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2008 Texas State Energy Plan

Governor’s Competitiveness CouncilJuly 2008

Table of Contents

List of Figures 2

Glossary 3

Executive Summary 5

1. Introduction: Texas’ Energy Landscape and Challenges 111.1 StructureoftheTexasElectricityMarkets 131.2 WholesaleElectricityMarketsinERCOT 151.3 RoleofERCOTandTransmissionPlanninginMarketFacilitation 191.4 RetailElectricityMarketsinERCOT 201.5 Texas’FutureEnergyNeeds 241.6 Summary 25

2. Generation Policy 262.1 OverviewofInvestmentTrends 262.2 CurrentChallenges 282.3 RecommendedActions 38

3. Transmission and Distribution Policy 463.1 OverviewofInvestmentTrends 463.2 CurrentChallenges 473.3 RecommendedActions 49

4. Energy Efficiency and Demand-Response Policy 514.1 OverviewandPotentialBenefitsofEfficiencyandDSM 514.2 CurrentEnergyEfficiencyandDSMProjects 524.3 FuturePotential 554.4 CurrentChallenges 564.5 RecommendedActions 58

5. Retail Electricity Market Policy 595.1 OverviewofRetailMarket 595.2 CurrentChallenges 605.3 RecommendedActions 60

6. Texas Energy Workforce Competitiveness 626.1 ProjectionofWorkforceDemandbyKeyOccupations 626.2 WorkforceSupplyAssessment 626.3 WorkforceGapAnalysis 656.4 TexasWorkforceChallenges 666.5 RecommendedActions 686.6 SummaryofWorkforceStrategicDirection 69

7. Implementing the Energy Plan 70

8. Acknowledgements 71

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List of Figures

Figure 1 Texas’RegionalPowerGrids............................................................................................................13Figure 2 SenateBill7MarketStructure........................................................................................................14Figure 3 NewGenerationPlantsSince1995.................................................................................................15Figure 4 ERCOTInstalledGenerationCapacityMix.......................................................................................16Figure 5 Texasvs.U.S.ElectricityMix............................................................................................................16Figure 6 NaturalGasPrices1999-2008.........................................................................................................17Figure 7 GrowthofRenewableEnergyCapacityinTexas..............................................................................17Figure 8 WindCapacityasofMarch2008.....................................................................................................18Figure 9 ZonalMarketDesign........................................................................................................................19Figure 10 NodalMarketDesign.......................................................................................................................19Figure 11 ResidentialRetailElectricityOptions...............................................................................................20Figure 12 PercentageofResidentialCustomersServedbyaNon-AffiliatedREP............................................21Figure 13 AverageResidentialElectricityRatesforStatesHighlyDependentonNaturalGas........................22Figure 14 PercentageIncreaseinResidentialElectricityPricesvs.CommodityPrices...................................23Figure 15 ERCOTLongTermPeakDemandForecast.......................................................................................24Figure 16 ERCOTPeakDemandandSupplyForecast......................................................................................24Figure 17 ERCOTCapacityNeedswithReplacementofUnitsOver40YearsOld............................................25Figure 18 LocationofERCOTGenerationPlantsbyFuelType.........................................................................26Figure 19 ERCOTCapacityandEnergyMixbyFuelType.................................................................................26Figure 20 YearlyCapacityAdditionsbyFuelType...........................................................................................27Figure 21 AnalysisofNewGenerationAdditions............................................................................................29Figure 22 ImpactofGenerationAdditionsonPowerPrices...........................................................................30Figure 23 FuelandLevelizedCostsofVariousGenerationTechnologies........................................................31Figure 24 CO2EmissionsfromFossilFuelCombustionbyState,2005............................................................32Figure 25 ShareofCO2EmissionsbySector,2005..........................................................................................33Figure 26 ReductioninNOxEmissionsSince1999..........................................................................................34Figure 27 ReductioninSO2EmissionsSince1999...........................................................................................34Figure 28 ProjectedCO2PricesfromRecentEIAandEPAAnalyses................................................................35Figure 29 ImpactofCarbonRegulationonLevelizedCostofNewGeneration:$9 per MMBtu Scenario............36Figure 30 ImpactofCarbonRegulationonLevelizedCostofNewGeneration:$13.50 per MMBtu Scenario......37Figure 31 EffectsofWindCapacityAdditionsonWestZonePowerPrices.....................................................40Figure 32 WeightedAveragePriceofBalancingEnergybyERCOTZone.........................................................41Figure 33 RecentFederalCarbonRegulationProposals..................................................................................43Figure 34 ProjectedImpactofCO2PricesonCoalGenerationin2030...........................................................44Figure 35 NorthAmericanGridInterconnections...........................................................................................46Figure 36 RTOTransmissionInvestments........................................................................................................47Figure 37 CompetitiveRenewableEnergyZones(CREZ).................................................................................48Figure 38 WindCapacityScenarios.................................................................................................................48Figure 39 SummaryofTDUDSMProgramBudgetsfor2008..........................................................................53Figure 40 TexasDSMSpendingandSavingsRelativetoOtherStates,2006...................................................54Figure 41 ImpactonSystemPeakDemandofVariousDSMScenarios...........................................................55Figure 42 ProjectionofWorkforceDemandintheEnergyCluster..................................................................62Figure 43 CoreEnergy-RelatedKSAs...............................................................................................................63Figure 44 WorkforceDemand-SupplyMisalignmentintheEnergyClusterIndustryGroup...........................65

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Glossary

Acronym/Abbreviation Term ACEEE............................AmericanCouncilforanEnergyEfficientEconomy CCN...............................CertificateofConvenienceandNecessity CCS................................CarbonCapture&Storage CREZ..............................CompetitiveRenewableEnergyZones DR.................................DemandReduction DSM..............................Demand-SideManagement EE..................................EnergyEfficiency EILS................................EmergencyInterruptibleLoadService EOR............................... EnhancedOilRecovery ERCOT...........................ElectricReliabilityCouncilofTexas KSAs.............................Knowledge,skills,andabilities NRC............................... NuclearRegulatoryCommission PGC...............................PowerGenerationCompany PUC...............................PublicUtilityCommission PURA.............................PublicUtilityRegulatoryAct PV..................................Photo-voltaic QAP...............................QualifiedAllocationPlan REP............................... RetailElectricProvider RPS................................RenewablePortfolioStandard RRC................................ RailroadCommissionofTexas SBF................................SystemsBenefitFund SERC..............................SoutheasternElectricReliabilityCouncil SPP................................ SouthwestPowerPool SPS................................SouthwesternPublicServiceCompany STEM............................Science,Technology,Engineering,andMath SWEPCO........................SouthwesternElectricPowerCompany TCEQ.............................. TexasCommissiononEnvironmentalQuality TDU...............................TransmissionandDistributionUtility TEA...............................TexasEducationAgency TEF................................TexasEnterpriseFund THECB...........................TexasHigherEducationCoordinatingBoard THSP.............................TexasHighSchoolProject TWIC............................. TexasWorkforceInvestmentCouncil TWC............................... TexasWorkforceCommission WECC............................WesternElectricityCoordinatingCouncil

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Executive Summary

Texasroutinelytopsthelistofthebestplacestoliveandwork,andthebusinessclimateinTexasisconsistentlyrankedthebestinAmerica.TexasishometomoreFortune500companiesthananyotherstate,isthenumberoneexportingstateinthecountry,andcontinuestohaveaneconomythatoutpacestherestofthenation.Texaswelcomestheentrepreneurialspiritandrecognizesbusinessesthatbuild,relocate,orexpandinTexasbringjobsandprosperitytoallTexans.

InNovember2007,GovernorRickPerryestablishedtheGovernor’sCompetitivenessCouncilbyappointing29publicandprivatesectorleaders,andchargedthemtoidentifyissuesaffectingTexas’competitivenessintheglobalmarketplaceandtomakerecommendationsforhowTexascancontinuetoachievelong-termsustainedeconomicsuccess.AsnotedbyGovernorPerrywhenheestablishedtheCouncil:

To remain competitive in the 21st Century global economy, Texas must create a seamless system of opportunity and innovation, starting when young Texans enter grade school and continuing until they graduate from college, qualified for jobs that will keep our state at the forefront of the global market.

Becauseoftheattractivebusinessclimate,thequalityoflife,andtheimmenseopportunitiesofferedtoTexans,Texas’laborforceisgrowingtwiceasfastasthenationasawhole.Thepopulationofthestateisalsoexpectedtodoubleby2050.

This robust economic environment and population growth brings with it an increase in demand and thechallengeofmeetingtheenergyneedsof thestate.Duetoglobalmarketdemand, thecostsofall formsofenergy(includingnaturalgas,electricity,andgasoline)haveincreaseddramaticallyinthepastseveralyears,andTexanshavehadtodedicateagrowingportionoftheirhouseholdincometowardtheseincreasedcosts.Texascompanies,competingintheglobalmarketplace,alsoneedadequate,reliable,andreasonablypricedenergy.Withoutaccesstosuchenergy,theeconomicprosperityofTexasanditscitizensisthreatened.

Texasisatacrossroadsinplanningitsenergyfuture.ThisEnergyPlanproposesaroadmaptoguideTexastowarda futurewitha reliableenergy supply that isbalancedandcompetitivelypriced. It furtherproposes togiveresidentialcustomersthetoolstheyneedtobettermanagetheirenergyconsumption.

ThefuelmixusedtogenerateelectricityinTexasisheavilyweightedtowardnaturalgas.Texasproducersaredoingtheirparttomeetthisincreaseddemand.Theyhaveinvestedbillionsofdollarstoproducemorenaturalgas.TheBarnettShalegasfieldaloneisgeneratingthousandsofjobsandtensofbillionsofdollarsininvestment.Evenwith this increased investment by Texas producers, North American demand still far outpaces supply,resultinginhigherpricesforthiscriticalcommodity.

Texas’heavyrelianceonnaturalgashasresultedinsignificantlyincreasedelectricitycosts.Texas’competitivewholesalemarketisrespondingtothesefactorsbyattemptingtoprovideadiversemixofnewgeneration.Yet,inordertoreducetheimpactofnaturalgasonTexaselectricrates,asubstantialamountofnewnon-gasbaseloadgeneration (asmuchas25,000megawatts) is needed.However, becauseof thepending threat that federallegislationwillextortheavypenaltiesoncompaniesthatgenerateelectricitywithconventionalcoaltechnology,generationcompaniesare increasinglyreluctantto invest innewconventionalcoal-firedpowerplantsatthescalenecessarytopositivelyimpactpowerprices.

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Texashasestablishedastrong,competitiveelectricmarket.Allfuturechangestothecurrentstructureshouldbeevaluatedagainstthefollowingcoreprinciples:

State policy should continue to focus on providing reliable, competitively priced electric service to allcustomersbystrengtheningthecompetitivemarketplace,byremovingartificialbarrierstocompetition,andbyprovidinglegalandregulatorystabilitywithinthatmarket.

Statepolicyshouldnotartificiallyimpedeinvestmentintheelectricsectorbyprivatecompanies.Doingsowillhinderthedevelopmentandadoptionofnewtechnologies.

Inenactingtherecommendationsinthisplan,orinanyproposedlegislativeorregulatorychange,thestateshouldbemindfulof thecostssuchachangewill imposeonall residential,commercial,and industrialcustomers.

Statepolicyshouldcontinuetorecognizethatresidentialelectriccustomersneedtobeeducatedinordertomakeinformeddecisionsabouttheirenergypurchasingneeds.

State policy should recognize that a growing energy demand can be met either by increasing powergeneration, by encouraging energy efficiency and customer demand-response, or by a combination ofboth.

The state should not create newmandates for any particular generation technology, as poorly craftedsubsidies can have far-reaching and unintended consequences that may result in higher costs toconsumers.

Financialassistancefromthestateintheformoftaxincentivesorinnovationprizes,however,mayattimesbeappropriatetohelplowerbarrierstonewtechnologiesthatarenotyetcommerciallyviable,butsuchassistanceshouldbelimitedinscopeanddurationwithadefined,knowncosttotaxpayers.

ERCOT,underthedirectionofthePUC,shouldcontinuetooverseethemanagementofthegridandprovidethebasictransmissioninfrastructurenecessaryforcompetitioninthepowergenerationandretailelectricitymarketstoflourish.Withregardtowindrelatedtransmission,thePUCshouldcontinuetoberesponsiblefordevisingandimplementingacost-effectiveplanthatmaintainsreliabilityassoonaspossible.

Thestateshouldensurethatmarketabuseandmanipulationarenottolerated.

The state should guarantee that the electric grid is secure and redundant to the extent necessary tomaintainreliability.

ThestateshouldensurethattheK-12andhighereducationsystemsmeettheworkforceneedsofagrowingTexasenergymarket.

ThisplanapproachesthechallengesTexascompaniesandcustomersarefacingwithenergyinamultifacetedway.Itseekstoremoveanybarriersinthecompetitivemarketthatpreventsoundeconomicdecisions.Atthesametime,itcreatesincentivestoencouragethedeploymentofrenewableorcleanenergy.Italsorecognizesthe increasingly important role thatenergyefficiencydemand-responsewill play in reducing theamountofenergyused.

Inall,thisplanprovides37recommendationstoremovebarrierstofacilitatethemarketsolutionsandinnovationthatTexaswillneedtoaddressthesignificantchallengeofprovidingtheenergyneededtofuelTexas’vibranteconomy.Theserecommendationsare:

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Wholesale Market Recommendations:

Recommendation1:RecognizingthatthecombinationofincentivesandcompetitivemarketforcesinplaceinTexasresultedinmorerapidinvestmentinwindenergythaninanyotherstate,Texasshouldpromotethecompetitivemarketplacebyneitherincreasingnorremovingthemandatesforrenewableenergy.

Recommendation2:TheLegislatureshouldrepealthepresumptioninPURAinfavorofgas-firedplantsinordertoensurethatadiversemixofresourcesisdevelopedinTexas.

Recommendation3:Texasshouldnotinstituteanynewpowerplantpermittingprocesses,asthiswouldinsertcostlydelay,erectbarrierstoentry,andeliminatetheabilityforTexas’competitivemarketplacetorespondquicklytochangingmarketsignals.Legalandregulatorycertaintyiscriticalforthecompetitivemarketplace to function.Numerous states have lengthy and costly permitting processes forwind, andgas-andcoal-firedgeneration;Texashasavoidedthisbypermittingonlyemissionandwateraspectsofgenerationplants.

Recommendation4:ToencouragethedevelopmentofnuclearpowerinTexas,theTCEQshouldexpeditenecessarywaterandwastewaterpermitsassociatedwithnewnuclearpowerplants.WhilealldesignandsitepermitsresidewiththeNuclearRegulatoryCommission,ensuringthatthesestatepermitsdonotdelaydevelopmentiscritical.

Recommendation5:Thestateshouldestablishapartnershipbetweeninstitutionsofhighereducationandindustrytoresearchopportunitiesregardingtheentirenuclearfuelcycle,includingrecyclingspentfuel.Franceobtains75to80percentofitselectricpowerfromnucleargenerationfacilities,butintheUnitedStates,continueduncertaintyaboutnuclearwastedisposal remainsanongoinguncertainty fornuclearplantdevelopers,andexploringpossibilitiestorecyclespentnuclearfuelmayhelpresolvethisissue.

Recommendation6:Thestateshouldestablishaninnovationprizeorprizes,fundedwithprivate-publicrevenue,forthecommercializationoflarge-scaleenergystorage.

Recommendation7:ThePUCandERCOTshouldstudywhetheranadditionaloperatingreserveservicetohelpmanagethe intermittencyofwindenergyorotheralternativeenergysourceswouldbeacost-effectivesolutiontomorereliablyintegratingtheseenergyresourcestothegrid.Suchaservicecouldbeprovidedbyquick-startnaturalgasunits,demand-responsebycustomers,orstoragesolutions.

Recommendation8:Toencouragedevelopmentofnewsolarenergy,theTexasDepartmentofHousingandCommunityAffairsshouldamendtheirLowIncomeHousingTaxCreditApplicationQAPtoofferadditionalpointstoapplicantswhoinstallalternativeenergysourcesincludingsolarpanels,solarwaterheaters,orothersolarproductsintheirdevelopments.

Recommendation9:Thestateshouldprovideasalestaxexemptionforthepurchaseandinstallationofsolargenerationsystems.

Recommendation10:StatepolicymakersshouldbringaTexasperspectivetofederalcarbonpolicydebates.TexasneedstoparticipateactivelyinthecarbondiscussionandeducateWashingtondecisionmakersontheeconomicvalueofTexas’energyproductiontothenation.

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Recommendation11:Americanswillbearsignificantcosts,andTexanswillbearadisproportionateshareofthatcost,shouldthefederalgovernmentdecidetoimposedraconian,costlycarbonregulation.Retailcustomersshouldbefurthereducatedonelectriccompetition,efficiency,andthecostsandbenefitsoffuelmixchoices.Thestateshouldformaprivate-publicpartnershipamongindustrialandlargecommercialenergycustomers,petroleumandgenerationcompanies,chambersofcommerce,thePUC,theTCEQandtheRRCtoeducatethepubliconthecostofcarbonregulationtoTexans.ThispartnershipshouldinformitsworkbyconductingastudyhighlightingthecostofcarbonregulationversusenvironmentalbenefitstoTexans.

Recommendation12:Inordertoincentthedevelopmentofcleancoaltechnology,thestateshouldcreatea state innovationprize, fundedwithprivate-public revenue, for the large-scaledeploymentof aminemouthcleancoalgeneratingfacilitythatusesTexasligniteasitsprimaryfuelandcapturesnearlyallcarbonemissionforstorageundergroundoruseinenhancedoilrecoveryorothermarketdrivenbeneficialuse.

Recommendation13:Thestateshouldprovideafive-yearsalestaxexemptionfortheequipmentusedtocaptureandstorecarbondioxidefromfacilitiesthatuseTexasligniteasafuelsource.

Recommendation14:Texasshouldidentifyandresolvebarrierstoacceleratingdevelopmentofin-statenaturalgasassets,includingBarnettandothershaleassets.IssuesrelatedtotheproximityoftheBarnettshaletomajormetropolitanareasandtransportofgasfromtheregiontomarketsmustbeconsidered.Texasshouldalsoexploreanddeveloppartnershipswithotherjurisdictionstogainaccesstopotentiallyundervaluedresources.Aspartofthisexplorationanddevelopment,Texasshouldaddressthefederalbanonaccessingallonshoreandoffshoreresources.

Transmission and Distribution Recommendations:

Recommendation15: Inordertoproactivelyaddresstheadditionofsignificantwindcapacity, thePUCshouldexpeditiouslyconcludetheCREZproceeding,selectatransmissionplan,andissueneededCCNsforCREZtransmissionlines.Thecurrenttransmissiondevelopmentschedulemaynotallowforconstructiontocommencebeforethethirdorfourthquarterof2009.ThePUCshouldrapidlycompletetheremainingtaskssotransmissionconstructioncanbegininearnest.

Recommendation 16: The state should encourage onshore and offshore wind generation along theTexasGulfCoast.While thedevelopmentof theseresourcesshouldbebalancedwithconcerns relatedtomigratorybirdsandotherecologicalconditions,coastalwindresourcesappeartohavemuchsmallerincrementaltransmissionneedduetotheirproximitytotheexistingtransmissiongrid,andareexpectedtohaveenergyproductionthatmorecloselyalignswithpeakdemand.

Recommendation17:ThePUCshouldrequireERCOTandthetransmissionutilitiestostudydynamiclineratingsinWestTexastoshowavailabletransmissioncapacitymoreaccuratelyandallowformoreefficientuseoftransmissionfacilities.

Recommendation 18: The PUC should identify and resolve any legal or regulatory issues that preventthedevelopmentofmerchant transmission investments that couldprovideadditionalprivately fundedtransmission.

Recommendation19:TheGovernorshouldrequestthatthePUC,institutionsofhighereducation,ERCOT,andrelevantindustryevaluatenewconductorsandproposesiteswherethesetechnologiescouldprovidevalue.

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Recommendation 20: The Governor should direct the PUC to study whether alternate forms of rateregulationfortransmissionanddistributionutilitieswouldbeappropriatetomeetthesegoalsandidentifywhetheranystatutoryimpedimentsexisttoimplementingsuchregulation.

Recommendation 21: The state should partnerwith higher education institutions and corporations todevelopandpromoteadvancedtransmissionanddistributiontechnologiesandincentinvestmentintheresearchanddevelopmentofsuchtechnologies.

Energy Efficiency and Demand-Response Recommendations:

Recommendation22:ThestateshouldrequireTDUstodeployadvancedmeters,withanappropriatecostrecoverymechanismtoensurethatTDUsearnareasonablereturnonthis investment.ThePUCshouldhavetheauthoritytorequiredeploymentofadvancedmetersasrapidlyaspossible.

Recommendation23:ThePUCshouldensurethatERCOTincorporatesthemostcost-effectivemeansofensuring thatall retail customershave theoption tobe settledon15-minute intervaldata inorder toreceivethefullbenefitsofchangesinconsumptionbehaviorandgenerationfromsolarpanelsandotherdistributedsources.

Recommendation24: If thePUC study indicates a greaterpotential for cost-effectiveenergyefficiencyreductions, the state should raise the energy efficiency goals to the higher levels contemplated undercurrentlaw.

Recommendation 25: The PUC should incorporate additional messages about the benefits of energyefficiency,conservation,anddemand-responseprogramsintoitscustomereducationcampaign.ThestateshouldfullyprovisionthiscampaignusingtheSystemBenefitFund.

Retail Market Recommendations:

Recommendation 26: The state should resist efforts to re-regulate themarket and instead adopt therecommendationsinthisplan,whileretainingtheoversightofthePUCandERCOToverthemarket.

Recommendation27:ThePUCshouldrevisititscertificationrequirementsforREPsandevaluatewhethercurrentstandardsareadequategiventhesignificantchangeinnaturalgasandwholesaleelectricitymarketconditionssincemarketopening.

Recommendation28:ThestateshouldreinstitutefundingforthePUC’scustomereducationefforts,andtheGovernorshoulddirectthePUCto incorporatethetopicsaddressedinthisplan intotheeducationcampaign.

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Workforce Recommendations:

Recommendation29:Texasshouldcontinuetoinvestinprogramsdesignedtogenerateinterestinmathandscience.Thestateshouldincreasethescaleofsuccessfulprogramsthatproducequalifiedmathandscience teachers inorder to supportmore rigorousSTEMeducation.Acquaintingstudentswithenergyindustry career options through online tools will also enhance interest and engage learners in STEMfields.

Recommendation30:Texasneedstoincreasehighschoolcompletionratesandensurethathighschoolgraduatesarecollege-andworkforce-ready.Thestatemustadoptmodelcurriculaalignedwithcollegeandworkforcerequirementstoreachhigherstandards.

Recommendation31:Texasneedsto increasethenumberofpostsecondarygraduateswithknowledgeandskills thatmeet industryneeds.Thestateshouldencouragecollegesanduniversities toalign theirSTEMcurriculawithenergyworkforceneeds.

Recommendation32:Texasshouldimprovetheflexibilityofitstechnicaleducationandtrainingsysteminresponsetoindustryneedsacrossthestate,regardlessofserviceareaboundaries.Thestateshouldexaminewaystoallowcommunityandtechnicalcollegestodelivertrainingwhereemployeesareregardlessofthecollege’slocation.

Recommendation33: The state should continue the SkillsDevelopment Fund,which supports trainingprogramsthat responddirectly to theworkforceneedsofTexasemployers.This isaneffectivetool forhelpingtoretrainworkersandinmeetingtheneedsofindustryina“just-in-time”manner.

Recommendation34:Theenergyindustryshouldlooktothemilitaryanddecliningindustriestoexpanditsworkforce.Texasshouldworkwiththemilitarytoalignoccupationcertificationrequirementssothatre-trainingprogramsrecognizetheexistingskillsandtrainingofarmedforcespersonnel.Thestateshouldalsofocusonretrainingworkersfromdecliningindustriestoenabletheirtransitiontohigh-needoccupations.

