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Why is Texas the Model for Energy Deregulation?

energy deregulation

At the end of 1999, Texas and 22 other states started deregulating their electrical utilities. Since that time, Texas has successfully transformed from a typical state-regulated electric utility system to one that is 85% deregulated, allowing the bulk of its population to choose both their electrical service provider and a service plan that suits their lifestyle.

While only a handful of states have experienced problems implementing their versions of deregulation, all have regarded Texas as the model to follow. Why? Texas is the number one energy user in the country. Texas produces and consumes more electricity than any other state. And in spite of the sheer volume required to power up the state every day, Texas has made its deregulated electrical market succeed.

The Deregulated Energy Market

Ten years ago, Texas faced many of the same problems as the rest of the country under the regulated electricity system. The industry had stagnated, few power infrastructure improvements were being performed by the utilities to improve their efficiency in producing, transmitting, and metering electricity. Building new generation plants was often a slow, bureaucratic process because the utilities had to negotiate with state regulators over how to build new generation facilities and how to pass the expense on to consumers. Developments in green energy were under-funded and seldom progressed beyond the experimental stage. The utilities also had little incentive to improve service or innovate with emerging technologies because they had a monopoly: they were guaranteed a profit that pleased their stakeholders.

Throughout the country, however, more and more people demanded more and more electrical power. Already the second largest population in America, Texas is still among the fastest growing states and is expected to have 50 million by 2040. Houston, Dallas, and San Antonio are among the top 10 populated metropolitan areas in the country. The Austin area alone is expected to balloon to five times the current population over the next 30 years.

Texas is also the second largest economy in the United States (15th globally), with an annual output of over one trillion dollars. Unfortunately, Texas also emits 10% of total U.S. "greenhouse gases".

Growing concerns about climate change and the environment drove both state and federal governments to pass mandates for developing new green alternative energies. ERCOT has estimated that peak demand for Texas electricity has increased from 46,755 megawatts (MW) in 1990 to 62,339 MW in 2006 at about an annual rate of 2.5%. By 2030, demand will require between 60,000 and 80,000 MW of new electricity generation capacity.

State regulators, as well as industry experts, quickly realized that the regulated electric utility system lacked the agility to meet the needs of the 21st century.

Why Did Texas Succeed?

There are four reasons why the deregulated utility market succeeded in Texas.

1) Deregulation stimulated new investment in electrical generation to meet demand and add reliability. Where power companies once had to petition the state regulators for permission, they now build facilities when they see the potential for profit. In Texas, this led to an investment of over $25 billion in 39,000 MW of new generation and ensured that investors, not consumers, took the risk on the sale of all of that electricity. Most of this investment was in low-polluting natural gas-powered generation plants. Today, over half of Texas' electric power comes from natural gas. Texas produces 25% of the nation's natural gas and is the largest producer; storing and supplying natural gas via pipeline for all regions of the country.

The investment and building generation capacity also added something that Texas needed as a rapidly growing state: reliability. For example, on a hot July day, electricity demand in the ERCOT area can threaten to overload both generators and transmission lines. The result would be a blackout of large areas of the state. By building additional generators, more power can be generated to make up for system short-falls. Also, different generators can be brought on line to take over for generators that need maintenance or upgrades.

2) Restructuring has spurred the growth of more efficient, less-polluting electricity technologies. During the regulated utility years, innovation and alternative energy development languished, rarely moving beyond the demonstration phase. However, both the rising cost of energy production and concerns over the environment have spurred new development in co-generation, combined cycle generation, and green power. Nationwide, there is a huge demand for green power.

Customers are now more aware of greenhouse gases and climate change. Currently, more companies sell green power than ten years ago. This is not just because it is popular, but companies also see that green power sources are less expensive to operate in the long term than conventional systems. Two of the biggest innovations in green electrical power in Texas are wind and solar power.

Currently Texas leads the nation in wind-generated energy production with over 9,000 MW of installed wind energy. Over 2,000 wind turbines operate in the West Texas hills alone and the numbers continue to increase with development costs dropping and wind turbine technology improving. In 2007, Texas became the first State to reach the milestone of one Gigawatt of wind capacity installed in a single year. At 736 MW, the Horse Hollow Wind Energy Center in central Texas is the largest wind power facility in the world. Recently, the state finalized a plan for a 17,000 MW increase in wind capacity that will meet the federally mandated Renewable Portfolio Standard (RPS) years ahead of schedule.

