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A substantial growth in wind generation in Texas has left a need for new baseload generation. However, a lack of the appropriate price signals and market uncertainty have left many market participants unwilling to transact for the long term, the panelists said.
The Electric Reliability Council of Texas, the grid operator for most of the state, operates an energy-only market, which is designed to spur investment through long-term forward contracts, with generators being paid only for the energy they actually produce.
Capacity markets provide payments to generators when units are available but are not called upon to sell into day-ahead or real-time markets. Capacity payments are for making capacity available; energy markets pay generators who are producing energy.
"Look at the low gas prices," said Terence Darby, managing partner at Energy Investors Funds Group. "The lack of a capacity market in ERCOT will hamper development."
Darby also said that low interest rates given the weak state of the economy create the perfect opportunity for developers to get new projects off the ground. "The money is out there for the projects that are well capitalized," he said.
Thus far, it appears ERCOT has fared well in an energy-only market, with healthy reserve margins expected through the next few years. However, as more wind generation comes online, some fear the dynamics might change.
ERCOT's installed wind capacity grew to 8,000 MW in 2008, up from less than 5,000 MW in 2007. In addition, the grid operator has said it is considering proposals for another 50,000 MW. And while only a portion of that likely will get built, the need for new conventional generation remains.
"You're going to need a lot of other conventional types of generation to balance out all the wind that's being developed," said Jason Satsky, energy group director at Credit Suisse. "Without a capacity market in place, it's a problem ERCOT, in particular, is going to have."
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