Recommendation35:ThestateshouldcreateaWorkforceSupply-DemandDatabase.Texasneedsaccuratedatatoassessthecurrentandfutureworkforcegapsbetweensupplyanddemandinpriorityindustriesandoccupations.Thiswouldrequireacollaborativeeffortamongprivateindustry,theTHECB,theTWC,theTEA,andotherrelevantstakeholders.

Recommendation 36: The state should establish a Texas Center for Workforce Innovation andCompetitivenesstopromoteandsupportskillspipelineinitiatives.Theurgencyofskillspipelinechallengescalls forestablishingan intermediary that can facilitateworkforcepartnerships in supportofeconomicdevelopmentprioritiesinregionsacrossTexas.ThecentershouldhousestafffromtheTEA,theTWC,theTHECB,andtheTWIC.

Governance

Recommendation37:Thestateshouldcreateacouncilofmemberagenciesordesignateanofficialtaskedwithcoordinatingenergyfunctions.

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Section One: Introduction - Texas’ Energy Landscape and Challenges

The Texas electricmarket is like no other. Texas has sole jurisdiction over the electricitymarket in the vastmajorityofthestatebecause85percentofTexas’electricityusageoccursinanelectricgrid,ERCOT,whichliessolelywithinthestate.Therefore,Texasissubjecttolimitedfederaljurisdiction.ThisallowedTexastorestructurethewholesaleandretailelectricitymarketswithinERCOTcomprehensivelyandcohesivelyintoacompetitivemarketplace,overseenbythePUC.

Asaresultofthemovetoacompetitiveelectricmarket,Texashasseenanexplosionininvestmentingenerationfacilities,andiswidelyregardedashavingoneofthemostsuccessfulelectricmarketsintheworld.However,becausetheERCOTelectricgridliesentirelywithinthestate,Texashasalimitedabilitytoimportelectricityfromotherregions.Unlikeotherstatesthatrelyonneighboringregionstoprovidepowerinsteadofinvestinginnewgenerationfacilities,electricitydemandinTexasmustbemetbygenerationfacilitiesinTexas.ThesecompetitivemarketspositionTexaswelltocontinuetomeettheenergyneedsofagrowing,vibrantstatewithefficientmarket-basedsolutionsand investment.However,globalandnationalenergytrends,sincetherestructuringofthemarket,havesignificantlyimpactedtheelectricitymarketinrecentyears.

NaturalGasPrices—When retail competition started in2002, thepriceofnatural gaswasaround$2per MMBtu, leading to significantly lower electricity prices than during regulation. However, by June2008,thepriceofnaturalgasreachedarecord$11-12perMMBtu,andhasbecomeincreasinglyvolatile.Becausegenerationfueledbynaturalgasistypicallythe“marginal”orlastunitdispatchedinordertomeetdemand,itsetsthemarketprice.Thus,thenaturalgaspriceincreasehassignificantlyimpactedthepricesofwholesaleandretailelectricity,andtheincreasedpricevolatilityhasmadeitchallengingforTexanstoplantheirenergypurchases.

Carbon Regulation—Even though Texas has sought to create an environment for energy companiescharacterizedbylegalandregulatorycertainty,theprospectoffederallegislationtoregulatetheemissionsof carbon dioxide (CO2) and other greenhouse gases has created the single greatest uncertainty forcompaniesseekingtobuildgenerationfacilitiesinTexas.

This uncertainty is preventing the addition of low-cost generation that ultimately holds the greatestpotentialforreducingenergycostsinthestate.Coalisoneoftheleastexpensivesourcesofpower,andTexashasabundantligniteresources.Texas’energyfuture,perhapsevenTexas’abilitytocompeteglobally,isthreatenedbycarbonlegislation,eventhoughcarbonhasneverbeenrecognizedbyTexasorthefederalgovernmentasapollutant.

OilPrices—Oilpricesarealsoatrecordlevels,reaching$145perbarrelinJuly2008.WhileoilisnotusedtogenerateelectricityinTexastoanysignificantextent,gaspriceshavehistoricallybeentiedtooil.Highoilpricesalsoincreasetheeconomicpressureoncustomersandheightenmotivationtouseelectricityformeetingtransportationenergyneedswithplug-inhybridvehicles.

CostofBuildingNewGeneration—Significanttechnologicaladvancesarepositivelyimpactingthecostandefficiencyofwindturbines,combustionturbines,solarpanels,andothergenerationsources.However,therisingcostofbuildingmaterials(suchassteel,concrete,andcopper)haveincreasedtheexpenseofbuildingnew,capital-intensiveelectricitygeneration facilities, suchascoalandnuclearplants.Thishasmadealternativeenergytechnologiesmoreeconomicallyviable.

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Transmission—Transmissionanddistributionlinestransportelectricityfromgenerationfacilitiestoend-usecustomers.Texaspolicymakersunderstandtheneedfortransmissionexpansion,inordertoaccommodatedemandgrowth,tomaximizetheefficiencyandreliabilityoftheelectricgrid,andtoservethestate’svastwind resources. Although concerns have been expressed about the cost of new transmission, there isrecognitionthatthisinfrastructurewillofferaccesstoadditionalcleangenerationresources.

Retail Technology—Technological advances have been developed to empower consumers to becomemoreefficientusersofelectricity.Theseincludeadvancedmeteringsystems,higherefficiencyappliancesandequipment,andsystemsforautomaticresponsestomarketsignals.Thesedevicesmaybecomeevenmore important if transportationevenmodestlyswitchesfromoil toelectricity.Thesetechnologiesdo,however,haveup-frontcosts.

RetailPricingandPolicies—Retailcompetitionhasbroughtnewcompetitors,products,andservicestothemarketandpromisestobringforwardtechnologythatwillgiveresidentialcustomersthereal-timeability tomonitor their electricity usagewith the goal of reducing consumptionormoving it off-peak.However,risingnaturalgasandenergypriceshaveledsometoconcludethatrestructuringhasfailedtodeliveritspromisedbenefitstocustomers.Asaresult,proposalstore-regulatetheindustryareintroducedeverylegislativesession.Suchproposalscauselegalandregulatoryuncertainty,makingitmoredifficultforenergycompaniestogainaccesstocapitalmarketsand,ultimately,todeploythenewtechnologiesandproductsthatcouldenableelectricitycustomerstosavemoney.

Whiletheimpactofthesetrends isnotuniquetoTexas,theuniquenatureofTexas’electricitymarketsmayrequireTexaspolicymakerstoevaluatetheseimpactscloselyandimplementnewpoliciesandactionsthatwillfurtherimproveTexas’electricitymarketsandeconomiccompetitiveness.

Therearenoeasyanswerstotheenergychallengesofthenextseveraldecadesandthereisnosingle“silverbullet”tosolvetheproblemsofgrowingconsumptionfueledbythesuccessofglobalizationandconstrainedglobalenergysupplies.Rather,thequestionishowtomosteffectivelyandefficientlyprovidethediversemixofenergyresourcesneededforTexas’growingeconomy.

Manyotherstatesareaddressingthesechallengesbyadoptingcentralizedresourceplanningmechanismsandgovernmentaldictatesforspecificgenerationtechnologies.Suchattemptsinhibitmarket-basedsolutionsandcompetitivepressuresthataremorelikelytoprovidelong-termefficienciesandinnovation.Incontrast,becausethecompetitivemarketplaceinTexasisalreadyprovidingadiversemixofgenerationresources,thisplanseeksto identify and remove regulatory, legal, informational, and economic barriers that thwart efficientmarketresponsestotheenergyneedsofthestate.

Thisreportisorganizedintosevensections.TheremainderofSection1discussesthecurrentenergylandscapein Texas andprovides thebackground for thediscussion in thenext four sections concerning Texas’ energyfuture. Section2 focuseson the generation sector, identifies current challenges to thewholesale electricitymarket,discussestheimpactthatcarbonregulationmayhaveonTexas’abilitytomeetitsfutureenergyneedscost-effectively,andprovidesenergygenerationpolicyrecommendations.Section3addressesthetransmissionanddistributionsector,andprovidesrecommendationsforensuringthecontinueddevelopmentofitscriticalinfrastructure.Section4 identifies thepotential forenergyefficiency,demand-responseprograms,advancedmeteringdeployment,andsmartgridtechnologies,whichcanenablecustomerstohavemorecontrolovertheirenergyconsumptionandusagepatterns,andrevolutionizeportionsoftheretail,wholesale,andtransmissionanddistributionsectors.Section5discussesthefutureoftheretailelectricitymarketinthestate,andprovidesrecommendationstohelpensurethatallTexansareinformedabouthowtheyhelpTexas’energyfuture.Section6discussesworkforceneedsintheenergysectorandSection7addressesgovernanceissues.

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1.1 Structure of the Texas Electricity MarketsTexas’electricitymarketsarestructuredinamanneruniqueamongstates.Figure1showsTexas’fourregionalpowergrids.

TheElectricReliabilityCouncilofTexas(ERCOT)is the regionalpowergrid for themajorityofTexas,representing85percentoftheelectricitydemandinthestate,andcovering75percentofthegeographicareaofTexas. ERCOTincludesthe Dallas-Ft. Worth Metroplex, Houston,Austin,SanAntonio,CorpusChristi,andSouthTexas,includingtheRioGrandeValley.

ThemajorityoftheTexasPanhandle,includingAmarillo and Lubbock, and northeast Texasare located within the Southwest Power Pool(SPP),aregionalelectricgridthatalsoincludesOklahoma, Kansas, and portions of Arkansas,Louisiana,Missouri,andNewMexico.

Southeast Texas, including theBeaumont andPortArthurareas,islocatedintheSoutheasternReliability Council (SERC), which covers mostof the southeasternUnited States, except forFlorida.

El Paso is located in the Western SystemsCoordinatingCouncil(WSCC),apowergridthatcovers theUnitedStatesandpartsofCanadawestoftheRockyMountains.

In1995,theTexasLegislatureintroducedcompetitionintothestate’swholesalemarkets.Generationdevelopersnotaffiliatedwithelectricutilitieswerepermittedtoconstructandoperatenewgenerationfacilitiesandwereprovidedaccesstothetransmissionlinesofelectricityutilitiesinthestatetopermitthemtodelivertheirpowertowholesalecustomers.

SenateBill7,enactedin1999,continuedthetransitiontowardcompetitiveenergymarketsbyestablishingaframework,showninFigure2onthenextpage,toallowretailcompetitionintheelectricitymarket.Governingboardsofmunicipallyownedutilitiesandelectriccooperativesweregrantedtheauthoritytoelectwhetherandwhentoopentheirserviceareastocustomerchoice.1Retailcompetitioninthenon-ERCOTregions(SPP,SERC,andWSCC)wassubsequentlydelayedbyeitherlegislativeorPUCactionduetoconcernsabouttheviabilityofthewholesalemarketsintheseareas,anecessarypreconditiontoafairandlevelplayingfieldforcompetition.The investor-owned utilities in these areas (Southwestern Public Service Company (SPS), a division of XcelEnergy;SouthwesternElectricPowerCompany(SWEPCO),adivisionofAEPTexas;EntergyTexas;andElPasoElectricCompany)remainbundled,verticallyintegratedutilitiessubjecttofullregulationofratesandservicesbythePUC.NewgenerationfacilitiesrequireaCertificateofConvenienceandNecessity(CCN)fromthePUCpriortotheinclusionofthecostsofthefacilityinrates.

1 Todate,onlyNuecesElectricCooperativehaselectedtoenterretailcompetition.

Figure1:Texas’RegionalPowerGrids

ERCOT-ElectricReliabilityCouncilofTexasSPP-SouthwestPowerPoolSERC-SoutheasternElectricReliabilityCouncilWSCC-WesternSystemsCoordinatingCouncil

14

Within the ERCOT region, retail competition for customers of investor-owned utilities was implementedonJanuary1,2002.Themarketstructureforthisregionprovidedthattheformerly integratedutilitieswererequiredtoseparatetheirbusinessfunctionsintothreedistinctcompanies:apowergenerationcompany(PGC),atransmissionanddistributionutility(TDU),andaretailelectricprovider(REP).Thepowergenerationandretailelectricsectorsare,atthispoint,generallyunregulated,withpricesandinvestmentdecisionsdeterminedbytheforcesofcompetition.ThetransmissionanddistributionsectorremainsfullyregulatedbythePUC,withratessetonacost-of-servicebasisandopenaccessguaranteedtoallbuyersandsellersofelectricity.

Equalandnon-discriminatoryaccesstothetransmissiongridisvitaltothesuccessofbothwholesaleandretailcompetition.Withinthemajorityofthestate,theERCOTindependentsystemoperatorisresponsiblefortheday-to-daymanagementandoperationofthetransmissiongridtoensurethatallbuyersandsellershaveequalaccesstothegridandthatreliabilityismaintained.BecausetheERCOTpowerregionisentirelywithinthestateofTexas, theproductionandsaleofelectricity isnotsubject toregulationby theFederalEnergyRegulatoryCommission(FERC).WhileFERCdoeshavejurisdictionoverreliabilitystandardsandenforcement,theexistenceofasingleeconomicregulator(thePUC)placesTexasinauniqueposition.Texashasbeenabletodevelopacohesivemarketstructuretofosterwholesaleandretailcompetition,and,atleastwithintheERCOTregion,doesnotfacethehurdlesofmulti-statelicensingandpermittingthatcanoftensignificantlydelaynewgenerationandtransmissioninvestmentinotherpartsofthecountry.

ERCOT hasweak interconnectionswith neighboring grids. ERCOT has transmission capability of approx 800megawattstoSPPintheNorthandEastportionsofTexasthroughbi-directionalDCties,anda300megawattstietoMexico’sutilityComisiónFederaldeElectricidad(CFE).MostU.S.marketplaceshaveimport/exportcapabilityof20to25percentoftheirpeakdemandbutERCOThaslessthan7percentcapability.Assuch,developmentsexternaltoERCOTaffectERCOTpowerpricesinaverylimitedmanner.

Figure2:SenateBill7MarketStructureGenerationCompanies

TransmissionandDistributionUtility

RetailElectricProviders

EndUser

UnregulatedRates

RegulatedOpenAccess

UnregulatedRates

AffiliateREP

REP

REP

15

Asameansoffacilitatinggreaterinterregionaltransfers,threenewfacilitiesutilizing“switching”technologyarelocatedontheborderofERCOTandSPP/Entergy.Theseprojectsdonotsupplyadirectinterconnectionbetweenthemarkets;however,theunitsareallcapableofswitchingoutputfromoneregiontotheother.Intotal,thesethreeunitsaccountforanadditional2.9GWoftransfercapabilityintoandoutofERCOT.

IntheERCOTregion,alltransmissioncostsarespreadamongallcustomerswithintheregion.Underthisformofratemaking,allcostsoffullyintegratingnewgenerationtothegridbeyondtheinterconnectionpointarebornebyelectriccustomers.ThispolicyhasmadeTexasanattractiveplacetodevelopnewgenerationasdevelopersdonotfaceuncertaincostsinadditiontotheirowncapitalexpenditures.TheelectricutilitythatbuildstransmissionisrequiredtoobtainPUCapprovalbyobtainingaCCN.Theutility isrequiredtoprovideopenaccessservicetoeligibletransmissioncustomers,isallowedregulatedrightsofreturn,andisgrantedthepermissiontouseeminentdomaintoobtaineasementsfortransmissionfacilities.1.2 Wholesale Electricity Markets in ERCOTManyexpertsandfinancialanalystsviewthecompetitivestructureinTexasasasuccessfulexampleofwholesaleandretailcompetitiveelectricmarkets.TheERCOTmarkethasexperiencedunprecedentedinvestmentinthegenerationsectorsincerestructure,allattheriskandexpenseofthegenerationdevelopers.Totheextenttheownersofgenerationmakedecisionsthatultimatelyturnouttobepooreconomicchoicesoroperatetheirunitsinaninefficientmanner,theownersbeartheriskofforegoneprofitoraninadequatereturnontheirinvestment.Incontrast, inregulatedmarkets,ratepayersultimatelybeartheriskofconstructingandoperatingunitsandinefficienciesintheoperationsofautility’sgenerationfleetorcostlyinvestmentmistakesresultinhigherratesforcustomers.

Since 1995, over 37,000megawattsofnewgenerationhasbeenbuiltandiscurrentlyoperating in Texas, as shownin Figure3. Thevastmajorityofthisgeneration,over32,000megawatts, has been naturalgas – predominately efficientcombinedcyclegas turbines.2These units are advanced,high efficiency power plantsthat use less fuel than theolder,formerutilityownedgasgeneration on the grid, andhave led to the mothballingor retirement of these olderunits.

2 ThePUC.“NewGeneratingPlantsinTexasSince1995.”Map.PUC.7July2008<http://www.puc.state.tx.us/electric/maps/gentable.pdf>.

Figure3:NewGenerationPlantsSince1995

Bastrop&TravisCounties

BexarCounty

EctorCounty

ShacklefordCounty

Howard&MartinCounties

Nolan&TaylorCounties

Borden&ScurryCounties

GalvestonCounty

HarrisCounty

CalhounCounty

Ft.BendCounty

Kiowa,OK

ERCOTSPPSERCWSCC

Completedsince1995(37,063MW)Underconstruction(4,433MW)Announced(25,756MW)

16

This influx of new natural gas capacity has led to a fuelmixin Texas that, whenmeasured both on the basis of installedgeneration capacity andenergyproduced from that capacity,illustratesanextremerelianceonnaturalgas.Today,ERCOT’sinstalledcapacity,asshowninFigure4,is64.5percentnaturalgas.Naturalgasprovides46percentoftheenergyconsumedintheERCOTregion(50percentstatewide),asshowninFigure5.Incontrast,naturalgasaccountsforabout20percentoftheenergyconsumedintheU.S.

In any competitive commodity market, the market price isgenerallysetbythe last,or“marginal”unitofsupplyneededto satisfy demand, and electricity is no different. In ERCOT,naturalgas-firedgenerationisthemarginalsourceofelectricitygenerationinvirtuallyallhoursoftheyear,whichmeansbothwholesale and retail electricity prices are directly correlatedto natural gas prices. Even at the times when demand is atthe lowest (approximately 25,000 megawatts), natural gasgenerationisstillneededtomeetdemand.

Sincetheretailmarketopenedin2002,naturalgaspriceshaveincreasedsignificantly,andpriceshavebeenextremelyvolatile,rising from around $2 to $3 per MMBtu when the marketopenedin2002toabove$12perMMBtuinJune2008.Averagepricesfor2008areexpectedtobehigherthanthosein2005,whichreflectedthereducedsupplyresultingfromHurricanesKatrinaandRita.

Above:Figure4:ERCOTInstalledGenerationCapacityMix

Right:Figure5:Texasvs.U.S.ElectricityMix(GWh)

Coal20.3%

NaturalGas64.5%

Wind7.1%

Nuclear6.3%

Other1.1%

Water0.8%

InstalledCapacity2008

Coal49%

NaturalGas20%

Renewable9%

Nuclear20%

Other2%

U.S.

Coal37%

NaturalGas50%

Renewable2%

Nuclear10%

Other1%

Texas

Coal37%

NaturalGas46%

Renewable3%

Nuclear14%

Other0%

ERCOT

1�

Thesignificant increaseandheightenedvolatilityofnaturalgaspricessince2002isamajorchallengetotheelectricitymarketplaceinERCOT.Itisnotexpectedthatnaturalgaspriceswillreturnto2002levels.(seeFigure6)Rather,withtheneedtoaccessmoreexpensivesuppliesofgasinthefutureandincreasingLNGimportsfromabroad,pricesareexpected to remainhigh.Additionally,generatorsareexpected tobuildmorenaturalgascapacityincomingyearstofillexpectedcapacityshortfalls.Bythemiddleofthenextdecade,newnuclearandcoalplantshavethepotentialofloweringelectricityprices,butuncertaintyaboutpendingcarbonlegislationmaypreventtheadditionofanadequateamountofcoaltodramaticallyimpactprices.

In recent years, a substantialamount of wind energy hasbeen installed, primarily inWest Texas. This increaseis shown in Figure 7. Workremains to integrate largeamounts of wind. ERCOTmust have the tools andreserves to adequatelyhandle the intermittency ofwind generation. When windis produced, it generallydisplaces natural gas-firedgeneration, and sometimeseven coal, resulting in lowernatural gas consumption, andat times, lowering energyprices.

Figure6:NaturalGasPrices1999-2008$/MMBtu

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Figure7:GrowthofRenewableEnergyCapacityinTexas

2001 20042002 2005 2006 20072003

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Asofthefirstquarterof2008,Texashadinstalled5,317megawattsofwindcapacity,morethananyotherstate.Astate-by-statecomparisonisshownbelowinFigure8.In2007alone,Texasadded1,600megawattsofnewwindcapacity.ByMay2008,thetotalinstalledwindcapacityinTexasexceeded5,000megawatts,nearlysurpassingthelegislativemandatesetin2005,andERCOTcurrentlyprojectsthatasmuchas10,000megawattsmaybeoperatingbythespringof2009.Anadditional45,000megawattsareinvariousstagesoftheinterconnectionreviewprocess.3Thissurgehasbeendrivenbyhighnaturalgasprices,excellentwindresources,relativelyfewsitingissuesduetolowpopulationdensityinWestTexas,aviablewholesalemarketinwhichtoselltheenergy,and the state’s commitment tobuild the transmissionnecessary to exportwindenergy towhere it ismostneeded.With136,000megawattsofpotentialcapacity,Texashasthesecondlargestresourcepotentialinthecountry.4

Texashasalsoaddedgenerationfrombiomasstoitsfuelmix.CurrentTexaslawprovidesthatnewbiomassandlandfillgaselectricalgenerationiseligibleforrenewableenergycreditsunderTexas’renewableenergyportfoliostandard,leadingto20megawattsofnewbiomassand67megawattsofnewlandfillgascapacityhavingbeeninstalledsince1999.SignedbyGovernorPerryin2007,HouseBill1090providedforagrantprogramtoprovidesubsidiesofupto$20pertonforfarmers,loggers,andotherswhodivertsuitablebiomasswastetogenerationfacilitiesthatusebiomasstogenerateelectricity.Additionally,twocompaniesarecurrentlydevelopinglargerscalebiomasspowerplantsinEastTexas.However,thecapitalcostsofbuildingbiomassplantsarecomparabletonewcoalfiredpowerplantsandlimitedsuitablefuelwilllikelyconstrainbiomassenergytoarelativelysmallportionoftheoverallenergymix.

3 Kahn,Bob.“PlanningforTexas’EnergyFuture.”SenateBusinessandCommerceandSenateNaturalResourcesCommitteesHearing.SenateFinanceCommittee,TexasStateCapitolE1.036,Austin,TX.15Apr2008.7July2008<http://www.ercot.com>Path:News;ReportsandPresentations>

4 “U.S.WindEnergyProjects-Texas.”AmericanWindEnergyAssociation.31Mar2008.7July2008<http://www.awea.org/projects/projects.aspx?s=Texas>.

Source: American Wind Energy Association

Figure8:WindCapacityasofMarch2008

WA1,195

OR888

NV

ID75

MT165

ND345

SD98

NE73

KS465

TX5,317

OK689

CO1,067

WY349

UT1

NM496

AK2

CA2,484

MN1,299

IA1,295

MO163

AR

IL736

WI152

OH7

MI3 PA

294

WV66

TN-29

NY425

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19

1.3 Role of ERCOT and Transmission Planning in Market FacilitationERCOT,the independentsystemoperator inTexas, isoverseenbythePUC,andmanagestheflowofelectricpowertoapproximately20millionTexascustomersinordertokeeptheelectricgridreliable.TheelectricgridintheERCOTareaofthestateconnects38,000milesoftransmissionlinesandmorethan500generationunits.ERCOTalsoservesastheindependententitythatensuresseamlesscustomerswitchingandmanagesfinancialsettlementforthecompetitivewholesalemarket.