In spite of the defeat in 2009 of a $500 million state legislature plan to develop solar energy in Texas, the interest in taking advantage of Texas sun is still shining. A University of Texas study found the state could generate up to 123,000 new jobs by moving aggressively toward solar power panel manufacturing and installation. Several groups are already lobbying the governor to aim for a plan to generate 1,000 MW of solar power by 2015 and 5,000 MW by 2025. In March, 2010, the Texas State Energy Conservation Office awarded the City of San Antonio, the University of Texas at San Antonio and St. Philip's College some $3.7 million in grants to invest in new solar distributed energy generation capacity. This will triple the amount of the area's solar power generating capacity to 600 kilowatt (KW). Finally, design improvements by two Texas companies, Exeltech and Entech Solar, both of Fort Worth, will make solar electric panels even easier to install on consumers' roofs.

3) Texas has transformed its electrical grid. Operation of the Texas grid has changed to maximize its efficiency and increase reliability. Neither had gotten off the drawing board during the regulated years. In fact, one hold over from those days is that the Texas grid is largely disconnected from the rest of the country and presents significant challenges supplying power to the grids of both Texas and the rest of the country. In spite of this, electric Transmission and Distribution Utilities (TDU's) have succeeded in lowering transmission costs, both in terms of getting power to market and in reducing consumer energy waste.

In 2008, the Public Utilities Commission of Texas (PUCT) set energy savings targets at 20% of load growth for Texas utilities in 2009. This means that if the increased demand measured 10 MW, Texas utilities had to save 2 MW through efficiency measures. To meet these goals, the TDU's administer incentive programs while Retail Electric Providers and energy efficiency service providers implement the programs. The programs are open to all customers and have the goal to reduce system peak demand, energy consumption and/or energy costs.

TDU's pay incentives or rebates to program participants for the installation of high efficiency equipment that produces measurable and verifiable demand savings. TDU's do not pay incentives directly to residential customers. Residential participants instead must go through a third-party sponsor for energy efficiency measures installed in their homes. Non-residential participants can act as self-sponsors and be paid directly for energy efficiency measures installed in their facilities or go through a third party.The programs have been very successful.

Between 1999 and 2006, energy efficiency programs have reduced peak demand by 756,000 kW and saved 2,005 million kilowatt hour (kWh) per year. Texas utilities reported efficiency program savings of 457,808 megawatt hours (mWh) in 2007.Wind power is cheap only if you can get it to market. In February, 2009, the PUCT assigned approximately $5 billion of transmission projects to be constructed in Texas' Competitive Renewable Energy Zones (CREZ). The CREZ power-line projects represents one of the largest power transmission improvement projects in the state's history. New transmission lines will be in service within four or five years, eventually transmitting 18,456 MW of wind generated power from West Texas to the power-hungry metropolitan areas of the state.

4) Deregulation dismantled the monopolies and introduced market competition. After all, a reliable and growing electricity system is all about managing supply and demand. So, instead of one company making power, transmitting power, and billing you for the power in a one-size-fits-all format, the electricity market integrates wholesale and retail competition. Generation is separate from retail. Because retailers and their customers can choose where they buy power from, power generating companies are forced to produce power more efficiently because they are competing with other generator plants in other counties -- and in some cases, even in other states. Retailers, meanwhile, have to be more efficient and careful in their purchasing and selling of power.

It is no secret that the Texas electricity deregulation process has been rocky. Part of the reason has been volatile fuel prices brought on by international political and economic turmoil over the years. However, markets don't guarantee the lowest possible prices. They do guarantee the best possible prices based on a customer's preference. Of course, when looking for the best price, be it groceries or gasoline, information is a consumer's best friend. In a deregulated market, consumers can save money on their Texas electricity bills by staying informed about their energy usage, their energy plan's pricing, and their energy provider's competitors. The quickest way to lower your electric bill might mean shopping around for a better deal.

Deregulation has delivered improved reliability to Texas' growing energy demands. The old regulated system never could have kept up. Because of deregulation, there are more generation developments and greener innovations that make power more efficiently. There is now more reliability in power transmission with efficiency cutting both waste and energy cost in Texas. And finally, market competition has stimulated generators and retailers to cut their costs to deliver better service at a lower price to consumers.

That's why all the other states are following Texas.

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