New peak demand forecasting model could alter debate over market structure in ERCOT

February 3, 2014

A new methodology for forecasting peak electricity demand in Texas – which shows demand may not grow as quickly or as much as previously thought – could significantly reshape the debate over the future of the state’s competitive electricity market.

In a preliminary report released Jan. 23 that reflects calculations from the new model, ERCOT predicted that demand would increase an average of 1.3 percent annually over the next decade. That is almost half of earlier estimates, which had increases of up to 2.5 percent. The forecast added that megawatt hours consumed would grow 1.8 percent per year, beneath previous projections of up to 2.4 percent.

The lower growth estimates are the result of changes in the data ERCOT uses to anticipate demand. According to the Houston Chronicle, the new model “relies less on certain economic statistics that (ERCOT) said are weaker predictors of power demand than they have been in the past.” Among the factors considered in the old model were employment levels and weather.

For its part, the grid operator explained the new methodology recognizes that the “relationship between economic growth and electric demand has changed in recent years.” In an effort to “decouple” the correlation between the two, it developed a “new load forecasting model that uses forecasted growth rates in customer accounts, or premises, to project future growth trends in each region served by the ERCOT grid.”

“The new forecast model will better capture the relationship between premise counts and specific economic factors, such as number of households, population, housing stock and regional trends, as well as the variations in energy use among residential, business and industrial consumers,” ERCOT added.

The changes, which have already been reviewed by the grid operator’s board, a stakeholder group, and a private global technology company, could substantially ease concerns over Texas’ ability to generate enough power to meet future demand.

Using the new calculations, the Chronicle found that ERCOT’s reserve margin would increase this year to 16.7 percent from 13.8 percent and by 2017 would be 17.9 percent, up from the previously forecast 10.5 percent. It would not be until 2019 that the margins fell to 13.6 percent, which is still nearly double the “bleak” 7.4 percent figure that had been forecast under the old model, the paper added.

In a research note issued Jan. 25, UBS Global Research said, “Using the latest demand projections would indicate supply is only ‘inadequate’ in 2020 – and even then, marginally shy.” It further observed that previous forecasts had reserves falling short as early as next year.

This is critical because ERCOT’s perceived difficulty in maintaining its target reserve margin of 13.75 percent has been a key driver in the debate over whether Texas’ current energy-only market should be scrapped in favor of a capacity market. Previous calculations had indicated the grid operator would be hard-pressed to maintain the target as early as 2015, fueling calls for a restructuring that would ensure the generation necessary to meet increasing demands brought on by the state’s economic growth and rising population. The new methodology indicates it would take until 2019 for the reserve margin to drop below the 13.75 percent target.

However, as the Fort Worth Star-Telegram reported, “(a) lower demand outlook would indicate the supply could also grow less and still maintain a good reserve margin.” That could impact potential changes in the market that the Public Utility Commission of Texas is discussing while at the same time fortifying the position of those who believe the existing structure is performing as intended.

Commissioner Kenneth Anderson, who opposes the capacity market, said he believes the numbers that emerged from the new model do in fact demonstrate the current structure is working.

“Total energy used is growing faster than the peak, which means our market is doing what it was designed to do and is becoming more efficient,” he said. “Our current market design is encouraging more efficient use of electricity. We are using as much, but at times other than peak.”

ERCOT said it plans to incorporate the new load forecast into its next Capacity, Demand, and Reserves report, which could be released by late February depending on additional input from its board and stakeholders.