Electricity is unique among commodities in that it cannot currently be cost-effectively stored for later use.Thatmeansthesupplyanddemandofelectricitymustmatch inreal-timewithinrelativelysmall tolerances.ERCOTensures thatsupplyanddemandarematched in real-time,andoperatesmarkets toprocureneededenergyandreservestoensurethatreliabilityismaintainedevenifunexpecteddemandoccursorlargepowerplantstripoffline.Inaddition,ERCOTalsomanagescongestiononthegrid.Congestionoccurswheninsufficienttransmission capacity exists to allow the lowest cost providerof electricity todeliverypower to customers.Whenthetransmissiongridbecomescongested,ERCOTmaintainsthereliabilityofthegridbyinstructingpowerplantstochangetheiroutputlevelsinordertoroutepoweraroundthecongestion.

Undercurrentmarketrules,ERCOTmanagesthiscongestionintwoways.Forthemaincongestedtransmissionlines,themarketissegmentedinto“zones”,asshowntotherightinFigure9, andmarketparticipantswho schedulebetweenthesezonesbearthecostsofrelievinganycongestionthatemerges.ERCOToperatesmarketswheregeneratorsbidtoincreaseordecrease theiroutputbasedon theneedsofthesystem.Withinthesezones,ERCOTemployscommandandcontrolmechanismstoordergeneratorstoincreaseordecreasetheiroutput,withthecostsofresolvingthis“local”congestionbeingsharedamongallmarketparticipants.WhilethismodelhasallowedERCOTtomaintainreliabilityon thegrid, severalmajor shortcomingsof this approachhave become clear. In many cases, the price signals forgeneratorstorespondtoandoperateinwaysthatpreventcongestionfromoccurringsimplydonotexist,inlargepartbecausethecostsoflocalcongestionarespreadamongallmarket participants, irrespective ofwhether their actionscontributetothecongestion.Likewise,thereareinsufficientsignals to informERCOT as to themost effectiveway toresolve congestion.As a result, ERCOT is in themidstoftransitioning toanodalmarketplace, as shown inFigure10,whichisexpectedtodeliversignificantbenefitstothegridandmarketplacebyensuringthelowestcostdispatchof generation units, while cost-effectively managingcongestion.

Figure9:ZonalMarketDesign

Figure10:NodalMarketDesign

20

Ultimately,congestionisoftenbestaddressedthroughaddingnewtransmissioninfrastructuretothegrid.ERCOTconducts an ongoing transmission planning process to identify the grid’s neededupgrades. ERCOT annuallyreports their findings to the PUC, which ultimately approves the new transmission lines and their routes.Since2005alone,over2,500circuitmilesofnewtransmissionhasbeenaddedtotheERCOTpowerregion’stransmissiongrid,faroutpacingnewinvestmentanywhereelseinthecountry.FortransmissionprojectsintheERCOTpowerregion,thePUCistheonlyregulatorybodyinvolvedinthepermittingofthelines,andthePUChasenactedpoliciesandprocedurestoexpeditetheapprovaloftransmissionlinesdeemedcriticaltothegridbyERCOT.1.4 Retail Electricity Markets in ERCOTThecompetitiveretailelectricmarketinERCOTiswidelyviewedasoneofthemostsuccessfulelectricitymarketsintheworld.WhiletheimpactofhighandvolatilenaturalgaspricesonelectricitypricescontinuestocreatechallengesforcustomersandREPs,significantbenefitshavebeenachievedforTexascustomersandtheeconomy,sincetheopeningofthemarketplace.

One manifestation of Texas’ success since the opening of the retail market in 2002 is the proliferation ofconsumerofferings.DuetotheattractivenessofTexasasaplacetodobusiness,alltypesofcustomers(industrial,commercial,andresidential)maychoosefromalargenumberofREPsseekingtoprovidetheirenergyneeds.Inordertomanagetheirriskandcostofelectricity,customershaveawidearrayofproducts fromwhichtochoose, includingfixed-pricetermcontracts foras longasfiveyearsorproducts thatmoreclosely trackthereal-timeordaily energymarket. Larger customershaveoptions tomoreefficientlyuse self-generationanddemand-responsetoolstore-selltheirelectricitybacktothemarketattimesofhighdemandandenergyprices.Bothlargeandsmallcustomershaveoptionstopurchaseelectricityinamannerthatmeaningfullyimpactstheirenvironmentalconcernsandsensibilitiesthroughthepurchaseofrenewableenergyproducts.

Figure 11 shows the number ofnon-affiliated REPs and productofferings in each TDU territoryfor residential customers in earlyMay2008.TheAEPTexasCentralCompany territory, for example,had 30 providers offeringcustomers almost 100 differentproduct choices. These choicesinclude fixed- and variable-rateoffers, short- and long-termcontracts, and renewable energyoptions,withprices ranging from11.9 to 18.5 cents per kWh. Inordertogainandretaincustomers,competitivepressurescompelnon-affiliateREPs tooffer innovativeservicepackages,someofwhich includeenergyefficiencyproducts,demand-sidemanagement(DSM)options,andcustomereducationprograms.

Prior to restructuring, a fraction of such offeringswere provided to customers by the integratedmonopolyproviders. Further, in other stateswhere restructuring has taken place, the number of retail providers andproductshasdwindledtoafractionofwhatisavailableinTexas,becausepolicymakersrestrictedpricesoftheincumbentproviderstoalevelthatresultsinbelow-marketpricing.

TDUArea#ofNon-Affiliated

REPs

#ofProductOfferings

LowestPrice(cents per kWh)

AEP–TCC 30 99 11.9

AEP–TNC 29 95 11.1

Centerpoint 29 98 12.5

ONCOR 29 98 11.3

TNMP 27 90 11.5

Figure11:ResidentialRetailElectricityOptions

Source: http://www.powertochoose.org (May 8, 2008)

21

Shopping for electricityhas clearly proven popularwith customers, with over40 percent of residentialcustomers (50 percent ofresidentialload)andalmost70 percent of commercialand industrial customers,having switched theirservice to non-affiliatedREPs. Figure 12 showsthe share of residentialcustomers that haveswitched to non-affiliatedREP service in each TDUterritory, and its gradualbutcontinualupwardtrend.Commercial and industrialcustomers have embracedchange more quickly thanresidential customers. Thisisnotsurprising,giventhatthe cost of power is oftena major expense for suchcustomers.

Approximately80percentofresidentialcustomershavemadeobservablechoicesinthecompetitivemarket.Thispercentageincludesthosecustomersthathaveswitchedtheirservicetoanon-affiliatedREP,thosethathaveremainedwiththeiraffiliatedREPbutchangedtheirpricingplan,andthosethathaveoptedforservicefromanaffiliatedREPaftermovingtoanewareainTexas.Clearly,residentialcustomersareawareofelectricchoiceandareexercisingtheiroptiontochoose.

Thus,severalkeyhallmarksofcompetition—productchoice,priceoptionsandswitching—andthecontrolthathavingsuchproducts,prices,andchoicesprovidestotheconsumer,areallclearlyevidentinTexas.

No discussion of retail competition is complete without a discussion of whether prices are lower undercompetitionthantheywouldhavebeenundercontinuedregulation.In2006,inresponsetoarequestfromtheLegislature,thePUCperformedananalysisoftheratesthatwouldhavebeenchargedhadregulationbeenineffect,therateschargedbytheaffiliatedREPs,andthepricesofferedbythecompetitivemarketthrough2005.ThePUCconcludedthatevencustomerswhohadremainedwiththeaffiliatedREPspaidlowerpricesthantheywouldhaveundercontinuedregulation.Further,customersalsohadcompetitiveoptionsthatresulted inanestimatedsavingsof$800to$1440betweenJanuary2002andDecember2005.5

Unquestionably,hadnaturalgaspricesremainedlow,retailelectricitypricesinTexaswouldbeamongthelowestinthenation.Infact,aslateasApril2008,theaverageofallcompetitiveoffersintheeachservicearea,includinghigherpricedrenewableenergyandlonger-termfixedrateoptions,wascomparabletothelastrateschargedunderregulationin2001,eventhoughnaturalgaspriceshaveincreasedalmost300percentsince2001.

5 ThePUC.“ElectricityPricingonCompetitiveRetailMarketsinTexas”PUC.3Feb2006.7July2008<http://interchange.puc.state.tx.us/WebApp/interchange/Documents/32198_5_502558.PDF>

Figure12:PercentageofResidentialCustomersServedbyaNon-AffiliateREP

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Oncor Centerpoint TotalTNMPAEPTCC AEPTNC

Source: PUC Report Card on Retail Competition (Dec. 2007)

22

EvenwithTexas’relativedependenceonnaturalgasforpowergeneration,Texas’scompetitivemarkethaskeptTexas’priceforpoweramongthelowestofthestatesthatarehighlydependentongasforgeneration,asshowninFigure13.

Moreover,thereisstrongevidencethatthepriceofpowerhasbeenkeptdown,inspiteofhighergasprices,because of Texas’ competitivemarket. This is likely because competitive suppliers have hedged the volatilepriceofnaturalgas,andpassedonsuchbenefitstocustomersinordertodistinguishtheiroffersfromothers.Thisrichnessofofferingsprovidescustomerswithaccesstocreativityanddiversityintheirenergypurchasingdecisions,whichwouldnotbethecaseinatraditionallyregulatedframework.

Continuedincreaseinnaturalgasprices(toashighas$11to$12perMMBtuinJune2008)hascausedshort-termandvariableratepricestoincrease.SignificantdisturbancesinthewholesalemarketduringMayandearlyJune2008havealsocreatedchallengesforREPsandcustomers,especiallythosewhochosetorelyheavilyonthereal-timeorshort-termenergymarketsforsupply.WhilerecentchangestomarketrulesbythePUCandERCOTcombinedwith the transition toanodalmarketdesign in2009addresssomeof theseconcerns, theimpactofhighnaturalgaspricesmaycontinueforsometime.

Evenwith thiscontinuedrise innaturalgasprices,Texas’scompetitiveretailmarket iscontinuing toprovideoptionsforcustomersthatmitigatetheseseverepriceincreases.Whilenaturalgaspriceshaverisenalmost300percentsincemarketopening(asofJune3,2008),competitiveofferingsincludepricesthatarelessthana40percentincreasefromtheregulatedratesthatexistedattheendof2001,eventhoughTexas’heavyrelianceonnaturalgassetsthepriceofallfuelusedtogenerateelectricity.SeeFigure14onthenextpage.Ofcourse,notallREPscanprovidethelowestpricesandnotallcustomerssign-upwiththeREPwhohasthelowestprice,butoffersavailableinthemarketplacedemonstratewhatthecompetitivemarketwasdesignedtodo—todistinguishthosewhomakesmartbusinessdecisionsfromthosewhodonot.CustomersandREPswhochosetosecurelonger-termsuppliesoreffectivelyhedgedtheirriskwillhavewellpositionedthemselvesforthischallengingenvironment.

Figure13:AverageResidentialElectricityRatesforStatesHighlyDependentonNaturalGas

ME MA AK CA RI NV TX FL LA ME MA AK CA RI NV TX FL LA

2001 2007Averageof

lowestTexascompetitiveoffers=10.28

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TheothermainbenefitstemmingfromretailcompetitionhasbeenatangibleshiftofriskawayfromcustomertoREPs,powergenerationcompanies,andtheshareholdersofthesecompanies.Whilecustomersinregulatedmarketsenjoythebenefitofpayingtheaveragecostsofallfuelused(includingcoalandnuclearfuel)insteadof all energybeingpricedat the costof themarginal fuel (i.e.natural gas), these customersmustbear thefullriskofpayingforthecapitalcostsofthenewgenerationinvestmentneededtomeetdemand.Aswillbediscussedingreaterdetailinthenextsection,theincrementalcostsofnewcoal,nuclear,renewableenergy,orevennaturalgasgenerationnationwidearelikelytobefarinexcessofthecostsoftheexistinggenerationfleetincluded incurrentregulatedrates. Inregulatedmarkets, ratepayerswillberequiredtobearthefullcostoftheseinvestments,whereasincompetitivemarketssuchasERCOT,therisksofrecoveringthisinvestmentandareasonableprofitfallentirelyonthegenerationcompanies.

Assuch,allelectricitycustomersarelikelytoseesubstantialincreasesintheirelectricitycostsinthecomingyears,whetherthosecostdriversareincreasednaturalgaspricesorincrementalcapacityadditions.ThecompetitiveretailmarketinERCOT,however,willcontinuetoallowcustomersandREPstomanagethechangingcostfactorsandmorequicklyandefficientlyrespondtothesemarketdynamics.

Figure14:PercentageIncreaseinResidentialElectricityPricesvs.CommodityPrices(2000-2008)

* Lowest Retail Rate in TDU Service Territory

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1.5 Texas’ Future Energy NeedsSince1995,thecompetitivemarketinTexashasmettheneedsofthegrowingTexaseconomyprimarilythroughmarket-basedresponses.Asdiscussedearlierinthissection,over32,000megawattsofnew,efficientnaturalgas-firedgenerationwasinstalledinresponsetomarketforces.Additionally,marketforceshavemadeTexasthenation’sleaderininstalledwindcapacity.

IntheareasofTexasoutsidetheERCOTpowerregion,excesssupplybytheelectricutilitieshasbeendeclininginrecentyears.Assuch,someutilitieshavehadtopurchaseadditionalcapacityfromthewholesalemarkettobeabletocontinuetoservetheircustomersreliably,andseveralutilitieshaverequestedapprovalbythePUCtoconstructnewgenerationfacilitiestomeettheirdemandgrowth.

Texaswillcontinuetofaceasizableneedfornewgenerationresourcesinthenexttwodecades.Twomainfactorsdrivetheneedfornewcapacity:theexpectedgrowthinelectricitydemandintheregionandtheexpectedneedtoreplaceasignificantportionoftheexistinggenerationfleetduetoage.

Within its power region, ERCOT forecasts the peak demandwill grow at approximately 2 percent per yearbetweennowand2025,requiringanearly50percent increase in installedgenerationcapacitybythatdate,andaneedforbetween1,500and2,000megawattseachyearjusttomeetthisgrowthandmaintainadequatereservemargins.Theyear-by-yearforecastsareshowninFigure15.

Themarketcontinuestoaddadditionalgenerationresources inordertomeettheseneeds. In theshort term,ERCOTprojects thatadequatenewgenerationwillbeaddedtothegridinordertomaintaintheminimum12.5percentreservemarginneededtoensurereliabilityduringpeakperiodsthrough2013,asshownin Figure 16. Of the nearly 6,000megawatts of additional non-wind capacityexpectedtocomeonlineby2013,almost4,000megawatts,orovertwo-thirds,isnewcoalgeneration,withtheremainderbeingadditionalnaturalgas-combinedcycleandpeakingunits.Almost4,000megawattsofadditionalwindcapacityisalsoexpectedtobeonlineinthisperiod.

YearPeakDemandForecast

2007 63,794

2008 64,927

2009 66,247

2010 67,641

2011 68,964

2012 70,052

2013 71,454

2014 72,672

2015 73,908

2016 75,000

2017 76,420

2018 77,591

2019 81,622

2020 82,871

2021 84,363

2022 85,681

2023 87,015

2024 88,180

2025 89,883

Figure15:ERCOTLong-TermPeak

DemandForecast(MW)

Figure16:ERCOTPeakDemandandSupplyForecasts85000

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Beyond2013,itappearsthatthemarketwillcontinuetoprovideadequateresources,asthereareadditionalunitsinthefinalphaseoftheinterconnectionprocess,butcurrentlyawaitinganairpermitorfinalinterconnectionagreement.Theseadditionalresourcesrangefrom3,091megawattsin2009to19,068megawattsin2013.

ThisadditionalcapacitywillbeneededbecausethegenerationfleetinTexasisaging,asshowninFigure17.Approximately10,000megawattsofgenerationwithinERCOTiscurrentlyover40yearsold,withmanyoftheolderunitsbeinglocatedinmajormetropolitanareas.Over40,000megawattsofnewcapacitywouldbeneededby2017and75,000megawattsby2027tomeettheforecastedloadgrowthofthestateandtoreplacecapacityover40yearsold.6Evenifolderunitsstayonlineuntiltheyare50yearsold,20,000megawattsofadditionalnewcapacitywillbeneededby2017andalmost64,000megawattswillbeneededby2027.

1.6 SummaryThissectionhasprovidedanoverviewofTexas’currentenergylandscape.Thisdiscussionhasshownthebenefitsofthecompetitivewholesaleandretailmarketsandthesignificantchallengesthathaveemergedinthe lastseveralyears.Thenextsectionwilldiscusstheimpactofthesechallengesonthewholesaleelectricitymarket,andprovidethefirstsetofrecommendationsforenhancingtheabilityofTexas’energymarketstoadaptinthisdifficultenvironment.

6 ERCOT.“Long-TermPeakDemandandEnergyForecast.”ERCOT.May2007.7July2008<http://www.ercot.com>Path:News;ReportsandPresentations. ERCOT.“ReportonCapacity,Demand,andReserves.”ERCOT.May2007.7July2008<http://www.ercot.com>Path:News;ReportsandPresentations.

Figure17:ERCOTCapacityNeedswithReplacementofUnitsOver40YearsOld

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Section Two: Generation Policy

2.1 Overview of Investment TrendsAsdiscussedinthefirstsectionofthisreport,sincethewholesalemarketwasrestructuredin1995,significantnewinvestmentingenerationfacilitieshasoccurred,asnewcompetitorsenteredTexasseekingtocompeteintheelectricitymarket.(showninFigure18)Ofthe37,000megawattsofnewgenerationcapacityinstalledsince1995,thevastmajorityhasbeennaturalgas-firedgeneration.Wheninitiallyconstructed,thiscapacityprovidedalargeamountoflow-cost,environmentallyfriendlypowertoTexas,asthepriceofnaturalgaswaslessthan$3perMMBtu,andtheproductioncostoftheseunitswaslessthan$30permegawatts-hour.Atthetime,efficientcombined-cyclenaturalgas-firedgenerationwasthemostcost-effectiveoptionavailable.

This large addition of generation, while providing a reliableelectric grid for Texas, has increased the ERCOT region’srelianceonnaturalgas.Today, installedcapacity inERCOT is64.5 percent natural gas, (shown in Figure 19) and naturalgasgenerationprovides45.5percentofallenergyconsumedin the ERCOT region. Furthermore, natural gas generation isthemarginalsourceofelectricityproductioninvirtuallyeveryhour,whichmeansthatmarketprices inboththewholesaleandretailmarketaredirectlycorrelatedwithandimpactedbyincreasesinnaturalgasprices.

Figure18:LocationofERCOTGenerationPlantsbyFuelType

Figure19:ERCOTCapcacityandEnergyMixbyFuelType

CoalNaturalGasNuclearWindWaterOther

Dotsdonotreflectactuallocationoftheunitwithinthecounty.

Coal20.3%

NaturalGas64.5%

Wind7.1%

Nuclear6.3%

Other1.1%

Water0.8%

InstalledCapacity2008

Coal37.4%

NaturalGas45.5%

Nuclear13.4%

Other0.4%

Water0.4%Energy

Produced2007

Wind2.9%

Source: ERCOT

2�

Theadditionofnewnatural gas generationhas slowed, asnatural gaspriceshave increasedbyalmost300percentsincetheretailmarketopened.Ultimately,thesehighnaturalgaspricesshouldsendamarketsignalforgenerationcompaniestobuildnon-naturalgasfacilitiesthatarelowercost.Indeed,motivatedbyacombinationofTexas’renewableportfoliostandard,federalsubsidies,andhighermarketpricesresultingfromtheincreasesin the cost of natural gas, thousands ofmegawatts of wind generation have been installed inWest Texas.Whiletransmissionexpansionhaslaggedtheinstallationofwindfarms,windenergyhasdisplacednaturalgasgeneration,andthisspring,hasleadtosignificantlylowermarketpricesinthewesternpartoftheERCOTgrid.Additionally, generation companies in Texas are responding to thesemarket signals by attempting to buildadditionalcoalandnucleargenerationunits.Figure20belowshowstheannualactualandprojectedcapacityadditionsby fuel type.Approximately6,000megawattsofnewcoal capacity is expected to comeonlineby2015.WhilealargeandbeneficialadditiontotheERCOTgenerationmix,eventhisamountofcoalcapacitywillbeinsufficienttomeettheenergyneedsofTexas,asanadditional3,000megawattsofnaturalgasgenerationwillbeneededtomeettheshort termneedsofTexascitizens. In the longerterm,asizableamountofnewnuclearcapacityisplanned,9,000megawattshavebeenproposed;however,duetothelengthypermittingandconstructionprocess, it isunlikelytobeonlinepriorto2015.SuchinvestmentsillustratetheeffectivenessofTexas’competitivemarketplacetoincentadiversemixofgenerationresources.

Figure20:YearlyCapacityAdditionsbyFuelType(inGW)

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2.2 Current Challenges2.2.1 ImpactofNaturalGasPricesonEnergyPricesandInvestmentNeededtoMoveNaturalGasOff

theMarginWithsucha largeamountofnaturalgasgenerationmeeting theelectricityneedsofTexascustomers, theimpactofhighandvolatilenaturalgaspriceshassignificantlyincreasedthecostofelectricitysincethemarketopenedandmadeitmoredifficultforcustomerstomanageandplanfortheirelectricityusage.

ThepricevolatilityofnaturalgashasbeguntoleadTexasawayfromnaturalgasasagenerationsourceanddriveinvestmentinotherdirections,thoughsomeamountofadditionalnaturalgasgenerationislikelytobeneededintheshortterm.

Althoughcompaniesare investinginotherformsofgenerationsuchascoal,nuclearandwind,virtuallyallgeneration formshave their challenges,andTexas shouldproactively seek to removepotentialbarriers totheseformsofgeneration.Forexample:

Coal—Thecapitalcostsofbuildinggenerationplantshasincreasedgreatlyoverthelasttwotothreeyearsduetosignificantincreasesinthecostsofunderlyingmaterials,suchassteel,concrete,copper,andothermaterials.Sincecoalgenerationismorecapitalintensivethannaturalgas,increasesinmaterialscosthavehadagreatereffectontheoverallcostofgeneratingelectricityfromcoalthannaturalgasplants.Coalplantsalsofaceuncertaintiesrelatingtoenvironmentalregulation,includingcarbonregulation.WhilecoalplantscanpotentiallybeoutfittedwithtechnologytocaptureandsequesterCO2,suchtechnologyisunproveninutilityapplicationandaddssignificantcoststobuildingandoperatingcoalpowerplants.

Naturalgas—Texashasreliedheavilyuponnaturalgasinitsfuelmix.Naturalgasisrelativelyclean.Unlikebaseloadgeneration,suchascoalandnuclear,gas-firedplantscanberampedupordowninordertomeetfluctuatingdemand.Naturalgasplantscostlesstobuildthancoalandnuclearplants,althoughthecapitalcostofnaturalgas-firedplantshasincreasedduetotheunderlyingcostsofmaterials.Asnotedearlier,naturalgaspricesinthepastfewyearshaveincreasedgreatlyandhavebeenvolatile,resultinginhigherpricesforelectricity.

Nuclear—NonewnuclearunitshavebeenbuiltintheU.S.indecades.Nuclearemitsnocarbon,sotheuncertaintycreatedbypotentialfuturefederalcarbonlegislation,alongwithlowfuelcosts,makesitanattractive option. Significant incentives for new nuclear generationwere also recently adopted by thefederal government.However, thosepositive attributesmust bebalanced against a lengthy and costlypermittingprocess, capital costshigher thancoalplantsanduncertainty regarding federal governmentdecisionssurroundingwastedisposal.

