of taking the best of both California and New England." He prefers the methodology proposed by the Conservation Law Foundation and New England Electric Service for stranded cost recovery (paying for old unprofitable plant) than the "lost revenues" approach proposed by the California Public Utilities Commission. "Sunk revenues deemed prudent will be recovered by utilities in Texas, but not O&M expenses or new transmission and distribution expenditures," Wood states. He argues that the fundamental political trade-off in any deregulation scheme is to allow utilities to recover stranded nuclear and fossil fuel power plant costs in exchange for allowing customers more choice of power suppliers.

Although wind developers are showing an interest in the restructuring of the Texas market, the biggest push for deregulation is coming from cogenerators. Though Texas ranks as the top state in installed cogeneration capacity, only about half of the power generated at these facilities is sold to utilities. As of 1991, 8295 MW was developed out of a potential for 17,000 MW, most of it concentrated by oil refineries located along the Gulf Coast. By 1996, only 1900 MW will have firm power sale contracts. "That means there will be 6000 MW of cogeneration looking for a buyer," observed Tom "Smitty" Smith, an analyst with civic lobby group, Public Citizen. Trying to find alternative buyers of this power is now driving the effort to open up the Texas market, he says. "Refineries want to sell power at the retail level to surrounding communities. They want to make cogeneration systems their new profit centres," he adds.

Riding on the coat tails of this immense potential for additional gas-fired cogeneration, are sun and wind, resources which are just as abundant. Texas reportedly has more renewable energy resources than any other states, save California. The wind blowing throughout the state could supply 10% of the entire demand of the United States for electricity, or over five times what Texans need. At present, however, Texas ranks at the very bottom of states in terms of renewable capacity currently on-line, according to a report by the Environmental Defense Fund entitled The Next Texas Energy Boom. "Less than half of one percent of the state's energy consumption -- one-fifteenth the national average -- is being supplied by renewables; only Kansas ranks lower," claims this report.

Perhaps the biggest targets for the wind industry are past investments in coal capacity. The 11 oldest and dirtiest coal plants on the system represent 16,000 MW of capacity. More than 153,000,000 tons of carbon dioxide spew from Texas utility plants and oil refiners. Though refinery contributions are larger at 44%, the utility power plant share of 29% is a major contributor to pollution in population centres such as Dallas and San Antonio. Here pollution levels do not comply with federal air quality standards.

Environmental and consumer groups in Texas have put forward principles that echo what their counterparts said during California's deregulation debate: direct access opportunities should be granted to all classes of ratepayers at the same time; restructuring should not result in any degradation in environmental quality; a renewable portfolio standard should establish minimum standards for a diverse mix of clean power options. Public interest advocates agree with large industrial consumers on the issue of stranded costs, maintaining that above market costs be shared between utility shareholders and consumers. However, they are also willing to provide a few carrots to utilities, such as allowing a higher degree of stranded cost recovery for utilities that voluntarily divest generation from transmission and distribution functions.

A report commissioned by the Public Utility Commission of Texas reveals how important stranded costs, particularly nuclear plants, are to opening up markets to clean power. The book value of nuclear power plants owned by four Texas utilities ranges from $2,700 to almost $4,400 per kW. These reactors represent a stranded investment of up to $15 billion, claims the report. The key conclusion of the report is that the quicker the transition to market, the lower the amount of stranded costs and the greater the economic benefits for ratepayers.

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