Wind—Windenergybenefitsfromrecentimprovementsintechnology,high federal subsidies, zero carbon emissions, and no fuel costs.However, wind energy is produced intermittently, and wind farmsgenerallyproducepowerduringoff-peakhourswhendemandislowest.Substantialpenetrationofwindenergyintotheelectricgridislikelytocreate additional costs to ensure that adequate natural gas, storage,demand-response, or other technologies are online and available torespond to inherent largefluctuations inwindenergyproduction.Themostrobustwindsitesarealsousuallyinremotegeographiclocations,necessitatingsignificanttransmissioninvestmenttobeabletoefficientlymovethewindenergytothepartsofthegridwiththehighestdemand.

29

Solar—Solarenergybenefitsfromimprovedeconomics,theon-peaknatureofsolarenergyproduction,federalsubsidies,zerocarbonemissions,andnofuelcosts.However,thecapitalinvestmentcostsofsolarcentralstationgenerationandphoto-voltaicpanelsareextremelyhighandgenerationisintermittent.

Biomass—Biomass,includingwoodandlandfillgas,isanattractiverenewablegenerationoptioninTexasbecauseituseswastefromtheagriculturalandforestrysectors intheState.Asdiscussedearlier,Texaslawprovidesincentivesfornewbiomassandlandfillgaselectricalgeneration.Asaresultoftheincentives,biomassgenerationfacilitieshavebeenbuiltinTexas.Becausethecapitalcostsofbuildingbiomassplantsarerelativelyhighandbecausesuitablefuelsourcesarelimited,itislikelythatbiomassenergywillremainarelativelysmallthoughimportantportionoftheoverallenergymix.

Demand-SideManagement–Ifimplementedcorrectly,cost-effectiveDSMprogramscanbeaninexpensivealternativetothecostofbuildingnewgeneration,andprovidecustomerswithopportunitiestoreducetheirenergycosts.Asthecostofgenerationcontinuestoincrease,DSMbecomesamoreattractivewaytomanagedemand.

Ultimately,asignificantamountofnon-gasgenerationwillneedtobebroughtonlineinordertomovenaturalgasoffthemarginastheprice-settingsourceofgeneration.ICFInternational(ICF)conductedananalysisofavarietyofscenariosofnewnon-gasgenerationadditionstothemarketby2023,andcomparedpowerpricesineachscenariotothebasecase,theirresultsareshownbelowinFigure21.

Scenario Description GenerationMix(%ofenergyused)

Base 34%Gas,48%Coal,9%Nuclear,9%Renewables

Scenario1Base+24,000MWof

additionalwindgeneration32%Gas,46%Coal,9%Nuclear,13%Renewables


additionalwindgeneration30%Gas,39%Coal,9%Nuclear,22%Renewables


additionalnucleargeneration31%Gas,42%Coal,19%Nuclear,8%Renewables


additionalcoalgeneration26%Gas,57%Coal,9%Nuclear,8%Renewables





Figure21:AnalysisofNewGenerationAdditions

30

AsshowninFigure22,ICFconcludedthatthewindandnuclearcapacityscenarios(1-3)wouldnotappreciablychangethepowerprices,implyingthatgaswouldcontinuetobethemarginalfuelduringmostofthehours.Whilemuchlargeramountsofnewnucleargenerationwouldmoreappreciablyimpactprices,onlyalimitedamountofnucleargenerationislikelytobeabletocommenceoperationby2023duetothelengthyfederalpermitting process and construction time.Wind energy, due to its intermittent nature, does not produceenoughenergytoimpactpricessignificantly.

ICF found that the introductionof significantamountsof coal capacity (exceeding25,000megawatts)wasneededtolowerpowerprices,becauseonlytheintroductionofthatlevelofcoalcapacitywassufficienttomovenaturalgasgenerationoffthemargininalargenumberofhours.Whatthatmeansisthis:thereisadirectcorrelationbetweenthepriceofnaturalgasandthepriceofelectricityinTexasbecausenaturalgassetsthepriceofpower.Onlybyintroducinglargeamountsofnon-gasbaseloadgenerationintothefuelmixwouldTexasbeabletomovenaturalgasoffthemarginandremove it fromitspricesettingposition.Becauseoftheuncertaintycreatedbypotentialfederalcarbonlegislation,generationcompanieshavebeenreluctanttoconstructnewcoalfacilities,therebyeliminatingtheleastcostlyformofbaseloadgeneration.Asnotedabove,whilenuclearenergycouldeventuallyprovidesufficientcapacitytoremovenaturalgas-firedgenerationfromthemargin,onlya limitedamountofnewnucleargeneration is likely to comeon lineby2023,given thelengthyfederalpermittingandconstructiontimelinesassociatedwiththisgeneration.

Figure22:ImpactofGenerationAdditionsonPowerPrices

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2.2.2 CostsofNewConstructionICFandthePUCestimatedtheproductionandtotalcostsofthegenerationtechnologiesthatformthebulkofthefuelusedforenergynowtodetermineifthereareeconomicbarriersduetohighcapitalcostsfortheadditionof a largeamountofnuclear and coalfiredgeneration.7 Figure23 shows theseestimatesat tworangesofnaturalgasprices($9and$13.50perMMBtufornaturalgas)andcoalprices($1.80perMMBtuand$2.70perMMBtu)forthemajorbaseloadgenerationtechnologiesandwindenergy.

ThecostestimatesinFigure23includeICF’scurrentestimatesofthecapitalcostsforthevarioustechnologies,which are significantlyhigher than several years agodue to rapid increases in the costof steel, concrete,copper, andothermaterials.As a result of these cost increases, all generation technologieshavebecomesignificantlymoreexpensivetoconstructthanjustafewyearsago.Thisanalysisdoesnotassumeanyfederalor state subsidies for any technology. Existing subsidies can significantlyoffset someof the costsof thesetechnologies,butarenotincludedinthisanalysisbecauseoverthelongterm,thecontinuedexistenceofthesubsidiescannotbereliablypredicted.AsillustratedbyFigure23,pulverizedcoalisthelowest-costresourceoverthelifeoftheplantatcurrentfuelprices,suggestingthatabsentanybarriers,asubstantialamountofnewcoalgenerationwouldbeexpected.However,asdiscussedinthenextsection,thethreatofafederalCO2emissionstaxhascreatedasignificantmarketbarriertothiscost-effectivegeneration,assuchregulationwilladdsubstantialanduncertaincostsontocoal-firedelectricityproduction.Additionally,Texashasavaluableresource in its lignitedeposits,whichcompetes favorablywith Powder River Basin coal on a tonnage basis tomeet Texas’ coal demand. Texas’ligniteresource,itscoalcapacity,anditsabilitytorespondrapidlytomarketconditionsareallthreatenedbypotentialfederalcarbonlegislation,resultinginadverseimplicationsfortheTexascoal industry,generationcompanies,andTexaselectriccustomers,whoshouldhavetheabilitytobenefitfromanelectricsupplythatismademorediverseandcost-effectivewithcoalinthegenerationportfolio.

7 Solarenergyisnotshownbecausethecostsofthegenerationarestillsubstantiallyhigherthananyoftheotherresources.Biomassandgeothermalarenotshownbecauseoftherelativelylimitedapplicationsofthosetechnologies.

Figure23:FuelandLevelizedCostsofVariousGenerationTechnologies($perMWh)

GenerationType FuelCostsAverageCostof

Generation

NaturalGas-CombinedCycle($9perMMBtu) $64 $93

NaturalGas-CombinedCycle($13.50perMMBtu) $91 $120

NaturalGas-CombinedCyclew/CO2Sequestration($9perMMBtu) $70 $117

NaturalGas-CombinedCyclew/CO2Sequestration($13.50perMMBtu) $105 $146

PulverizedCoal($1.80perMMBtu) $16 $92

PulverizedCoal($2.70perMMBtu) $24 $101

PulverizedCoalw/CO2Sequestration($1.80perMMBtu) $24 $138

PulverizedCoalw/CO2Sequestration($2.70perMMBtu) $35 $150

IGCCCoal($1.80perMMBtu) $16 $128

IGCCCoal($2.70perMMBtu) $23 $136

IGCCCoalw/CO2Sequestration($1.80perMMBtu) $19 $154

IGCCCoalw/CO2Sequestration($2.70perMMBtu) $29 $163

Nuclear $5 $117

Wind(Intermittantresource) $0 $112

32

2.2.3 UncertaintyCreatedbyPotentialCO2RegulationFederal regulation of CO2 emissions has the potential to impose tremendous costs on Texas and restricttheabilityofthecompetitivemarkettoprovidethetypesofgenerationunitsthatwouldlowerthecostofenergy.

Texascompaniesproduce30percentofthenaturalgasconsumedintheU.S.and19percentoftotalU.S.oilproduction.Additionally,virtuallyallelectricityconsumedwithinTexasisproducedwithinthestateasopposedtobeingimportedfromotherregions.BecauseTexasproducessomuchofitsownenergyandexportssomeformsofenergytotherestofthenation,Texaswillbeadverselyaffectedbycarbonlegislationinadisproportionatemanner,muchmorethanstatesthatproducelittleenergy,oronesthatimportenergyfromotherstates,suchasCalifornia.Areasthathaveanabundanceofhydroelectricity,likethePacificNorthwest,willbesignificantlylessimpactedthanTexas.Figure24belowshowscarbonemissionsbystatein2005.Texasemittedjustover660milliontonsofcarbonin2005,11percent(almost6billiontons)oftotalU.S.emissions.

Figure24:CO2EmissionsfromFossilFuelCombustionbyState,2005(millions of Metric tons)

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Theselargecarbonemissionnumbersmustbeputintocontext.Asstatedearlier,TexasisthelargestproducerofnaturalgasconsumedintheU.S.,andproduces19percentofthetotaloilconsumedintheformofgasoline,jetfuel,andfeedstockforotherindustrialprocesses.Figure25abovecomparestherelativelylargerindustrialshareofTexas’carbonemissionstothatofotherpartsofthecountry.

Additionally,Texas’carbonemissionsreflect:(1)thelargeamountofmegawattsofelectricitygeneratedinTexas;(2)thestatepopulationandtherelativelyhighrateofelectricitydemandgrowthduetoTexas’growingeconomy;(3)Texas’climate,whichrequireslargeamountsofairconditioningandcooling;(4)theelectricityfuelmix,whichheavily reliesonnatural gasandcoal; (5) theheavy industrialoutputof the state,whichprovidesfortheproductneedsofthenation;and(6)alargetransportationsectorthatencompassestrucking,railroads,barges,airplanes,tankers,andautomobiles.

Figure25:ShareofCO2EmissionsbySector,2005

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Even without federalregulation, Texas hasproactively addressedmeans to lessen the state’selectricitygenerationfacilitiesenvironmental impact andindustrialoutput.Since1999,annual NOx emissions havefallen 22 percent from non-electricity generating unitsandbymorethan57percentfrom electricity generatingunits.Similarly,SO2emissionshave fallen by about 15percent from non-electricitygeneration facilities andmore than 22 percent fromelectricity generating unitsduring the same period.These comparisons aredisplayedinFigures26and27respectively.

These emissions reductionshavecomefromacombinationofproactivepoliciesadoptedbyTexas,aswellastheeffectsof Texas’ well-functioningcompetitive market, whichhas caused the retirementor mothballing of a sizablenumberofolder,lessefficient,andhigher-pollutingfacilities.

Driven by high naturalgas prices, excellent windresources, relatively fewsiting issues due to the lowpopulation density in WestTexas, a viable wholesalemarket in which to sellthe energy, and the state’scommitment to build thetransmission necessary toexportwindenergytowhereitismostneeded,Texashasledthenationinthedevelopmentand installation of thousandsof megawatts of new windgeneration.

Figure26:ReductioninNOxEmissionsSince1999

1999 2002 2005AllNon-EGUSources EGU

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TexashasalsobeenaleaderintheuseofCO2inenhancedoilrecovery(EOR)operationsandhasoneofthelargestCO2storagepotentialsofanystate.EORistheinjectionofCO2intooilwellsasameanstoincreasetherecoveryofadditionaloilatexistingwells.EORoperationshavebeenunderwayinthePermianBasinofwestTexassince1972,duringwhichtime,over55milliontonsofCO2havebeeninjected.8Texas’futuregenerationmixisimpactedbythethreatofcarbonregulation,causingmarketreluctancetoaddthequantityofcoalgenerationthatcouldmeaningfullylowermarketprices.Shouldthefederalgovernmentenact draconian and costly carbon regulations, certain typesof generationwill effectively bebarred fromconstruction,unlesscostlycarboncaptureandsequestrationtechnologiesareaddedtotheplants.

Figure 28 presents the CO2 emission allowanceprice forecasts for theMcCain-Lieberman and Lieberman-Warner bills, as evaluated by Energy Information Administration (EIA) and the Environmental ProtectionAgency(EPA).Thepriceprojectionsaredrivenbyseveralkeyassumptions,includingtheavailabilityofnewtechnologies(especiallynewnuclearplantsandcarboncapturetechnologies),theextentofelectricdemandgrowth,theavailabilityofoffsets,andnaturalgasprices.9

8 Han,W.,B.McPherson,andF.P.Wang.“CO2SequestrationinthePermianBasinSACROCNorthernPlatform,Siteof35YearsofCO2Injection.”AmericanGeophysicalUnion,FallMeeting2006.Abstract#H21A-1356.Dec2006.7July2008<http://adsabs.harvard.edu/abs/2006AGUFM.H21A1356H>.

9 TheCO2allowancepriceimpactsdescribedabovearenotnecessarilyreflectiveofICF’sowninternalCO2forecast.ICF’sCO2priceforecastsaregenerallylowerthanthoseshowninFigure28.

Figure28:ProjectedCO2PricesfromrecentEIAandEPAAnalyses2005dollars/TonCO2

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36

ThecostofCO2emissionregulation,whethersuchregulationisaccomplisheddirectlythroughacarbontaxorindirectlythroughacap-and-tradeallowancescheme,willplayasignificantroleinthedevelopmentandadoptionofgenerationtechnologies. ICFandthePUCanalyzedthepotential impactonthecostestimatesshowninFigure23forarangeofcarboncostscenarios.Figure29aboveshowstheresultsassumingnaturalgaspricesreturntoa$9perMMBturange.Again,thisanalysisdoesnotincludeanypresumedlevelofstateorfederalsubsidiesforspecificgenerationtechnologies,nordoesitpresumethatcertaintechnologieswillbepreferentiallyallocatedCO2allowancesorotherwiseexemptedfromtheregulation.Windpowerisshownforreference,butisnotdirectlycomparabletotheothertechnologiesbecauseofitsintermittentnature.

At$9/MMBtunaturalgasprices,coal,andnaturalgas-combinedcyclegenerationtechnologiesarethemostcompetitive.Atapproximately$30pertonofCO2,coalbecomesmoreexpensivethannuclearpower.Naturalgas-combinedcycleplantsaretheleastexpensiveoptionuntilcarbonpricesreach$60pertonofCO2whennuclear becomes more competitive. All carbon sequestration technologies remain more expensive thancombinedcycleandnuclearatcarbonlevelsevenashighas$100perton.

Figure29:ImpactofCarbonRegulationonLevelelizedCostofNewGeneration:$9perMMbtuScenario

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Whileitisperhapscounter-intuitivethatnaturalgasgenerationremainsalow-costoptionevenatthisrelativelyhighnaturalgasprice,thesignificantincreaseincapitalcostsforcoalandnuclearplantshaserasedsomeofthefuelcostbenefitsoftheseresources.BecausenaturalgasgenerationproducesroughlyhalftheCO2emissionsofcoalgeneration,theincreasedcostofcarbonregulationhasasmallerimpactonnaturalgasgeneration.ThisanalysisdoesexplaincurrentgenerationdevelopmenttrendsinTexas:withcarboncostsinthelow-to-midrange($20to$40perton),allofthemaingenerationtechnologies(naturalgas,nuclear,pulverizedcoal,andwind)allconvergeatroughlythesametotalcost.Thus,onewouldexpectthatthemarketwoulddevelopamixofresources,asitisdoing.

Figure30showsthesameanalysis,butassumesa50percentincreaseinthepriceofnaturalgas(to$13.50perMMBtu)andcoal(to$2.70perMMBtu).

Atnaturalgaspricesof$13.50perMMBtu,ifthereisnocarbonregulation,naturalgasbecomesalessattractiveresourceaspulverizedcoalissignificantlycheaperthannaturalgasandnuclearpoweriscostcompetitivewithnaturalgas.Ascarboncostsincreaseto$20perton,nuclearbecomestheleastexpensiveoption.UnderveryhighcostsforCO2emissions,naturalgas-combinedcycleplantsandnucleargenerationremainthetwoleastexpensivenon-windoptions.

Figure30:ImpactofCarbonRegulationonLevelelizedCostofNewGeneration:$13.50perMMbtuScenario

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Figures29and30,alongwithFigure22, clearly illustrate that the threatof carbon regulation ismaking itexceedinglydifficultforthecompetitiveelectricmarketinTexastodevelopthelow-costresourcesnecessarytolowertheendusecustomers’costofelectricity.AlthoughTexas’competitivemarketislikelytoprovetobemuchmoreadeptatrespondingquicklytotheserapidlychanginganduncertainmarketconditions,thereisnodoubtthatthisuncertaintycomesatacosttoTexasconsumers.Regulatedmarketsarelikelytomovemoreslowly,thusinsertinglagandtheunavoidablecostassociatedwiththatlag.Additionally,inregulatedmarkets,onceregulatorsapproveanewgenerationfacility,therisksthataninvestmentwilllaterprovetobeanunwisechoiceduetochangingmarketconditionsortechnologicaladvanceswillgenerallybebornebyratepayers.

However,Texasmustensurethatbarrierstoconstructingnewgenerationareaslowaspossibletofacilitateaquickmarketresponsetothischallengingenvironment.TheremainderofthissectionwilldiscusstargetedproposalstolowerthesebarriersandfacilitatethemostefficientmarketresponsetoTexas’energyneeds.

2.3 Recommended Actions2.3.1 Cost-EffectivelySlowtheRateofDemandGrowthAsseeninFigures23,29,and30,allcapacityadditionsarelikelytobesignificantlymoreexpensivethanjustafewyearsago,duetorisingfuelandcapitalcosts.Thethreatofcarbonlegislationanduncertaintyaboutitspotentialcostcreatesawiderangeofpossibleoutcomeforthemarketplacetoevaluatewhenmakingnewgenerationinvestmentdecisions.Carbonregulationislikelytocreateadditionalupwardpressureonelectricityprices,evenbeyondtheactualcostsofCO2emissions,asvirtuallyeveryinputtobuildingpowerplantsislikelytobecomemoreexpensive.Finally,draconianandcostlyCO2regulationwill likelycauseadditionaldemandfornaturalgas,givenitsrelativelylowCO2emissions,whichwillincreasethepriceofnaturalgas,causinganincreaseinthemarketpriceforelectricityinTexas.

Becauseofthesefactors,Texasis likelytobenefitfromadditionalenergyefficiencyandDSMthatslowtherateofdemandgrowthandshiftenergyusagetooff-peakhourswhereexistingcapacitysitsidle.ThisissueisaddressedingreaterdetailinSection4ofthisreport,asarespecificrecommendations.

Evenwithreduceddemandgrowth,Texaswillstillneedadditionalgenerationtomeetthedemandgrowthandtoreplaceoldgenerationunits,someofwhichmaybeforcedintoearlyretirementbycarbonregulation.

2.3.2 AllowtheMarkettoContinuetoProvidetheMostCost-EffectiveMixofResourcesWhilemanywillsuggestthattheanswertotheseenergychallengesistodictateormandateinvestmentsincertaingenerationtechnologies,suchmeasuresarelikelytoonlyfurtherincreasecoststoconsumersorhaveunintendedconsequences.Increasingenergypriceswill,asanormalfunctionofmarkets,createincentivesforcustomers,generators,andREPs tofind the lowestcost resources tomeetdemand, includingcreatingincentivesforinvestmentsinalternateenergyresourcesthattodaymaynotbeeconomic.Additionally,marketswillrespondtobringtechnologicaladvancementsmuchfasterthanregulatorsorlegislativebodiescan.

Asanexample,Texascurrentlymandates,throughaRenewablePortfolioStandard(RPS),that5,880megawattsofrenewableenergybeprovidedby2015andsetsatargetof10,000megawattsby2025.Oftheseamounts,500megawatts is set aside tobe supplied fromnon-wind sources. Texas is expected to exceed the initialmandatebeforetheendofthisyear,ifithasnotalreadydoneso,andwillunquestionablyexceedthe10,000megawattsgoalwithinafewyears,farinadvanceofthegoalssetbythelegislature.Somehavesuggestedthat,becausethemarketisdrawingsomuchinvestmentinwindgeneration,themandateisunnecessaryandshouldberemoved,whileotherssuggestincreasingtheRPS.Increasingthemandateisunnecessaryinlightofthesignificantinvestmentcurrentlytakingplace.Removingthemandateaddsanequallevelofuncertaintytoamarketthatisfunctioningwell.

39

Tomeet theenergychallengesof the state,Texas shouldallow themarketplace todrive investment inallformsofgenerationresourcesandnonewtechnology-specificmandatesshouldbeimplemented.Amandaterequiringonetechnologymayserveasadisincentivetootherequallybeneficialtechnologies,andislikelytoraisecoststocustomersandbusinessesinthestate.Mostimportantly,theTexascompetitivewholesalemodelisworkingtobringdiversenewgenerationinvestmenttothestateandanynewpoliciesshoulddonoharmthroughcreatingunnecessaryregulatoryandlegislativeintervention.

Texascurrentlyhasarequirementthatacertainpercentageofnewgenerationinstalledinthestateafter1999benaturalgas-firedgeneration.Sucharequirementisaninappropriatepreferencetoaparticulargenerationtechnology, especially given the increase in natural gas prices that has occurred since thepassageof thisprovision.

Recommendation1:RecognizingthatthecombinationofincentivesandcompetitivemarketforcesinplaceinTexasresultedinmorerapidinvestmentinwindenergythaninanyotherstate,Texasshouldpromotethecompetitivemarketplacebyneitherincreasingnorremovingthemandatesforrenewableenergy.

Recommendation2:TheLegislatureshouldrepealthepresumptioninPURAinfavorofgas-firedplantsinordertoensurethatadiversemixofresourcesisdevelopedinTexas.

Recommendation3:Texasshouldnotinstituteanynewpowerplantpermittingprocesses,asthiswouldinsertcostlydelay,erectbarrierstoentry,andeliminatetheabilityforTexas’competitivemarketplacetorespondquicklytochangingmarketsignals.Legalandregulatorycertaintyiscriticalforthecompetitivemarketplace to function.Numerous states have lengthy and costly permitting processes forwind, andgas-andcoal-firedgeneration;Texashasavoidedthisbypermittingonlyemissionandwateraspectsofgenerationplants.

2.3.3 RemoveBarrierstoAddingNewNuclearGenerationAsnotedthroughoutthisEnergyPlan,theTexaswholesalemarketshouldcontinuetoincentprivateinvestmentinadiversegenerationportfolio.Nuclearpowerplaysanimportantroleinprovidingnecessarydiversityandisunaffectedbytheuncertaintysurroundingfederalcarbonlegislation.Althoughjurisdictionovernuclearissueslargelyresideswiththefederalgovernment,TexascanassistinthedevelopmentofnewnuclearfacilitiesbyensuringthatanypermittingdonebyTexasisdoneinatimelymanner.

Recommendation4:ToencouragethedevelopmentofnuclearpowerinTexas,theTCEQshouldexpeditenecessarywaterandwastewaterpermitsassociatedwithnewnuclearpowerplants.WhilealldesignandsitepermitsresidewiththeNuclearRegulatoryCommission,ensuringthatthesestatepermitsdonotdelaydevelopmentiscritical.

Fordecadesnow,thefederalgovernmenthasfailedtoprovidepotentialnucleargenerationinvestorswithcertaintyregardingnuclearwastedisposal.TexasA&MUniversityhasmoreexpertiseintheareaofnucleargenerationthananyotheruniversityintheUnitedStates.Texasshouldnotcontinuetowaitforthefederalgovernmenttofulfillitsobligationinthisarea,butshouldinsteadtakeadvantageofthestate’sexpertisetoresearchopportunitiesregardingtheentirenuclearfuelcycle.

Recommendation5:Thestateshouldestablishapartnershipbetweeninstitutionsofhighereducationandindustrytoresearchopportunitiesregardingtheentirenuclearfuelcycle,includingrecyclingspentfuel.Franceobtains75to80percentofitselectricpowerfromnucleargenerationfacilities,butintheUnitedStates,continueduncertaintyaboutnuclearwastedisposal remainsanongoinguncertainty fornuclearplantdevelopers,andexploringpossibilitiestorecyclespentnuclearfuelmayhelpresolvethisissue.

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2.3.4 AddressBarrierstoGrowthintheWindIndustry,WhileReliablyIntegratingWindintotheGridTexashasexperiencedunprecedentedgrowthinthewindgenerationsectorinrecentyears.TheamountofwindgenerationinTexasexceedsthatofanyotherstatebyawidemargin,andemphasizesTexas’leadingroleinmeetingthechallengeofchangingmarketconditions.Further,thereareincreasinglypositiveexternalitiesintermsofwindtechnologydevelopmentandmanufacturing(e.g.,windturbinedesignandmanufacturing)asTexascontinuestobetheleaderinrenewabletechnologyadoption.Finally,windgenerationcandecreasenatural gas consumption by displacing generation from natural gas units at times when wind energy isproduced.

Recentoperationalissueswithwindhaveillustratedtheneedtoensurethatadequateoperatingreservesareavailabletooffsetthesuddendrop-offofwindgeneration,andthatwindgenerationisappropriatelyincorporatedintoERCOT’sgridoperations.InFebruaryof2008,ERCOThadtoimplementemergencyprocedurestoaccountfora rapiddecline inavailableoperating reserves.Whileothergenerationoutagesand issues contributedsignificantly totheevent,a largeandsuddendecline inwindenergyproductionwasacontributing factor.ThiseventillustratedtheneedforERCOTtousenewstate-of-the-artforecastingtoolstobetterestimatetheamountandrateoffluctuationofwindenergyproduction,toproactivelyidentifyoperationalissuesthatarelikelytoarisefromthecontinuedexpansionofwindpoweronthegrid,andtoexploremeansofprovidingbetterincentivesorrequirementsforwindgenerationoperatorstoscheduletheirpowermoreaccurately.

Becauseoftheextensivewindactivityinthewesternpartofthegridandthecurrent limitedtransmissionoutofthearea,powerpricesinthewesternERCOTpowergridregionhavebeenlowerthantherestoftheERCOTregionthisspring.Attimesthisspring,powerpricesinthewesternpartofthegridhavebeennegative.Astheinstalledwindcapacityhascontinuedtogrowoverthepastyear,aheadoftheneededtransmissionexpansions,thefrequencyofthesenegativepriceperiodshasincreased,asshowninFigure31.

Figure31:EffectsofWindCapacityAdditionsonWestZonePowerPrices

250

200

150

100

50

0

-50

5000

4800

4600

4400

4200

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3800

3600

MW

DailyAverage$/M

Wh

12/1/071/20/08

3/10/084/29/08

Indicates levelbelowwhichgeneratorsbidnegativepricestostayon

PriceWindMWLinear(Price)

41

ERCOTrecentlycalculatedthattheweightedaveragepricesofbalancingenergywasnegativeforthemonthofMarch2008.ThoseresultsareshowninFigure32above.

While the provision of wind energy to themarket has the potential to create a tremendous benefit forcustomers,ithasalsomadeitdifficultforothertypesofgenerationinthisarea(primarilycoalandnaturalgasgeneration)tobeeconomicallyviable.Asaresult,pricesforcertaintypesofoperatingreserveshavebeenmuchhigherthisspringthaninpastyears.

Ultimately,tomaintaindeveloperconfidenceinthemarkets,thesolutionistoincreasetransmissioncapacityoutofWestTexastotherestofthegridinordertomovethiswindpowertothemajordemandcentersinthestateasrapidlyaspossible.Thesetransmissionissuesandtheassociatedrecommendationsarediscussedinthenextsection.

Giventheinabilityofmanybaseloadunits(especiallynuclear)todecreaseproductionattimesofhighwindproductionandtheneedtokeepsomefossilfuelunitsonlinetoprovideoperatingreservestothesystem,evenwithsubstantialtransmissionadditions,thereisalimittotheamountofwindenergythattheERCOTgridcanaccommodateduringlowdemandperiodsinthespringandfall.Asaresult,ERCOTmayberequiredto limit the amountofwindenergy generationduring theseperiods andoperating reservesmaybecomeveryexpensivebecausethedownwardpressurethatwindgenerationmayputonpricesmakesitdifficultforcontrollablegenerationtostayeconomicallyonline.

Energystoragetechnologieshavethepotentialtoaddresstheseissues.Suchtechnologiesstoreexcesswindenergyinaformthatcanbereleasedatalatertimewhendemandishigher.Texashasanumberofmatureoilfieldsthatcouldbeusedforcompressed-airenergystorage(airispumpedinduringoff-peakperiodswhenpowerpricesarelowandextractedforextrapowergenerationduringpeakperiodswhenpowerpricesarehigh),andmarketparticipantsareexploringotheroptionsforcompressedairstorageorlarge-scalebatteries.ThesetechnologiesalsohavethepotentialtoprovidegreateruseofnewtransmissionfacilitiesbuiltinWestTexas.Thesetechnologies,however,arenotyetcommerciallyviable.Severalinitiativesshouldbeexploredtohelpmaturethesetechnologies.

Recommendation6:Thestateshouldestablishaninnovationprizeorprizes,fundedwithprivate-publicrevenue,forthecommercializationoflarge-scaleenergystorage.

Recommendation7:ThePUCandERCOTshouldstudywhetheranadditionaloperatingreserveservicetohelpmanagethe intermittencyofwindenergyorotheralternativeenergysourceswouldbeacost-effectivesolutiontomorereliablyintegratingtheseenergyresourcestothegrid.Suchaservicecouldbeprovidedbyquick-startnaturalgasunits,demand-responsebycustomers,orstoragesolutions.

HUB Mar2008 Feb2008 Jan2008 Dec2007

South $57.97 $64.73 $58.46 $49.29

North $67.72 $58.83 $67.91 $48.29

Houston $66.33 $64.29 $57.61 $53.05

West ($11.11) $46.21 $35.64 $60.04

ERCOTHUB $55.79 $60.94 $59.39 $50.70

Figure32:WeightedAveragePriceofBalancingEnergybyERCOTZone

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InadditiontoreliablyintegratingwindgenerationinWestTexas,thestateshouldcontinuetoencouragethedevelopmentofwindenergyresourcesbothonshoreandoffshorealongtheTexasGulfCoast.OnshoreandoffshoreGulf Coastwind energy resources are expected to bemore synchronizedwith the daily demandpatterns,sowindismorelikelytobeavailablewhenitisneededthemosttomeetdemand.TheonshoreandoffshoreGulfCoastwindresourcestypicallyhavefewerincrementaltransmissionrequirements;however,thetwocurrentcoastalwindenergyprojectshaveencounteredsitingcontroversiesduetomigratorybirdpatternsandothercoastalecosystemconcerns.

2.3.5 ProvideIncentivesofDefinedDurationandCosttoSolarTechnologiestoAssistinMakingTheseTechnologiesCost-Effective

Texashasasolarintensitybasethatisamongthebestinthecountry.Thisresourcecreatesthepotentialfordeploymentofbothutility-scalesolarthermalplantsandcommercial/residentialscalerooftopphotovoltaicpanels.Texasalsohassubstantialoldercoal-oroil-firedgenerationcapacitythatcouldberefurbishedwithsolarconcentratingtechnologytoproduceahybridplantthatrunsonsolar-heatedsteaminthedaytimeandoncoal-firedsteamatnight.Suchtechnologies,however,donotappeartocurrentlybeeconomicallyviable.PublicannouncementsbyFPLEnergyandAcconiaSolarforprojectsinotherstatessuggestthecapitalcostsofconcentratedsolarplantsareashighorhigherthannewnuclearplants,whileproducingmuchlessenergy.However,Texasshouldcontinuetomonitor thematurationof thesetechnologies todetermine if theywillbecomeaviableeconomicoptionforTexas’powerneeds.ExpansionofthetransmissiongridinWestTexastoaccommodatewindpowermayalsoprovideopportunitiestoco-locatesolargenerationtechnologiesintheregionaswell.

InApril2008,GovernorPerryannouncedTexaswouldinvest$1millionthroughtheTexasEnterpriseFund(TEF)inHeliovoltCorporationofAustinfortheconstructionofa125,000squarefootmanufacturingfacilityanddevelopmentspacetotestandproducethecompany’sthinfilmsolarpowercells.Thisinvestmentwillcreatenearly160 jobsand$62million incapital investment.Suchstrategic investmentswill continue topositionTexasasaleaderinnewenergytechnologies.

InadditiontostrategicinvestmentsthroughtheTEF,TexasshouldadopttwostrategicinitiativestocontinuetohelpspurnewinvestmentinsolartechnologyinTexas.

Recommendation8:Toencouragedevelopmentofnewsolarenergy,theTexasDepartmentofHousingandCommunityAffairsshouldamendtheirLowIncomeHousingTaxCreditApplicationQAPtoofferadditionalpointstoapplicantswhoinstallalternativeenergysourcesincludingsolarpanels,solarwaterheaters,orothersolarproductsintheirdevelopments.

Recommendation9:Thestateshouldprovideasalestaxexemptionforthepurchaseandinstallationofsolargenerationsystems.

2.3.6 BringaTexasPerspectivetotheDebateOverCarbonLegislationtoIllustratethePotentiallyDevastatingEffectsCO2RegulationWillHaveontheTexasandNationalEconomy

AlthoughTexashasneverrecognizedcarbonasapollutantandlegislationintroducedtodosoatthestatelevelhasneverreceivedseriousconsiderationbytheTexasLegislature,momentumtowardsignificantandcostlyregulationappearstobebuildingatthefederallevel.ThecurrentLieberman-Warnerproposal,S.2191,passedtheEnvironmentandPublicWorksCommitteeintheU.S.SenatebutfailedtogarnerthenecessaryvotesontheSenatefloor.

Eventhough itappearsunlikely legislationwillpassthisyear, it isexpectedthatmultipleproposalswillbeintroducedthatmayhaveasevereimpactonTexas’economy.Figure33onthenextpageshowskeycomponentsoftheleadingproposals.

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The costs of theseproposalswill dependon theprecisenature, extent, andmethodof cappingor taxingcarbonemissionsandtheextenttowhichdomesticandinternationaloffsetsarepermitted.However,becauseTexashasalargershareofindustrial-relatedemissionsthantherestofthecountryandbecauseTexasishometomanyoftheworld’slargestrefiningandpetrochemicalcompanies,Texasislikelytobedisproportionatelyimpactedbythisregulation.Amulti-sectorproposal,likesomeofthoseshownearlier,thatcoversemissionsfrom the electric, transportation and industrial sectors,wouldmakeup to 96percent of Texas’ emissionssubjecttoacap.

However,asamajorproducerofoilandnaturalgasthatiscombustedoutsideofthestate,Texasindustrymayberesponsibleforanevengreatershareofreductionsthanitsemissionswouldindicate.Severalproposals,includingLieberman-Warner,setthepointofcompliancefornaturalgasandpetroleumupstreamofthepoint

Figure33:RecentFederalCarbonRegulationProposals

S.1766:TheLowCarbon

EconomyActof2007

(Bingaman/Specter)

S.2191:America’sClimateSecurityActof2007(Lieberman/Warner)

S.280:TheClimateStewardship&

InnovationActof2007

(McCain/Lieberman)

S.485:GlobalWarming

ReductionActof2007

(Kerry/Snowe)

H.R.1590:TheSafeClimateAct

of2007(Waxman)

Introduced July2007 Oct2007 Jan2007 Feb2007 Mar2007

StartYear 2012 2012 2012 2010 2010

Coverage All6GHGs All6GHGs All6GHGs All6GHGs All6GHGs

TargetsCappedsectors:60%below2000levelsby2050

Cappedsectors:70%below2005levelsby2050

Cappedsectors:60%below1990levelsby2050

Wholeeconomy:65%below2000levelsby2050

Wholeeconomy:80%below1990levelby2050

Sectors

Fossilfuel,highGWPgases,some

NOx

Electricity,transportation,

industry

Commercial,industrial,electric

power,andtransportation

Greatestemittingsectors/sources;thosewithmostcost-effectivereduction

opportunities

Allsectors(largest/easiesttocontrolemitters)

Structure

Generally,upstreamCap&Trade,industrial

andelectricemittersatpoint

ofemissions

Cap&Trade Cap&Trade Capandtrade;otherstandardsorrequirementsTBD

Cap&Trade

Allocation

Initially49%freelyallocatedtoregulatedentities;75%auctionby

2030

20%togenerators,decreasingto0%by2035;10%toLSEs;20%toindustry,rising

auction(startingat24%)

TBDbyadministrator(mixoffreeallocations

andauction)

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andauction)

TBDbyPresident(mixoffreeallocation

andauction)

Flexibility

Domesticoffsets,possibleinternational

offsetprogram(upto15%)$12/

metrictonsafetyvalve,risingat5%

+inflation

15%ofcapmaybemetwithforeigncreditsand15%withoffsets;15%maybeborrowedfromtheCarbonMarketEfficiency

Board

Offsetsupto30%,banking,borrowing,earlyreduction

credits

Offsets;international

creditspossible;banking

Banking,earlyreduction

“rewarded”,forestandagriculturalsequestration“encouraged”

44

of combustion. Inotherwords, Texas companiesmaybe required topay for CO2 allowances to cover thecarboncontentoffuelsproducedinTexasbutusedelsewhere.

AsshowninFigure28,thecostoftheLieberman-Warnerbillisestimatedtoresultincostsofover$50pertonofCO2emitted.Thepowersectorisprojectedbymany,includingtheEPAandtheEIA,toberesponsibleforthelargestshareofemissionreductions.ICFhasestimatedthattheabilitytoeconomicallydispatchexistingcoalplantsisnotaffectedbycarbonregulationuntilthecostexceeds$30perton,eventhoughtheregulationwillsignificantlyincreasethecostsoftheseunitsandsiphonrevenuesthatwouldotherwisebeusedtobuildadditionalcapacityinTexas.Thatis,carbonregulationwillextractanenormousamountofmoneyfromTexasbusinessandconsumersandsendittoa largenewbureaucracy inthefederalgovernmenttodramaticallyexpandfederalspending,withoutaccomplishinganyofthestatedgoalsofreducingCO2emissionsfrompowerplants.

In ICF’sprojections,atCO2pricesabove$30/ton,coal-firedgenerationfromexistingunitswillbegintofallrapidlyfromthelevelsthatwouldoccurwithoutcarbonregulation,asshowninFigure34above.At$80/tonCO2, generation fromcoal-firedpowerplantsmay fall byover75percent. This generationwill have tobereplacedbyothersources,andgiventhelimitedabilitytoaddlargeamountsofnuclearcapacity,becauseoflengthyfederalpermittingrequirementsandinactivityonresolvingwastedisposalissues,itismostlikelythatsubstantialadditionsofnaturalgas-firedgenerationwillbeneededtomaintainreliabilityinthestateaswellasotherregionsofthecountry.Thiswillcreateadditionalsignificantdemandfornaturalgas,raisingbothnaturalgasandelectricitypricesforTexans.

Figure34:ProjectedImpactofCO2PricesonCoalGenerationin2030

0 10 20 30 40 50 60 70 80 90

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Becausenaturalgaswill continue tobe themarginal sourceofgeneration inTexasunder thesescenarios,electricitypriceswillincreasenotonlyduetothelikelyhighernaturalgaspricescausedbythisregulation,butalsobecausenaturalgasgenerationemitsCO2,althoughlessthanhalfthatofcoal.Texasnaturalgasgeneratorswillberequiredtopurchasecarbonallowancesorpayataxontheiremissions,raisingelectricityprices.

Recommendation10:StatepolicymakersshouldbringaTexasperspectivetofederalcarbonpolicydebates.TexasneedstoparticipateactivelyinthecarbondiscussionandeducateWashingtondecisionmakersontheeconomicvalueofTexas’energyproductiontothenation.

Recommendation11:Americanswillbearsignificantcosts,andTexanswillbearadisproportionateshareofthosecosts,shouldthefederalgovernmentdecidetoimposecostlycarbonregulation.Retailcustomersshould be further educated on electric competition, efficiency, and the costs and benefits of fuelmixchoices.Thestateshouldformaprivate-publicpartnershipamongindustrialandlargecommercialenergycustomers,petroleumandgenerationcompanies,chambersofcommerce,thePUC,theTCEQ,andtheRRCtoeducatethepubliconthecostofcarbonregulationtoTexans.ThispartnershipshouldinformitsworkbyconductingastudyhighlightingthecostofcarbonregulationversusenvironmentalbenefitstoTexans.

2.3.7 IncenttheDevelopmentofCleanCoalTechnologyandtheUseofTexasligniteEmergingtechnologiessuchasCarbonCaptureandStorage(CCS)couldhelp,butthecostsarepotentiallylargeanduncertain.Investinginresearch,development,ordemonstrationCCSprojectscouldbebeneficialforTexasasitmayhelpsustainthedemandforTexasligniteandalsohelpinenhancedoilrecovery.R&Ddemonstrations,legalactiontoresolveissuesrelatedtoliabilityconcerningthereleaseofsequesteredCO2,and/orprovidingfundingtoaidprivateindustryeffortstoimplementlarge-scaleCCSonpowerplantsmaybehelpful.

Recommendation12:Inordertoincentthedevelopmentofcleancoaltechnology,thestateshouldcreatea state innovationprize, fundedwithprivate-public revenue, for the large-scaledeploymentof aminemouthcleancoalgeneratingfacilitythatusesTexasligniteasitsprimaryfuelandcapturesnearlyallcarbonemissionforstorageundergroundoruseinenhancedoilrecoveryorothermarketdrivenbeneficialuse.

Recommendation13:Thestateshouldprovideafive-yearsalestaxexemptionfortheequipmentusedtocaptureandstorecarbondioxidefromfacilitiesthatuseTexasligniteasafuelsource.

2.3.8 DevelopTexasNaturalGasAssetsandAggressivelyExplorePartnershipstoGainAccesstoUndervaluedResources

Thealmost300percentincreaseinthecostofnaturalgassince2002indicatesademandfornaturalgasfaroutpacingsupply.The ICFanalysisshowsacontinuedheavyrelianceonnaturalgas,which isonly likely toincreaseiffederalcarbonlegislationisenacted.Inadditiontodiversifyingthefuelmixfromwhichelectricityisgenerated,Texasshouldalsomakeeffortstoincreasethesupplyofnaturalgas.

Recommendation14:Texasshouldidentifyandresolvebarrierstoacceleratingdevelopmentofin-statenaturalgasassets,includingBarnettandothershaleassets.IssuesrelatedtotheproximityoftheBarnettshaletomajormetropolitanareasandtransportofgasfromtheregiontomarketsmustbeconsidered.Texasshouldalsoexploreanddeveloppartnershipswithotherjurisdictionstogainaccesstopotentiallyundervaluedresources.Aspartofthisexplorationanddevelopment,Texasshouldaddressthefederalbanonaccessingallonshoreandoffshoreresources.

Finally,Texasshouldensurethatitstaxpoliciesencouragethedeploymentofadditionalenergyresourcestothestate.Therefore,Texasshouldundertakefurtherresearchtoascertaintheimpactstateandfederaltaxeshaveonbringingenergyinvestmenttothestate.

EasternInterconnection

46

Section Three: Transmission and Distribution Policy

3.1 Overview of Investment TrendsTexas’ transmission system is divided into ERCOT and non-ERCOT regions, shown in Figure 35. The ERCOTtransmissionsystemisoneofthreeinterconnectedgridsthatservicethecontinentalUSandiscomprisedof38,000milesoftransmissionlines,22percentor8,515milesofwhich,arehigh-voltage345kVlines.10Electricityistransportedoverahigh-voltagesystemoveramulti-pathpowernetworkthatallowsforalternativeenergyflowpaths.Forthenon-ERCOTregionsofTexas,theSPPperformstransmissionplanningforpartsofNortheastTexasandtheTexasPanhandle,theEntergyGulfStatesUtilities(withinSERC)forpartsofEastTexasandtheElPasoElectricCompany(withinWSCC)forpartsofWestTexas.

InTexas,TDUs11providetransmissionanddistributionserviceandaresubjecttoextensiverateregulationbythePUC.ERCOTconductsatransmissionplanningprocessandhasoverseentheadditionof5,200circuitmilesoftransmissionsince1999.Thesetransmissionadditionshavefacilitatedtheinterconnectionoftensofthousandsofnewmegawattsofgenerationfacilitiestothegrid,andhavealleviatedbottlenecksthatlimittheabilitytomovepowerefficientlyaroundthestate.Evenwiththisinvestment,therearestilltimeswhenthetransmissionsystemisconstrained,andpricesdivergethroughtheregion.

In order to support demand growth, reduce congestion, and accommodate unprecedented levels of windgeneration,ERCOThasidentified$3billionoftransmissionimprovementneededoverthenextfiveyears.TheimprovementsincludeenhancingtheNorth-HoustontransfercapabilityandbolsteringtransfercapabilityfromWestTexastoaccommodatethelargewindcapacityaddition.

10 NERC.“2007Long-TermReliabilityAssessment:2007-2016.”Oct2007:107.7July2008<http://www.nerc.com/files/LTRA2007.pdf>.11 InTexas,someofthelargestTDUsareOncor,CenterpointEnergy,andAEP.

Source: North American Electric Reliability Corporation

Figure35:NorthAmericanGridInterconnections

WECC

TRE

NPCC

SERC

FRCC

SPP

RFC

MRO

EasternInterconnection

QuébecInterconnection

WesternInterconnection

ERCOTInterconnection

47

ERCOT has the second highest amount of planned transmission investment among Regional TransmissionOrganizationspermegawattsyear(seeFigure36).Althoughoverthelasttwoyearsdistributioninvestmentshavepickedupconsiderably,distributionexpenditureincreasesaveragedonly2.5percentoverthesameperiod.

3.2 Current Challenges3.2.1 ExpandingtheTransmissionGridtoAreaswithLarge-ScaleWindEnergyPotentialAsdiscussed in theprevioussection, farmorewindcapacityhasbeen installed inWestTexasthancanbepresentlyexportedtothemajorpopulationcentersinthecentralandeasternportionsofthestate.Asaresult,powerpricesintheWesternportionofthegridhavefrequentlybeennegativethisspring,aswindgenerationownershavebidpricesdowninanattempttokeeptheirplantsonline.Windgeneration,hasonoccasion,alsobeencurtailedbecauseoftransmissioncongestion,andontheseoccasions,energythatcouldhavedisplacednaturalgasgenerationwaslost.

Substantial transmissionexpansiontorelievetheexistingcongestionandproactivelyaddresstheexpectedadditionofsignificantadditionalwindcapacity iscriticaltoefficientlyuseTexas’windresources,whilestillprovidingforareliableelectricitygridandensuringthatadequatefossil-fuel,controllablegenerationisonlinetoprovidereservestothesystem.

RTOCostofProjects

($M)PeakDemand2007(MW)6

NumberofyearsinPlan

$/MW-yr

NewEngland3 4,385 27,460 10 15,969

ERCOT5 2,800 62,500 6 7,467

PJM2 9,319 139,428 10 6,684

SPP1 2,200 35,900 10 6,128

MidwestISO4 2,200 109,099 5 4,033

1 SPP Transmission Expansion Plan for 2008-20172 PJM RTEP Cost Summary based on project completion date 2007-20173 New England ISO Regional System Plan Transmission Project Listing - October 2007 Update for 2007-2012; excludes $978 million in 2007 in-service

projects4 Midwest ISO Transmission Expansion Plan 20075 NERC 2007 Long-Term Reliability Assessment; Does not include CREZ related transmission.6 SPP (market footprint) and ERCOT from FERC Market Oversight summaries; Midwest ISO from 2007 Transmission Expansion Plan; PJM from press

release May 5, 2008.

Figure36:RTOTransmissionInvestment

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Fortunately,Texashasnotonlyledthenationinaddingnewtransmissioninfrastructuretothegrid,buthasalsoadopted innovative transmission policies in order tospecificallyintegratenewrenewableenergygenerationto the grid. In 2005, Governor Perry supported andsigned legislation establishing a process to build thetransmission necessary to get wind on to the grid.A key feature of this legislation is the CompetitiveRenewable Energy Zone (CREZ) process. The goal oftheCREZprocessistofacilitatewinddevelopment through the proactiveidentification of areas of the statewhere futurewind generation is likely tolocate, and proactively begin the process tobuild new transmission capacity to integratetheseareastothebroaderERCOTgrid.TheCREZdesignationsbythePUCareshowinFigure37.

The PUC directed ERCOT to perform studies and recommend atransmission plan for four different levels of wind capacity from thedesignatedzones.OnApril2,2008,ERCOTfiledtheresultsofthesestudies,showninFigure38,andprovidedatransmissionplanandcostestimatesforeachscenario.ThePUChascompletedthehearingandexpectstomakeafinaldecisionontheCREZdesignationsandtransmissionplansbyJuly31,2008.

Additionally,thePUCisexploringselectingthetransmissionprovidersfortheCREZlinesbasedonacompetitivebiddingprocess.Whilethisisadeparturefromthestandardpracticeofdefaultingtransmissionbuildstotheincumbenttransmissionserviceproviderintheareathatthelinesaretobebuilt,thismodificationincreasesthetransparencyandeasewithwhichnewtransmissionproviderscanenterTexasandcompetetobuildtheselines.ThePUCisintheprocessofrevisingitscurrentrulestoaccommodatethischangeandoutliningcriteriaforthequalificationandselectionoftransmissionproviders.

3.2.2 EncouragingInvestmentinTechnologicalAdvancementsinTransmissionandDistributionTechnologies

While Texas has adopted many innovative policies and encouraged investment in transmission, the factthat transmission and distribution remains a regulated function creates the possibility that technologicaladvancementsorinvestmentswillnotoccurasrapidlyastheyoccurincompetitivemarkets.Thisispartiallybecause in traditional ratemaking, incentives for utilities to invest in these technologiesmaynot exist, ascompaniesaregenerallyfocusedonminimizingcostsbetweenrateproceedingsduetothelagthatcanoccurinreflectingnewinvestmentsinrates.Newtechnologiesmayalsopermitmoreefficientuseofthetransmissiongrid,butmaynotbeaggressivelypursuedbyutilitiesifuncertaintyaboutcostrecoveryexists.

Figure37:CompetitiveRenewableEnergy

Zones(CREZ)

Scenario1(MM) Scenario2(MW) Scenario3(MW) Scenario4(MW)CREZWindCapacity 5,150 11,553 17,956 17,516

BaseCaseWind 6,903 6,903 6,903 6,903

TotalWind 12,053 18,456 24,859 24,419

Figure38:WindCapacityScenarios

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3.3 Recommended Actions3.3.1 ExpeditiouslyCompletetheCREZProceedingandOtherTransmissionProjectsforWind

Generation

Recommendation15: Inordertoproactivelyaddresstheadditionofsignificantwindcapacity, thePUCshouldexpeditiouslyconcludetheCREZproceeding,selectatransmissionplan,andissueneededCCNsforCREZtransmissionlines.Thecurrenttransmissiondevelopmentschedulemaynotallowforconstructiontocommencebeforethethirdorfourthquarterof2009.ThePUCshouldrapidlycompletetheremainingtaskssotransmissionconstructioncanbegininearnest.

Recommendation 16: The state should encourage onshoreand offshore wind generation along the Texas Gulf Coast.Whilethedevelopmentoftheseresourcesshouldbebalancedwithconcernsrelatedtomigratorybirdsandotherecologicalconditions,coastalwindresourcesappeartohavemuchsmallerincremental transmission needdue to their proximity to theexisting transmission grid, and are expected to have energyproductionthatmorecloselyalignswithpeakdemand.

3.3.2 ExamineMethodstoEnsureCurrentTransmissionisEfficientlyUsed

Manyareasofthecountryuseamethodcalled“dynamiclinerating”to efficiently use existing transmission capacity. Transmissionlines generally accommodatemore power in coolerweather orwindyconditions(becauseairmovementacrossthetransmissionlines tends to cool them).Centerpoint EnergyandOncor ElectricDelivery currentlydynamically rate theirtransmissionlinesbasedonambienttemperature,andAmericanElectricPowerhasanumberoftransmissionlines thataredynamically rated inamanner that canaccount forwindspeedeffects. For the restof thetransmissionowners,ERCOTcurrentlyusesa staticmethodofdetermining theamountofpower thatcanflowacrosstransmissionlines.BroaderuseofdynamiclineratingsmayallowERCOTtoreliablyaccommodateadditionalwindenergyoverexistingandnewtransmissionlinesinWestTexas.

Recommendation17:ThePUCshouldrequireERCOTandthetransmissionutilitiestostudydynamiclineratingsinWestTexastoshowavailabletransmissioncapacitymoreaccuratelyandallowformoreefficientuseoftransmissionfacilities.

3.3.3 ConsiderAlternativeTransmissionModelsandAdditionalInterconnectionstoOtherGridsTobenefitfromscaleandregionaldiversityoffuelmix,TexasshouldevaluateenhancingtransfercapabilitywiththeEasternandWesternInterconnectionsthroughadditionalback-to-backDCfacilitiesandDCtransmissionlines,providedthatsuchinterconnectionsdonotthreatenTexas’uniquejurisdictionalstatus.

Suchinvestmentsmaybeattractiveaspuremerchantinvestments,astheDCtechnologyiscontrollableandcantakeadvantageofdivergencesinmarketpricesbetweenthevariousgrids. InTexas,severalcompanieshave expressed interest in constructing transmission using a non-traditional regulatory approach. Theseincludefacilitiesthatareprivatelyfunded,arenotrolledintotheratebase,anddesignedforexclusiveuseforinterconnectingtotheutility’stransmissionsystem.Thechallengefromaconstitutionalandpolicystandpointiswhetherthebuilderofsuchfacilitieswouldhaveaccesstopropertythrougheminentdomain.

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Recommendation 18: The PUC should identify and resolve any legal or regulatory issues that preventthedevelopmentofmerchant transmission investments that couldprovideadditionalprivately fundedtransmission.

3.3.4 StudytheUseofHigh-CapacityConductorsManyotherregionsreplaceexistingtransmissionlineswithhigh-capacityconductors.Thisreducesthetimeforincreasingtransmissioncapacityandoftencanbeexecutedwithouttakinglinesoutofserviceanddisruptingthemarketplace.

Recommendation19:TheGovernorshouldrequestthatthePUC,institutionsofhighereducation,ERCOT,andrelevantindustryevaluatenewconductorsandproposesiteswherethesetechnologiescouldprovidevalue.

3.3.5 ConsiderStreamlinedFormsofRegulationforTransmissionandDistributionUtilitiesTexas has adopted an innovative transmission cost recovery and rate-setting process whereby TDUs canannuallyreflectnewlycompletedtransmissionlinesintheirrateswithouttheneedforafully litigatedandcostlyratecase.Thisstreamlinedrecoveryprocesssignificantlyreducesthelaginreflectingnewinvestmentsinrates,andhasmadeTexasanattractiveplacefornewinfrastructureinvestment.Additionally,thelegislaturehas provided for surcharges to recover expenses related to advancedmetering, nuclear decommissioningcosts,andenergyefficiencyexpendituresoutsideofafullratecase.Whenfullratecasesareconducted,theycanbeasexpensiveandtime-consumingasratecasesforfullybundledandregulatedutilities,eventhoughtransmissionanddistributionexpensesonlycomprise20to30percentoftheretailcustomer’stotalbill.

Texasshouldexplorewhetheralternativeformsofregulation,suchasperformance-basedratemaking,rateof returnbands,or formulaic rateadjustmentscouldprovideamoreefficient regulatoryconstruct for theregulatedtransmissionanddistributioncompanies.Theseformsofregulationcouldprovideforlowercost,anincentive/penaltystructureforservicequality,orenergyefficiencygoals,andameanstoencouragenewinvestmentininfrastructureandsmart-gridtechnologiestomodernizethedistributionnetworkandultimatelylowercostsforconsumers,whilestillprovidingappropriateregulatoryoversightbythePUCandperiodicfullratecases.

Recommendation 20: The Governor should direct the PUC to study whether alternate forms of rateregulationfortransmissionanddistributionutilitieswouldbeappropriatetomeetthesegoalsandidentifywhetheranystatutoryimpedimentsexisttoimplementingsuchregulation.

3.3.6 EstablishResearchandDevelopmentPartnershipstoDevelopAdvancedTransmissionandDistributionTechnologies.

ThereisanincreasingamountofinnovationintechnologicalsolutionstohelpgridoperatorsandTDUsrapidlysense,diagnose,andmitigateissuesthatmayotherwisecausecustomerpoweroutagesorreliabilityissues.Many of these technologies have recently become feasible due to advances in information technology.Texasshouldestablishprivate-publicpartnershipstodevelop,promote,andresearchthesetechnologiesfordeploymentontheTexaspowergrid.

Recommendation 21: The state should partnerwith higher education institutions and corporations todevelopandpromoteadvancedtransmissionanddistributiontechnologiesandincentinvestmentintheresearchanddevelopmentofsuchtechnologies.

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Section 4: Energy Efficiency and Demand-Response Policy

Inadditiontoreducingbarriers togeneration investmentandensuringadequate transmission infrastructureexiststoensuretheefficientmovementofpoweraroundthepowergrid,Texasshouldexplorewaystocost-effectivelyreducetherateofdemandgrowthinthestate.AsillustratedinSection3,givendramaticallyincreasedfuelandcapitalcosts,allfutureincrementalsourcesofgenerationarelikelytoberelativelyexpensive.Proactivemeasuresthatcanreducetheneedforadditionalgenerationresourcesinthestate,especiallyduringpeakusageperiods,canprovidesubstantialbenefitstoTexans.

4.1 Overview and Potential Benefits of Efficiency and Demand-Side Management

Texas has implemented demand-side management (DSM)programsformanyyears.DSMprogramsarebroadlydefinedas a set of actions that can be taken to influence the levelandtimingof theconsumptionofelectricity.DSMprogramsaregenerallycategorizedintotwotypesofprograms;energyefficiency programs and demand-response programs. Bothtypes can be implemented for all classes of electricitycustomers.

Energyefficiencyprogramsaredesignedtoincreaseefficiencybymaintainingthesamelevelofproductionorcomfort,butusing less energy. For example, a program that allows orencourages commercial customers to retrofit their buildingswithmoreefficient lightingsystemswouldbe referred toasan “energyefficiency”program.Otherprograms thatwouldfitintothiscategoryincludethepromotionofnewhomeconstructionthatuselessenergythanhomesbuiltusing standard construction practices or implementing standards that appliancesmust use a lower amountofelectricity. Ingeneral,energyefficiencyprogramsprovidea reduction in theoverallquantityofelectricityconsumedovertheyear,butmaynotnecessarilyreducetheelectricitydemandedatthehourofsystempeak.Manycustomers routinelyengage inenergyefficiencyactions throughpurchasingmoreefficientappliances,installingcompactfluorescent lightbulbs,oradjustingthetemperatureof theirhouse in responsetohigherenergypricesorenvironmentalsensibilities.

In contrast, a demand-response program is designed to encourage customers to reduce usage during peaktimes or to shift that usage to other times. For example, a program that provides a payment to customerswhopermittheirelectricityprovidertocycleofftheirairconditionersforbriefperiodsusingaremoteswitch,usuallyduringtimesofpeakdemand,wouldbeclassifiedasademand-responseprogram.Otherexamplesofcustomerdemand-responseinTexasincludepricingstructuresthatprovideforreal-timeenergyprices,whichalso encourages customers to reduce consumption during peaktimes or interrupt their consumptionwhenwholesalemarketpricesaregenerallyhigherandwhenthesystemmayberunningshortofcapacity.Ingeneral,demand-responseprogramsprovideareductionintheelectricitydemandedatthetimeofsystempeakandmayormaynotreducetotalannualelectricityusage.

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4.2 Current Energy Efficiency and DSM ProjectsIn2007,GovernorPerrysignedHouseBill3693(HB3693),comprehensiveenergyefficiencylegislationthatisintendedtosignificantlyincreasethespecifiedenergyefficiencygoalsoverthenexttwoyears.

Regulatedutilities(TDUsinERCOT,andtheintegratedutilitiesoutsideofERCOT)arerequiredbylawtoofferDSMprogramssufficienttooffset15percentofthegrowthindemandbyDecember31,2008and20percentofthegrowthindemandbyDecember31,2009.ThePUCisrequiredtosubmitastudybyJanuary2009to,amongotherthings:

Considerthetechnical,economic,andachievablepotentialandnaturaloccurrenceofenergyefficiencyinTexas;

Determinetheamountofenergysavingsachievablethroughutilityprograms;

Recommend whether utility funding of energy efficiency should continue or is best provided by thecompetitivemarketplace;

Recommendwhetherutilitiesshouldfundeducationalprogramsregardingenergyefficiency;

Quantifythecostandbenefitsofmeetingenergyefficiencygoals;and

Assesswhetherthefollowingadditionalgoalsareachievable:30percentreductioningrowthindemandbyDecember31,2010anda50percentreductioningrowthindemandbyDecember31,2015.

In2008,theTDUs12areimplementingDSMprogramswithatotalannualbudgetofapproximately$96million,assummarizedonthenextpageinFigure39.

AccordingtocalculationsperformedbyICF,theseprogramsprovidedemandreductionatacostofapproximatelyof $506/kW of demand avoided. In contrast, the approximate capital costs of the incremental generationresourcesanalyzedinSection2were:

PulverizedCoal($3,000/kW)

IGCCCoal($4,000/kW)

CombinedCycleGasTurbines($1,200/kW)

PeakingGasTurbines($600/kW)

Nuclear($5,000/kW)

CertainDSMprogramsmayalsohaveadditionalbenefits,includingpowerplantsemissionreductionsandlandandwater use reductions as newplant construction is deferred. Additionally,more efficient use of existinggeneration,transmission,anddistributionfacilitiesmaybeachievedaspeaksindemandare“leveled”overthecourseofthedayandyear.Thissavesonoperationandmaintenanceofelectricsystemcomponents.Finally,energyefficiencyleadstoincreasedlocaleconomicdevelopmentactivityastheexpendituresmadeonincentives,marketing,training,andotheractivitiesflowtolocalbusinesses.

NotallDSMprogramsprovidebenefits.Thebenefitsofeachtypeofprogrammustbecarefullyweighedagainstanyprogramdrawbacks,suchasshort-termincreasesinrates,programcosts,uncertaintysurroundingsuccessoftheprograms,anddifficultyinforecastingtheparticipationandcostsintheprograms.

12 Thisincludes:Oncor,Centerpoint,Entergy,TexasNewMexicoPower,AEPTexasNorth,AEPTexasCentral,SWEPCO,andElPasoElectric.

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Theprovisionofexpandedenergyefficiency/DSMprogramswill likelyresultinshort-termincreasesinTDUrates,duetoprogramcostsandthecostrecoverymechanismprovidedfor inHB3693.Furthermore,eventhoughallcustomerswillpayfortheincentiveprogramsthroughhigherTDUratesandwillindirectlybenefitfromthereducedgrowthindemand,onlysomecustomerswillreceivethedirectprogrambenefitsthroughmoreefficientairconditioners,lightbulbs,insulation,weatherization,andappliances.

When combinedwith concerns about equity between customers, between customer classes, and differentperspectivesonthefuturecostsofcarbon,thedeterminationofthe“appropriate”levelofDSMcanbeacomplexandpolicy-drivenexercise.NumerousenergyefficiencyDSMstudieshavebeencompletedwhichsuggestthatloadgrowthcanbeeliminatedordramatically reducedwithcost-effectiveDSM.While thatgoal is laudable,many others have expressed concern that such load reductionsmay not be practical, desirable, or provideadequatelevelsofreliability,especiallyinstateswithsignificantpopulationgrowthandeconomicdevelopment,likeTexas.

Despitethesepotentialdrawbacks,itisclearthatDSMprogramshaveanimportantroletoplayinTexas’mixofresources.DSMprogramsbecomemoreattractiveaswholesalegenerationratesincreaseandenvironmentalregulationsmakeitmoredifficulttobuildgenerationfacilities.

ProgramType

CustomerClassTotal2008Budget

%ofTotalResidential

HardtoReach/Low-

IncomeCommercial

AirConditioningEquipmentandInstallationPractices $12,042,897 $1,840,042 $20,506,916 $34,389,855 36

Weatherization(Primarily) 30,980,900 30,980,900 32

CompactFluorescentLamps 8,928,297 8,928,297 9

EfficiencybySchoolDistricts 7,008,442 7,008,442 7

ENERGYSTARNewHomes 3,748,199 3,748,199 4

LoadManagement 686,269 2,903,593 3,589,862 4

Low-IncomeWeatherization 1,739,428 535,514 2,274,942 2

EfficiencybyCityAuthorities(MultipleMeasures)

1,549,403 1,549,403 2

Retrocommissioning 1,110,452 1,110,452 1

EfficiencybySchoolDistricts 1,055,854 1,055,854 1

StandardOffer(MultipleQualifyingMeasures)

634,230 634,230 1

WaterandSpaceHeating 487,324 487,324 1

TOTAL $28,255,542 $33,308,266 $34,193,952 $95,757,760

%OFTotal 30 35 36

Figure39:SummaryofTDUDSMProgramBudgetsfor2008

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In2006,prior to theenactmentofHB3693,Texas rankedapproximately22ndamong the states forenergyefficiencyonapercapitabasis,andtheAmericanCouncilforanEnergyEfficientEconomy(ACEEE)rankedTexas’policiestowardsDSMasthe11thmostfavorableinthenation.TexasrankedsixthintheoveralllevelofDSMspendingbythestatesin200613andfourthintermsofoverallenergysavingsasaresultofenergyefficiencyandDSMprograms. Figure40 illustrates that althoughTexas spends lessmoney thanmanyother statesontheseprograms,themoneyusedinTexasismoreeffective.Texasaccountsforagreaterproportionoftheactualenergyefficiencysavingsasitdoesthecost.Additionally,since2002, largecommercialand industrialcustomershavebeenabletoparticipate inmarketsforreservegenerationcapacityconductedbyERCOTbybiddingtheirloadintothesemarkets.Inessence,thesecustomerscompetewithgeneratorstoprovidereservesbyofferingtocuttheirconsumptionwithveryshortnotice,andindoingso,freeupgenerationthatwouldbeotherwisebeprovidingthesereservestogenerateenergyforcustomerconsumption.In2007,thePUCalsoestablishedanewEmergencyInterruptibleLoadService(EILS)programthatwillprovideforadditionaldemand-responsethatERCOTcanutilizepriortoimplementingrotatingoutagesinemergencysituations.ThecostsoftheseprogramsarenotincludedinFigure40,eventhoughtheyprovideasubstantialamountofdemand-response(approximately1,500megawattscombined).

13 Eldridge,Maggie,etal.“TheStateEnergyEfficiencyScorecardfor2006.”ACEEE.Report#E075June2007.7July2008<http://www.aceee.org/pubs/ e075.pdf>.

WI

Figure40:TexasDSMSpendingandSavingsRelativetoOtherStates,2006

30%

25%

20%

15%

10%

5%

0%CA MTMI MNIA NH NJID NVMA NYME OH OR RI TN TX UT VT WACO CT FL HI

%ofTotalUSEnergyEfficiencySpending %ofTotalUSEnergyEfficiencySavings

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REPs such as TXU Energy,Direct Energy, andReliant Energy have also begun to introduce energy efficiencyservicesasanelementoftheircompetitiveofferings,andretailcustomersareincreasinglyrespondingtohigherenergypricesbyadoptingawiderangeofconservationandenergyefficiencyactivitiesoutsideofspecificutilityorREPprograms.MunicipalandcooperativeutilitiesalsoprovideDSMprogramstovaryingdegrees,includingsomeveryaggressiveprograms(e.g.,AustinEnergy).4.3 Future PotentialFigure41isananalysisconductedbyICFregardingtheimpactonthesystempeakdemandofthelevelofDSMrequiredbycurrentlawandtheimpactifthegoalwasincreasedtoa30percentreductioningrowthindemandbyDecember31,2010anda50percent reduction ingrowth indemandbyDecember31,2015. ICF’s studyresultssuggestthattheincreasedenergyefficiencyrequirementsofHB3693,currentlyunderstudybythePUC,couldresult inthedeferraloreliminationof21,899megawattsofnewgenerationneededtomeetexpecteddemandthrough2030.Eventhelevelsrequiredundercurrentlylawhavethepotentialtodeferapproximately10,000megawattsofnewgenerationandtheassociatedemissions.

Figure41:ImpactonSystemPeakDemandofVariousDSMScenarios

ScenarioReductioninRateofLoadGrowth

2008 2009 2010 2015

HB3693Min. -15% -20% -20% -20%

HB3693High -15% -20% -30% -50%

120,000

100,000

80,000

60,000

40,000

20,000

GWDem

and

20082009

20102011

20122013

20142015

20162017

20182019

20202021

20222023

20242025

20262027

20282029

2030

BaseCase CurrentDSM(HB3693Minimum)

HighDSM(HB3693withextensionto30%and50%growth)

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4.4 Current Challenges4.4.1 DeploymentofAdvancedMeteringResidentialconsumersaccountforapproximately45percentoftheenergydemandinERCOT.Yet,residentialconsumerscurrentlyreceiveverylittleinformationabouttheirconsumptionbehaviorandhowchangesintheirusagepatternsanduseofDSMtechnologiescanreduceenergyuse.ResidentialelectricitymeterscurrentlytrackthetotalnumberofkWhconsumedbetweenthetwodatesonwhichthemeterisread.ThesemeterscannottrackwhenthesekWhwereused(atnightorduringtheday)orwhatthecustomercontributedtotheoverallsystempeakdemand.Incontrast,industrialandlargecommercialcustomershavemoreadvanced(andexpensive)electricitymetersthatrecordthecustomers’usageeveryfifteenminutes.Asaresult,thesecustomershavecompetitivepricingoptionsthatpermitthemtopayfortheirelectricusagebasedon“timeofuse”(or“heatrate”ofgeneratingunitsonline)becausethetimeperiodsoftheirenergyuseisidentifiable.

AkeycomponentofHB3693istheencouragementofrapiddeploymentofanAdvancedMeteringInfrastructure(AMI) for energy efficiency and demand-response. AMI provides real-time consumptiondatawhich offersresidential consumers new technologies and services to manage their energy consumption. If deployedubiquitouslyaspartofa“smartgrid,”bothconsumersandtheTDUwillbenefitfromreliabilityincreasesasconsumersreducetheirpeakdemandusage.

ProvidingadvancedmeterstoretailcustomersmaybenefittheTDUsbyallowingthemtoprovideremotely-readmeters,remotelyconnectanddisconnectcustomers,andtheabilitytointerfacewithin-homedevices,suchasaspecialthermostatthatadjuststemperaturesettingsinresponsetodifferentpricesthroughouttheday.SeveralvendorsareworkingwithTexasTDUstofurtherexplorethedevelopmentofin-homenetworksthatwouldallowautomationofappliancestotakeadvantagesoflowerenergypricesatcertainportionsoftheday.

AlthoughAMIcanbeexpensive,theinvestmentcanbeoffsetbythecombinationofoperationalbenefitsitprovides (e.g., reducedcostsassociatedwithmeter reading,connections, theftdetection,anddistributionsystem optimization, etc.) and DSM program benefits (e.g., increased participation in time-of-use rate,benchmarking,anddemand-responseprograms.)ThePUChasdevelopedrulestoguidetheimplementationofAMI and the recovery of the associated costs, and both Centerpoint Energy andOncor havefiledAMIdeploymentplanswiththePUC.

Foremost,thisisadramaticchangeforconsumers,andtheywillneedtobeeducatedaboutthefeaturesandbenefitsofAMI.Inaddition,cooperationisneededamongTDUs,REPsandotherpartieswhomayeachliketodevelopservicesthatleveragetheAMI,aswellasrulestogoverntheaccesstotheAMIandtheuseofdatagatheredbytheAMI.IssuesamongeachoftheseentitieswillhavetoberesolvedbeforeTexascustomerswillbeabletorealizethefullvalueofAMI.

Finally,ERCOTmustdeveloptheabilitytosettlepowerpriceson15-minuteintervaldataforallcustomers.Forcustomerstoreceivethefullbenefitsofreducingtheirconsumptionduringpeakperiods,thecustomerandtheirREPmustbeaccuratelybilledonthebasisofwhentheenergyconsumptionactuallyoccurred.ThismayrequireasignificantcapitalinvestmentbyERCOTandclosecoordinationandsequencingwithERCOT’supcomingtransitiontoanodalmarket,nonetheless,itisacriticalstepforubiquitousdeploymentofAMI.

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Appropriatemeteringinvestmentisalsocriticalforensuringthatdistributedgeneration,suchassolarpanelsonresidentialandcommercialstructures,receivesaccuratecompensationforexcesspowersenttothegrid.Advancedmeterscanseparately trackwhenacustomerwithsolargeneration isanetconsumer fromthegridandwhenthecustomerisgeneratingexcessenergythatissentontothegridforusebyothercustomers.Becausecustomerswithsolarpanelshavethepotentialtobenetconsumersatoff-peakhourswhenpricesaregenerallylower,andnetproducersduringpeakdemandtimes,Texashasauniqueopportunitytoprovidemarketincentivesfordeploymentofsolargenerationbyensuringthatexcesspowerisaccuratelymeasuredatthetimeit isproduced,andthatcustomerreceivesthereal-timewholesalemarketpricefortheexcessenergy.

4.4.2 CustomerEducationWhilemostobserverswouldagreethatthepotentialforDSMissignificant,therearewide-rangingopinionson the amount that is feasible, given customerwillingness to invest in themore efficient technologies orbehaviors.WhileaTDUmaybewillingtoinvestinatechnologythatpaysback(i.e.,thesavingsexceedthecosts)overasevento10-yearperiod,60percentofcommercialandindustrialcustomersrequiretheirenergyefficiencyinvestmentstopaybackintwoyearsorless.Forresidentialcustomers,theupfrontcostsofmoreefficientappliancesandhomescanbeasubstantialbarrier,eventhoughthemoreefficientoptionsultimatelycostlessovertime.Whiletheincentivepaymentscurrentlyprovidedfor,bytheexistingstatutoryprograms,canhelpencouragemanycustomerstotakethesemoreefficientactions,notallcustomerswillbeconvincedofbenefits.

4.4.3 TDUFinancialImpactsCurrentDSMcostrecoverymechanismsfortheTDUscanserveasadisincentiveforthecompaniestoinvestin efficiencymeasures, as rates for some customer classes aredesigned to recover the costs of providingtransmissionanddistributionserviceonaperkWhorperkWbasis.Thatis,eventhoughthecostsofprovidingTDU service is generally fixed, increased energy efficiency measures will reduce customer consumption,resultinginlowerrevenue.Absentsomealternativewaytorecoverthislostfixedcostcontribution,theutility’simplementationofDSMprogramsmayreduceitsearningsuntilsuchtimethatratescanbeadjustedtoaccountforthelowerconsumption.

ThePUChasrecentlymadesignificantrevisionstoitscostrecoveryrulesthatimprovedtheinternalfinancialincentivesofaTDUtoaggressivelypursueDSM.These includepermittingtheTDUtorecover incrementalDSMprogramcostsrequiredtomeetincreasinggoalsthroughanannualcostrecoveryriderinsteadoffilingforatypicallyexpensiveandtime-consumingratecase.Inaddition,TDUsarenoweligibletoretainashareofthenetbenefitsoftheDSMprogramstheysuccessfullyimplementpursuanttocertainperformancecriteria.However,theseincentivesaresubjecttoacapof20percentoftheutility’sprogramcosts.

Sincethesemechanismsarenew,itisnotyetcleariftheywillhavetheeffectofsignificantlyremovingthepre-existingdisincentivesforTDUstopursueDSM.

4.4.4 IncorporationofOtherPartiesandTechnologiesinDSMProgramsItwasanticipatedthattheintroductionofretailcompetitionwouldspurthedevelopmentofnewtechnologiesusedforthedeliveryofenergyefficiencyservices.Whilelow-incomeactionagencies,federalweatherizationprograms, REPs, energy service companies, andother organizations havebeen involved in thedelivery ofDSMprograms,theTDUsremaintheprimarysponsorsoflarge-scaleDSMprograms.NumerousREPsarenowimplementingenergyefficiencyprogramsasawaytoattractandretainretailcustomers.PartofthestudycurrentlybeingconductedbythePUCistoevaluatemeansbywhichthecompetitivemarketcanplayagreaterroleindeliveringtheseservices.

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4.5 Recommended Actions4.5.1 RequireUbiquitousInstallationofAdvancedMetersbyAllTDUsandEnableUsageoftheMeters

byREPs.Underthecurrentstatute,thePUCcannotrequireaTDUtodeploy advanced meters to all customers. Ultimately, thegreatestbenefitswillbeachievedbyubiquitousdeployment,as a complete advanced meter roll-out will permit theautomation of meter reading, reconnection requests, andothermarket facilitating activities performed by the TDUs,andwillprovideoffsettingoperationcoststotheupfrontcostsforthemeters.Broad-baseddeploymentofadvancedmeterswithothersmartgridtechnologieswillalsopermitTDUstobettermonitortheirsystemandrespondtopoweroutages.

In addition to the actual meter deployment, appropriatesettlementoftheconsumptiondatageneratedbythemetersis critical for customers to enjoy the benefits of real-timepricingoffers,andtoreceivethevalueofexcesspowersentto the grid by customers who install solar panels or otherdistributedgeneration.

Recommendation22:ThestateshouldrequireTDUstodeployadvancedmeters,withanappropriatecostrecoverymechanismtoensurethatTDUsearnareasonablereturnonthis investment.ThePUCshouldhavetheauthoritytorequiredeploymentofadvancedmetersasrapidlyaspossible.

Recommendation23:ThePUCshouldensurethatERCOTincorporatesthemostcost-effectivemeansofensuring thatall retail customershave theoption tobe settledon15-minute intervaldata inorder toreceivethefullbenefitsofchangesinconsumptionbehaviorandgenerationfromsolarpanelsandotherdistributedsources.

4.5.2 MonitorandReviewtheResultsofthePUCEnergyEfficiencyStudyRequiredbyHB3693,andAdjusttheProgramasIndicated

ThePUCwillprovideacomprehensivereporttothe81stTexasLegislature,includingevaluationsofthepotentialforadditionalenergyefficiencyandDSMprogramsinthestate,fundingmechanisms,andwhetherthegoalsforreductionsinpeakdemandgrowthshouldbeincreased.

Recommendation24: If thePUC study indicates a greaterpotential for cost-effectiveenergyefficiencyreductions, the state should raise the energy efficiency goals to the higher levels contemplated undercurrentlaw.

4.5.3 CustomerEducation

Recommendation 25: The PUC should incorporate additional messages about the benefits of energyefficiency,conservation,anddemand-responseprogramsintoitscustomereducationcampaign.ThestateshouldfullyprovisionthiscampaignusingtheSystemBenefitFund.

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Section Five: Retail Electricity Market Policy

5.1 Overview of Retail MarketAsdiscussedinSection1ofthisreport,Texas’retailelectricitymarketiswidelyregardedasthemostsuccessfulinthenation,ifnottheworld.Texashasmorecompetitors,moreproducts,morerenewableenergyoptions,andawiderrangeofchoicethananyothercompetitiveelectricitymarket.Texas’vibrantretailelectricitymarketwellpositionsTexasformeetingtheenergychallengesofthenextseveraldecades,asREPswillcontinuetoinnovateandcreatevalue-addedservices,suchasenergyefficiencyanddemand-responseprogramsastheyattempttodistinguishthemselvesfromothercompetitors.

Through the end ofMarch 2008, Texas’ average electricity rates compared favorablywith similarly situatedstatesthathavealargeproportionoftheirelectricityproducedfromnaturalgas,andevenresidentialcustomersenjoyedchoicesthatwerecomparableto,ifnotlowerthan,theratesthatexistedimmediatelypriortoretailcompetition,eventhoughnaturalgaspriceswerenearly300percenthigher.

May2008wasanimmenselychallengingmonthfortheretailelectricitymarketinTexas,especiallyforthoseREPsandcustomerselectingtopurchaseelectricityonashort-termbasis.Naturalgasprices,alreadyathistorichighsof$9perMMBtu,increasedanother33percentbylateMay/earlyJunetomorethan$12perMMBtu.Additionally,thefollowingfactorsaffectedtheTexaswholesaleretailelectricmarkets:

unexpectedtransmissioncongestioncausedextremeandpersistentpricespikes intheSouthTexasandHoustonareasofthegrid,

importsofpowerintothosezonescouldnotbeaccomplishedduetoacombinationofunseasonablyhightemperaturesandelectricitydemand,and

transmissionandgenerationmaintenanceoutageslastedlongerthanexpected.

BecauseanumberofREPswereaggressivelyrelyingonthebalancingenergyandtheshort-termenergymarkets14toservetheircustomers,sometimesatfixedrates,theseproviderssufferedsevereliquidityproblems,andhadtoexitthemarket.Itisimportanttonotethatthevastmajorityofresidentialcustomerswereprotectedfromprice spikesbecause theyhadchosena retailelectricityplanthat provided for fixed prices or their provider had securedadequatelong-termcontractssuchthatonlyasmallportionoftheirenergydemandwas servedby the shorter-termenergymarkets.

Whilequick actionby thePUC, ERCOT, and the IndependentMarket Monitor, appear to have addressed some of thecongestionmanagement issues, the events inMay illustratethe need to continue the move to a nodal market and theneed for many of the recommendations in this report. Themove to a nodal market design will enable more effectivecongestionmanagement,additionaltransmissioncapacitywillpermit enhanced imports of wind energy from West Texas,and aggressive DSM and deployment of advanced meterswill empower customers to better manage their electricityconsumption.

14 ERCOTobtainsanddeploysbalancingenergytomaintainthebalancebetweenload(energyusage)andgenerationandtoresolvetransmissioncongestionthroughacentralizedauctionprocessknownasthebalancingenergymarket.Approximatelyfivepercentofloadissoldthroughthebalancingenergymarket;theremainderissoldthroughbilateralcontractsbetweenindependentparties.

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5.2 Current ChallengesPersistentlyhighandvolatilenaturalgaspricescombinedwiththehesitationtoinvestincoalgenerationbecauseofuncertaintycausedbythethreatoffederalcarbonlegislation,arethegreatestchallengestothesuccessoftheretailelectricitymarket.WhileTexas’retailmarkethassuccessfullymitigatedtheimpactofrapidlyincreasingnaturalgaspricesonthemajorityofTexascustomers,asdiscussedinSection2,withsuchasignificantamountof natural gas-fired generationon themargin in the ERCOTmarket, natural gas price volatility in the short-termwillcontinuetobeachallengeforREPsandcustomers.SuchvolatilitycanmakeitverydifficultforREPs,businesses,andcustomerstoplantheirenergyneeds.However,Texas’retailmarketprovidesawiderangeofoptionstohelpcustomersmanagetheirneedsincludinglonger-termfixedpricecontracts,andshort-termanddemand-responseoptionsforcustomerswhohavetheabilitytoshifttheirconsumptionpatterns.ThePUCandERCOTshouldcontinuethetransitiontoamoreefficientwholesalemarketmodel,andthePUCshouldcontinuetorefinemarketrulestoensurecustomersareadequately informedabouttheiroptionsandprotectedfromdeceptiveandmisleadingpractices.ThePUCshouldalsocontinuetovigilantlyoverseethemarkettoensurethatmarketpowerabuseandmarketmanipulationdoesnotartificiallyraisepowerprices.

5.3 Recommended Actions5.3.1 TexasShouldResistAttemptstoRe-regulatetheMarketandInsteadFocusonRemovingBarriers

toLower-CostGenerationResourcesTheeventsofMayandJune2008willundoubtedlycausesometocall forare-regulationoftheelectricitymarket.However,asdiscussed inSection2, inorder toreduceelectricityprices inTexas,naturalgasmustbemovedoffthemarginbytheadditionofa largeamountofnon-naturalgasbaseloadgeneration.Whilesignificantamountsofnuclearandcoalgenerationareunderdevelopment,uncertaintyaboutthepotentialforcostlyregulationofCO2emissions ispreventingthese lowercost resources,especiallycoal, frombeingdevelopedinthequantitiessufficienttolowerelectricityprices.Also,uncertaintyaboutlongtermstorageofspentnuclearfuelishavingthesameeffectonnucleargeneration.

Re-regulationwouldeffectivelyrequiretheremovalofallcustomerchoicesexceptasinglemonopolyproviderwhowouldberequiredtopurchaseelectricityfromthewholesalemarketplaceand/orconstructnewgenerationunits.AsshowninSection2,thecurrentcostsofconstructingnewcapacitymakeitunlikelythatsignificantcostreductionswilloccur,andpurchasesfromthewholesalemarketwillnotresultinsignificantlydifferentpricesthanREPscanobtainfromthemarketplacetoday.Re-regulationwouldalsocreatesignificantuncertaintyforcompanies,suchaswindenergydevelopers, lookingtoinvestinthestate.AsdiscussedinSection2,everyotherareaofthecountry,whetherregulatedornot,facessignificantcostsofaddingnewgenerationoverthenexttwodecades.Texasislightyearsaheadoftheseotherregionsinaddingnewgenerationandtransmissioncapacity, and Texas’ competitive marketplace has placed the risk of substantial new capital additions ingenerationon the companies building these resources andnot Texas customers. Reverting to a regulatedmarketwouldsubjectTexanstosubstantialnewcostswithouthavingameaningfuldownwardimpactontheoveralllevelofelectricityprices.

Instead,Texasshouldadopttherecommendationsinthisreport,acceleratethedevelopmentofnon-naturalgasgeneration,reliably incorporatewindenergytothegrid, removebarriers tothedevelopmentofothertypesof generation, andoffset theneed for future capacity by expanding energy efficiency anddemand-responseprograms.

Recommendation 26: The state should resist efforts to re-regulate themarket and instead adopt therecommendationsinthisplan,whileretainingtheoversightofthePUCandERCOToverthemarket.

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5.3.2 ThePUCShouldRevisittheLicensingRequirementsforREPs,GiventheSubstantialIncreaseinNaturalGasandElectricityPricesSinceMarketOpening.

ThePUCcurrentlyhasverylowcertificationbarriersforcompaniestoprovideretailelectricityserviceintheareasofthestateopentocompetition.Whiletheselowbarriershavepermittedawiderangeofcompaniestoenterthemarket,thefinancialstandardsadoptedforcompaniesatmarketopening,whennaturalgaspriceswere$2to$3perMMBTU,maynolongerbeadequatewithpricesmorethanfourtimesthatlevel.

Recommendation27:ThePUCshouldrevisititscertificationrequirementsforREPsandevaluatewhethercurrentstandardsareadequategiventhesignificantchangeinnaturalgasandwholesaleelectricitymarketconditionssincemarketopening.

5.3.3 ContinuedCustomerEducationIn1999, thePUCwasappropriated$12millionper yearfrom the System Benefit Fund to conduct a statewide,comprehensive education campaign to inform Texansabout the changes in the electricity market. In 2007,GovernorPerryrequestedthatthelegislaturerestorethemajorityofthisfunding,butthelegislaturefailedtofundthis program adequately. As a result, the PUC’s annualeducationbudgetisonly$750,000,makingitdifficultforthe PUC to continue the important work of educatingTexans about the significant changes in the electricitymarket and how conservation tools can help customersmanagetheirelectricityusage.

Recommendation 28: The state should reinstitutefundingforthePUC’scustomereducationefforts,andthe Governor should direct the PUC to incorporatethe topics addressed in this plan into the educationcampaign.

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Section Six: Texas Energy Workforce Competitiveness

Texas’workforce is producedby the state’s skills pipeline,whichprepares, advances, and renews skills. Thepipelineconsistsofthebasiceducation(K-12),communityandtechnicalcolleges,universities,privatetrainingproviders,theworkforcesystem,andcorporations.Whentheskillspipelineworkswell,thereisaflowofhighschoolgraduateswhoenteroccupationaltrainingandcolleges,producinggraduateswithspecificskillsneededbykeyindustries.Buildinganext-generationskillspipelineisacorecompetitivenessneedfortheEnergycluster.

Understandingworkforcedemandandsupplyisthecornerstoneofassessinghowwelltheskillspipelineworks.ThedemandandsupplyofTexas’workforcefortheEnergyclusterhasbeenanalyzedforthe10yearperiodstarting in2007.Todetermineworkforcedemand, criticaloccupations in theEnergyclusterand the relatedknowledge,skills,andabilities(KSAs)werefirststudied. Industryprojectionswerethenusedtoestimatejobgrowththrough2017.

The skills pipeline framework—preparation, advancement, and renewal—was used to guide analysis of theworkforcesupply.Todothis,TexaswasbenchmarkedagainsttheU.S.technicalworkforcepipelineandtrainingprograms for industrieswith thegreatestprojected jobgrowth. Inaddition,aneconomic impactmodelwasusedtoforecastthetechnicalworkforcepipelinethrough2017.Finally,aworkforcegapanalysiswascarriedoutbycomparingdemandandsupplygrowthratesthrough2017.ThisanalysissetthestageforidentifyingTexas’skillspipelinechallengesfrompreparation(K-12)throughadvancement(communityandtechnicalcollegesanduniversitytraining)andrenewal(re-trainingandemploymentoptions).

6.1 Projection of Workforce Demand by Key OccupationsTexas’Energyclusterworkforceisprojectedtogrowinthefossilfuels,nuclear,renewables,andtransmissionanddistributionsectorsahealthy68percentbetween2007and2017,fromabout40,000to66,000jobs.(seeFigure42)Usinganinput-outputmodel,occupationalgrowthprojectionsweremadefor2017resultingfromindustrialgrowthasprojectedby ICF industryanalysts. IndustrygroupssuchasNuclearandRenewablesareprojectedtoexperienceworkforcedemandgrowthof150percentand100percent,respectively.In10years,Renewableswillcontinuetobethelargestjob-providingindustry.

6.2 Workforce Supply AssessmentGiventheoutlookforskillsdemandandsupplyforoccupationscrucialtothecompetitivegrowthoftheEnergycluster,howwell istheTexasskillspipelineperforming?ThefollowingsectionexaminesTexas’skillspipelineissuesateachofthesepartsoftheskillspipeline:

Preparation:AreTexasstudentscollege-andwork-ready?

Advancement:IsTexasdevelopingtherightskillsattherighttime?

Renewal:IsTexasretainingandharnessingthecurrentskillsbase?

IndustryGroups 2007Jobs 2017Jobs TotalChange %Change

FossilFuels 7,543 8,339 796 11

Nuclear 2,214 5,545 3,331 150

Renewable(Wind,Solar,Hydro,&Tidal) 18,427 36,903 18,476 100

TransmissionandDistribution 11,330 15,636 4,306 38

TOTAL 39,514 66,423 26,909 68

Source: EMSI (Economic Modeling Systems, Inc.), Economic Impact – Input/Output, 2008

Figure42:ProjectionofWorkforceDemandintheEnergyCluster

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6.2.1 PreparationWorkforcedevelopmentbeginswiththeperformanceoftheK-12educationsystem.Nationwide,andmostnotably inTexas, thedemographicsof thestudentandworkforcepopulationshavechangedandcontinueto change dramatically. The overall population is aging, andwith it the proportion of non-workers in thepopulation.

Aswithmanyindustries,theneedforworkerswithcollegedegreesinscience,technology,engineering,andmath (STEM) is growing in the Energy cluster. For these reasons, increasing high school graduation rates,enhancingreadinessforcollegeandwork,andimprovedSTEMcapabilitiesareimportanttomeetingworkforceneeds.KeyperformanceindicatorsoftheTexaspreparationsystemaremeasuresofretentionandgraduationratesaswellashigh-qualityinstructioninmathandscience.

Inadditiontoreviewingstandardizedtestscores,Texashighschoolcompletionrateswerealsoanalyzed.Highschoolcompletioniscriticalfortworeasons.First,Texashighschoolgraduatesconstitutethepoolofentrantstopostsecondaryeducation,andsecond,criticaljobsintheEnergyclusterrequireadvancedtechnicaleducation.HighschoolcompletioniscrucialfortheTexaseconomybecausecompetitivenessisheavilydependentontheavailabilityofatrainedandeducatedworkforce.

Likemanystates,Texasfacessignificantchallengeswithrespecttohighschoolcompletion.Inresponsetothischallenge,Texashasbeenworkingtoimprovehighschoolsbyredesigningthetraditionalhighschoolmodeltoincreasestudentachievementandensureallstudentsreachtheiracademicandcareergoals.TheTexasHighSchoolProject(THSP)createdin2003andsponsoredbytheTexasEducationAgency(TEA),theOfficeoftheGovernor,theBillandMelindaGatesFoundation,theMichaelandSusanDellFoundation,andothers,workstopreparehighschoolstudentsforcollegeandcareersuccess.This$261millionpublic-privateallianceprovidesavarietyofoptionsforhighschoolsuccesstoaccommodatedifferinglearningstyles.THSPmakesgrantstoschoolsthattargetstudentsatriskfordroppingoutofhighschool,providingstrategies includingtutoring,mentoring,andonlineaccelerationprograms.

6.2.2 AdvancementAfundamentalissueiswhetherprospectiveworkersarebeingpreparedwiththerightskills.TheU.S.DepartmentofLabor’sOccupationalInformationNetwork(O*NET)wasusedtolinkeachofthemostin-demandjobswiththe requiredKSAs. The jobs that aremost in-demand in the energy industry generally require core STEMKSAs. The coreenergy-relatedKSAsarepresented in Figure43. TheseKSAsare typically acquired throughpostsecondaryproprietarytechnicalschools,communityandtechnicalcolleges,anduniversities.

Mechanical

EngineeringandTechnology

ProductionandProcessing

EducationandTraining

Mathematics

EnglishLanguage

Design

BuildingandConstruction

ComputersandElectronics

Chemistry

CustomerandPersonalService

PublicSafetyandSecurity

Transportation

SocialPerceptiveness

Instructing

CriticalThinking

ActiveListening

ServiceOrientation

TechnologyDesign

SystemsAnalysis

JudgmentandDecisionMaking

Science

Source: EMSI (Economic Modeling Systems, Inc.), Career Pathways - Competency Analysis, 2008

Figure43:CoreEnergy-RelatedKSAs

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Comparedtobenchmarkstates,Texashasasimilarproportionofpostsecondarystudentsgoingintodegreeprogramsrelatedtoenergyoccupations.Forexample,usingdatafromtheNationalCenterforEducationStatisticsfor2008,3.6percentofpostsecondarygraduatesinTexasareinengineeringorengineeringtechnologiesascomparedwith3.5percentinCalifornia,3.4percentinColorado,3.3percentinIllinois,4.3percentinLouisiana,2.9percentinNewYork,and3.0percentinPennsylvania.Themoreimportantcomparison,however,isnotTexastothebenchmarkstates,butrathertheU.S.tobenchmarkcountries.Forexample,9.3percentofU.S.tertiarygraduatesareinthesciences,whileAustralia,Canada,andtheUnitedKingdomproduce13.6,11.6,and15.1percent,respectively.15

6.2.3 RenewalOneofthegreatestconcernsforthesustenanceofmanyindustriesistheagingworkforce.Arelatedconcernamongemployersistheamountofskillandexperiencelostasemployeesretire.InTexas,theworkforceaged55andolderaccountsfor15.2percentofthelaborpoolversus12.3percentonlyfiveyearsearlier.16Inaddition,evidencesuggeststheenergyworkforceisslightlyolderthaninotherindustries—themedianagefortheU.S.workforceis41years,whilethemedianagefortheutilitiesindustry,forexample,isabout45(justlowerthanthemedianageofoilandgasworkers).17

Thechallengeofskill renewalamongtheexistingworkforceremains.Employerswillneedtosupporttheiremployeesinobtainingtimelyskillupgradesinordertoremaincompetitive.Texas’communityandtechnicalcollegeshavebeenparticularlyactiveinassistingemployersinrenewingskillsrelatedtotherapidlychangingEnergyclusterinfieldssuchaswind.

Employerswillneedtoconsiderincreasinglyhowtoleverageopportunitiesamongindividualswhoarenotintheworkforce,eitherfromthemilitaryordecliningindustries.

Recruitingnewworkers,retainingcurrentworkers,andtransferringknowledgefromretireestothosewhowilltaketheirplaceremainimportantchallenges.Additionally,giventhegeneraldecreaseinyoungerworkers,Texasismakinggreatstridesindevelopingandimplementingprogramstorecruitandtrainaworkforcefornewertechnologies.Forexample,BaylorUniversity,TexasA&MUniversity,theUniversityofTexasBrownsville,theUniversityofTexasElPaso,andtheUniversityofHoustonallhaveprogramsinrenewableenergy.Inaddition,TexasTechUniversity,TexasSouthernUniversity,WestTexasA&MUniversity,TexasStateTechnicalCollege,andTheUniversityofTexasatAustinhaveprograms inwindpower training. In fact,TexasStateTechnicalCollegeWestTexas implementedoneoftheveryfirstwindenergytechniciancertificationprograms inthenation.Texasalsohasthreeprogramsdedicatedtonuclearenergyandfivetosolarpower.

Texas has the largest investment nationwide in teacher performance pay. In 2006, the Texas Legislatureauthorizedtwoteacherincentivepayprograms.TheTexasEducatorExcellenceGrantprogram(2008)awardsapproximately$100millionannuallytohigh-performingorimprovingschoolsrankedinthetophalfofschoolsinpercentageofeconomicallydisadvantagedstudents.TheDistrictAwardsforTeacherExcellenceprogramwillbegininfiscalyear2009andwillproviderewardstoteacherswhocontributesubstantiallytoimprovedstudentachievement.ParticipationinthisprogramisoptionalforallTexasschooldistricts.Texashastakenamajorstepinthequesttoattractandretainthebestteacherswithitsinvestmentinteacherperformancepayprograms.

15OrganizationforEconomicCo-OperationandDevelopment.7July2008<http://www.oecd.org>.16 U.S.CensusBureau.“2006AmericanCommunitySurvey.”U.S.CensusBureau.7July2008<http://www.census.gov/acs>.17 CenterforEnergyWorkforceDevelopment.“GapsintheEnergyWorkforcePipeline.”CenterforEnergyWorkforceDevelopment2007.7July2008<http://

www.cewd.org/surveyreport/execsummary_cewdreport_oct07.pdf>.

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6.3 Workforce Gap AnalysisOnecorequestionfacingtheEnergyclusterisdefiningwhichskillsareneededandhowtobestachievetheirdevelopment,otherwiseknownastheskillsgap.Toanalyzegapsbetweenfutureneedsandfulfillmentcapacity,workforcedemandandsupplyfortheTexasEnergyclusterwereforecasted.AnalysisrevealsthattherateofgrowthinworkforcedemandforNuclearandRenewablefaroutpacesthegrowthinsupplyoftrainedprofessionalswhocansatisfyindustry’sworkforcerequirements.FortheNuclearindustrygroup,thedemandgrowthrateof150percentismatchedbya36percentincreaseinsupplyrates.Similarly,fortheRenewablesindustrygroup,ademandgrowthrateof100percentismatchedbya34percentincreaseinsupplyrates.Theothertwoindustrygroups,FossilFuelsandTransmissionandDistribution,areexpectedtosatisfytheirworkforcedemandswithfuturesupplies.Figure44belowshowsworkforcedemandandsupplymisalignmentsfor2017.

Theprimaryskillspipelinechallenge for the futureTexasEnergyclusterwillbe toensure that thesupplyofqualifiedpersonnelmeetsthedemandofthecluster’sNuclearandRenewablesindustrysegments.

Figure44:WorkforceDemand-SupplyMisalignmentintheEnergyClusterIndustryGroup

Source: EMSI (Economic Modeling Systems, Inc.), Economic Impact/Output, 2008. Supply: Regression Analysis of Graduation Data from National Center for Education Statistics, Common Core of Data (CCD)

160%

140%

120%

100%

80%

60%

40%

20%

0%

150.5%

35.6%

100.3%

34.5% 38.0% 34.8%36.9%

10.6%

FossilFuels Nuclear Renewables-Wind,Solar,Hydro,andTidal

TransmissionandDistribution

WorkforceDemand WorkforceSupply-NumberofGraduates

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6.4 Texas Workforce ChallengesToensurecompetitivenessintheEnergycluster,Texasneedstobuildaskillspipelinethatconsistentlysuppliestrained,work-readypersonnel.Basedontheworkforceanalysisandmodeling,reviewofTexas’position,andstakeholderinputs,thechallengesfacedbyTexas’skillspipelinefortheseclustersincludesthefollowing:

6.4.1 PreparationChallenges6.4.1.1 PreparingStudentstoChooseCareersintheEnergyClusterBasedonanalysisoftheEnergycluster,occupationsintheNuclearandRenewablessub-clustersareprojectedtoexperienceagrowthinworkforcedemandthrough2017thatfaroutpacesthesupplyofskilledlabor.18

OnekeyworkforcechallengeforTexas istofamiliarizestudentswiththebenefitsofchoosingacareer inEnergy.Ingeneral,studentslackanunderstandingofavailableindustrycareerchoicesandtheeducationalpathrequiredtoachievecareerobjectives.

6.4.1.2 EnhancingHigh-SchoolCompletionRates,ImprovingTeacherQuality,andBetterPreparingStudentstoBeCollege-andWorkforce-Ready

BenchmarkanalysisindicatesthatTexascompareswellwithotherstatesonelementaryandmiddleschoolsciencestandardizedtestscores.However,Texashasahighschoolcompletionratethatislowerthanrequiredtoproducetheworkforcetomeetthecluster’sneeds.Alowerrateofhighschoolcompletiontranslatesintoasmallercollege-eligiblestudentpopulationandultimatelyasmallerpotentialworkforceforindustry.

Perhaps themost important strategy for improvingpublic education is to attract and retainhigh-qualityteachers in hard-to-teach subjects (math and science) and geographic areas (inner cities, rural areas,andschoolsnotmeetingannualyearlyprogressforsuccessiveyears).Texashasstartedaddressingthesechallengeswithitsrelativelylargeteacherincentivepayinitiatives.

College-readiness, as definedby the TexasHigher EducationCoordinatingBoard(THECB), refers tohavingtheknowledgeand skills necessary to begin entry-level college courseswith a reasonable likelihood of success and not requiringdevelopmentaleducation.19The2007reportbytheCommissionforaCollege-ReadyTexas founda lackof rigor in thestate’scurriculum standards. Improving college readiness by betteraligningcurriculawithcollegereadinessstandards,enhancingcurriculum standards in math and science, and increasingrigorousapplied-learningopportunitiesinTexaspublicschoolsis crucial to improving the competitive advantage of Texas’students.

18 SeeFigure42onpage62fordemandgrowth-ratevs.supplygrowthratedetails.19 CommissionforaCollege-ReadyTexas-FinalReport,November7,2007,<http://www.collegereadytexas.org/>.

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6.4.2 AdvancementChallenges6.4.2.1 ReviewingandModifyingSTEM(Science,

Technology,Engineering,andMathematics)CurriculatoEnsureitReflectsKnowledgeandSkillsNeededbyIndustry

High-level job analysis was carried out in the criticaloccupations in each cluster to identify the associatedKSAs necessary for cluster success. Graduating studentsand employeeswith KSAs in the STEMareas are crucialto support projected industry growth and to feed intoscienceandengineeringoccupations.Morespecifically,aworkforcewithKSAsinmathematics,chemical,mechanical,installation, and engineering and technology are thefoundationfortheworkperformedintheEnergycluster.Stakeholders validated these findings and suggestedstrategiesneededtoaddressSTEM-relatedworkforcegapsinprofessionalandtechnicalpositions.

Both the careereducationprogramsand the college readinesseffortsdiscussedabovewill be critical toincreaseearlyawareness,notonlyofcareeroptions,butalsooftheacademicpreparationneededtosatisfyworkforcerequirements.

6.4.2.2 DevelopingaMoreFlexibleTechnicalEducationandTrainingSystemTexascommunityandtechnicalcollegescannotfreelyoffertrainingincertainserviceareas,becauseitwouldrequire navigating cumbersome approval processes. Additionally, stakeholders’ suggested approvals fortrainingareoftendenied.This limitedflexibilitypreventscertainbusinessesfromsecuringneededtrainingwhenpursuingnewprojects.Texasneedstoaddressthisjurisdictionalchallenge.

6.4.3 RenewalChallenges6.4.3.1 MitigatingtheEffectsofChangingDemographicsandSkillObsolescenceTexas’Energycluster isundergoingdemographicchange in the formofanagingworkforce.Workersage55andupcompose15.2percentof the labor force,up from12.3percentfiveyearsearlier. Inaddition,manyworkersfaceskillobsolescenceduetodeclinesinindustrydemandsforcertainskills,technologicaladvancement,andprocesschangesthathaveoccurredintheindustryoverthelastdecade.

Texasfacesachallengeofretrainingexistingworkerswithobsoleteskillswhileinfusingthelaborpoolwithnewworkerstopreventsevereworkforceshortagesattheentryandmiddleoccupationallevels,andalsotooffsetthenegativeeffectsofanagingworkforce.

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6.4.3.2 ImprovetheAbilitytoRespondandRemainAheadoftheCompetitionLikeitsglobalcompetitors,Texasfacesthechallengeofrespondingtoeconomicconditionsinaninnovative,timely,andcollaborativemanner.To stayaheadof its competitors,Texasneeds toaddress the followingchallenges.

Strengthencapacitytobetterassesscurrentandfutureworkforceneedssothatgapsbetweensupplyanddemandinpriorityindustriescanbediscerned.Thelackofanindustry-widesupplyanddemanddatabasepresentsachallengeforeducationalinstitutionsandindividualsinplanningandrespondingtoemergingworkforceneedsandopportunities.

Makeinformationaboutjob,education,andtrainingopportunitiesinkeyindustryclustersmoreeasilyaccessible.Texasworkforceandeconomicdevelopmentwouldbenefitbyimproving,developing,anddeployingcross-agencystrategiestorespondtoindustryneeds.Texaswouldalsobenefitbyimplementingregionally-focusedstrategiescenteredonitsindustryclusters.

6.5 Recommended Actions BuildingtheTexasworkforceskillspipelineisamajorissuethatextendsbeyondthetwoclustersthatarethefocusofthisreport.Manyclustersaresufferingfromdeficitsinskilledemployeesandabroaderstrategyneedstobedeveloped.Proposedactionsforaddressingtheskillspipelinechallengesidentifiedabovearenowpresented.

6.5.1 PreparationRecommendationsTexas may prosper from several industries that are projected to grow, but these industries need qualityworkers.Someoftheseindustrieshaverecruitmentchallengesrootedinhistoricalbiasesandmisperceptionsaboutthequalityanddiversityofjobsavailable.Otherjobsrequirehighschoolgraduatestobecollege-andworkforce-ready.Texasshouldaddressthechallengeofpreparingstudentstochoosecareersinallindustries,includingthoseintheEnergycluster,byacquaintingstudentswithcareerchoicesandgettingthemcollege-andworkforce-ready.

Recommendation29:Texasshouldcontinuetoinvestinprogramsdesignedtogenerateinterestinmathandscience.Thestateshouldincreasethescaleofsuccessfulprogramsthatproducequalifiedmathandscience teachers inorder to supportmore rigorousSTEMeducation.Acquaintingstudentswithenergyindustry career options through online tools will also enhance interest and engage learners in STEMfields.

Recommendation30:Texasneedstoincreasehighschoolcompletionratesandensurethathighschoolgraduatesarecollege-andworkforce-ready.Thestatemustadoptmodelcurriculaalignedwithcollegeandworkforcerequirementstoreachhigherstandards.

6.5.2 AdvancementRecommendations

Recommendation31:Texasneedsto increasethenumberofpostsecondarygraduateswithknowledgeandskills thatmeet industryneeds.Thestateshouldencouragecollegesanduniversities toalign theirSTEMcurriculawithenergyworkforceneeds.

Recommendation32:Texasshouldimprovetheflexibilityofitstechnicaleducationandtrainingsysteminresponsetoindustryneedsacrossthestate,regardlessofserviceareaboundaries.Thestateshouldexaminewaystoallowcommunityandtechnicalcollegestodelivertrainingwhereemployeesareregardlessofthecollege’slocation.

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6.5.3 RenewalRecommendationsTexas can meet future workforce needs by continuingeffortstoretrainworkersfromslow-growingindustriesandmaking it easier for skilled workers, such as those in themilitary,totransitionintotheTexasworkforce.Texasshouldalso increase its ability assess supply anddemandgaps intheskillspipeline.

Recommendation 33: The state should continue theSkills Development Fund, which supports trainingprogramsthatresponddirectlytotheworkforceneedsofTexasemployers.Thisisaneffectivetoolforhelpingtoretrainworkersandinmeetingtheneedsofindustryina“just-in-time”manner.

Recommendation 34: The energy industry should lookto the military and declining industries to expand itsworkforce.Texasshouldworkwiththemilitarytoalignoccupationcertificationrequirementssothatre-trainingprogramsrecognizetheexistingskillsandtrainingofarmedforcespersonnel.Thestateshouldalsofocusonretrainingworkersfromdecliningindustriestoenabletheirtransitiontohigh-needoccupations.

Recommendation35:ThestateshouldcreateaWorkforceSupply-DemandDatabase.Texasneedsaccuratedatatoassessthecurrentandfutureworkforcegapsbetweensupplyanddemandinpriorityindustriesandoccupations.Thiswouldrequireacollaborativeeffortamongprivateindustry,theTHECB,theTWC,theTEA,andotherrelevantstakeholders.

Recommendation 36: The state should establish a Texas Center for Workforce Innovation andCompetitivenesstopromoteandsupportskillspipelineinitiatives.Theurgencyofskillspipelinechallengescalls forestablishingan intermediary that can facilitateworkforcepartnerships in supportofeconomicdevelopmentprioritiesinregionsacrossTexas.ThecentershouldhousestafffromtheTEA,theTWC,theTHECB,andtheTWIC.

6.6 Summary of Workforce Strategic DirectionsTheTexasEnergyclusterhasoneofthelargestworkforcesinthestate.BuildingaskillspipelinemaybeoneofthemostimportantchallengesfacingTexasbuttherapidpaceofchangeintheindustrymeansthatTexasmustensureitsabilitytodeliveraqualityworkforce.

Major energy firms are already learning towork closelywith nearby high schools to introduce their careeropportunitiesandbuildrelationshipsthatwillhopefullyleadtostudentsremaininginschool,graduating,andgoingontoreceivetrainingthatwillleadtoacareerintheirindustry.EnhancingtheK-12capacitytoretainandpreparestudentsisaprincipalchallengeinthisclusterorinanyother.Fortunately,thesystemforadvancingskillsinTexashasbeenadaptiveandisworkingmorecloselywithindustriestoshapeanddelivertrainingprogramsthatbettermatchtheirneeds.

Texashasastrongtraininginfrastructurebutthescaleofchallengesahead,intermsofrapidchangesinskillsneedsandanagingworkforce,meansthereneedstobeanincreasingconvergenceoflifetimehumancapitalmanagement frompreparationthroughadvancementandrenewalofskills. Industryandalleducationalandtraininginstitutionsneedtoformnewregionalskillspipelinepartnershipstoachievethis.Anewintermediarytohelpstudy,enable,andguidethesechangesmayalsobeneededinTexas.

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Section Seven: Implementing the Energy Plan

Texasistheundisputedleaderinenergyandpetroleumproductionandconsumption.Inordertoachievethisposition,industryandgovernmenthaveworkedtogetherfordecadestoproduceenergyforuseinTexasandtoexportresourcesaroundtheglobe.

However,thenextcenturyofenergydevelopmentwillprovetobemorechallengingthanthefirstcentury.Texaswillleadthenationinthedevelopmentofnewnuclearplants,useitsvastundergroundreservoirstostoreCO2,produceelectricitywithcleanresourceslikewindandsolar,anddevelopwaystousethe250yearsupplyoflignite.Inordertoachievethenextcentury’sgoals,Texasmusthaveagovernancestructurethatfitsitsfuturegoals.

Thestates’majorenergyregulatory,permitting,research,andassistanceprogramsaredispersedthroughoutatleastsevenstateagencies.

ThePublicUtilityCommissionoverseesthewholesaleandretailelectricitymarkets,includingERCOTandTDUs,andthesystembenefitfundtosupportlowincomecitizens;

TheTexasCommissiononEnvironmentalQualitypermitsnewelectricgeneratingplantsandcoalmines;

The Railroad Commission regulates the oil and gas production in the state aswell as lignite and coalproduction;

TheGeneralLandOfficeissuespermitsforresourceproduction,bothwindandoilandgas,onstatelandsandoffshorewatersandhasalternativefuelsandconservationprograms;

TheComptrollerdirectstheresourcesoftheStateEnergyConservationOfficewhichdisbursesfederalandotherrevenuesusedforenergyefficiency;

TheTexasDepartmentofAgriculturepromotesthedevelopmentofbiofuelsinTexas;and

TheTexasDepartmentofHousingandCommunityAffairsdisbursesweatherizationassistancegrants.

Thesplitofjurisdictioncausesconfusionforbusinessandindustry,andmakesitmoredifficulttocarryoutacohesiveenergypolicy.

Recommendation37:Thestateshouldcreateacouncilofmemberagenciesordesignateanofficialtaskedwithcoordinatingenergyfunctions.

Responsibilities:TheCouncilorofficialshouldhavetheprimaryrolesoutlinedbelow:

PrepareBiennialTexasEnergyPlanUpdate:Withinputfromvariousagencies,prepareandreleasebiennialTexasEnergyupdatewithannualupdatesandongoingcommunicationwiththepublicandindustry.

CoordinateImplementationofLegislativeMandates:Coordinateimplementationoflegislativemandateswithlistedagenciestoensurethatmandatesareexecutedinacohesivemanner.

OverseetheGrantingandAdministrationofInnovationPrize:Overseethegrantingandadministrationoftheinnovationprizeforthestorageofenergycreatedinthisplan.

OverseeNuclearResearch:Overseethepartnershipbetweeninstitutionsofhighereducationandindustrytoresearchopportunitiesregardingtheentirenuclearfuelcycle,includingrecyclingofspentfuel.

OverseetheGrantingandAdministrationofInnovationPrize:Overseethegrantingandadministrationoftheinnovationprizeforcleancoal.

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Section Eight: AcknowledgementsGovernor’s Competitiveness Council (GCC) members Members with an asterisk beside their names resigned before the issuance of this report.GCCChairman:MichaelWilliams,Chairman,TexasRailroadCommissionPhilWilson,TexasSecretaryofStateandFormerGCCChairman*TomBurbage,ExecutiveVicePresidentandGeneralManager,LockheedMartinAeronauticsCompanyDonCain,President,AT&TTexasTheHonorableSusanCombs,TexasComptrollerofPublicAccountsDeirdreDelisi,Chairwoman,TexasTransportationCommissionAaronDemerson,ExecutiveDirector,Governor’sDivisionofEconomicDevelopmentandTourismJimEpperson,SeniorVicePresident,StateLegislativeandRegulatoryAffairs,AT&TCorp.*GayleFallon,President,HoustonFederationofTeachersBuddyGarcia,Chairman,TexasCommissiononEnvironmentalQualityMikeGreene,CEO,LuminantEnergySandyKress,Chairman,CommissionforaCollegeReadyTexasRonLehman,EmployerCommissioner,TexasWorkforceCommissionJohnnyLovejoy,II,PresidentandCEO,LovejoyandAssociatesGrayMayes,DirectorofPublicAffairs,TexasInstruments,Inc.TheHonorableDonMcLeroy,Chairman,StateBoardofEducationCharlesMcMahen,PastChairman,Governor’sBusinessCouncilRonMcMillan,RegionalVicePresidentofGovernmentalAffairs,TimeWarnerCableBillMorrow,Chairman,TexasEmergingTechnologyFundZebNash,SiteManager,ExxonMobilChemicalCompanyJosephO’Neill,III,ManagingPartner,O’NeillProperties,Ltd.RaymundParedes,Commissioner,TexasHigherEducationCoordinatingBoardRobertScott,Commissioner,TexasEducationAgencyBarrySmitherman,Chairman,TexasPublicUtilityCommissionTheHonorableToddStaples,Commissioner,TexasDepartmentofAgricultureJohnSylvester,Jr.,Chairman,TexasWorkforceInvestmentCouncilKipThompson,VicePresidentofGlobalFacilitiesandStrategicGrowth,Dell,Inc.JeffreyWade,ExecutiveVicePresidentandGeneralCounsel,LexiconGenetics,Inc.RicWilliamson,Chairman,TexasTransportationCommission,posthumousBobWingo,Chairman,TexasEconomicDevelopmentCorporationPaulZmigrosky,GroupVicePresidentofProcurementandLogistics,Frito-Lay

Project ManagementDonnaNelson,OfficeoftheGovernorAndresAlcantar,OfficeoftheGovernor

Special ContributorBrianLloyd,PublicUtilityCommissionofTexas

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Thefollowingarevariousstakeholdersthatcontributedtothisinitiativethroughmeetingsandinterviews.Stakeholder Participants and Other ContributorsAssociationofElectricCompaniesofTexasAEPTexasAESWindGenerationAllianceforRetailMarketsApacheCorporationAustinCleanEnergyIncubatorBarrettandSmithLawBayCorpHoldings,LTDBrichfieldBurchetteRittsandStone,PCBrownMcCarroll,LLPCenterforStrategicandInternationalStudiesCenterPointEnergyChevronConstellationConsumerPowerline-ExtendEnergyCriterionCatalystsandTechnologiesCurrentGroup,LLCDeutscheBankDevonEnergyDirectEnergyDuPontE.OnClimateandRenewablesEconomicAllianceoftheHoustonPortRegionElectricReliabilityCouncilofTexasEnergyCompanyEnerNOCEntergyTexasEOGResourcesElectricReliabilityCouncilofTexasExelonPowerExxonMobilFluorCorporationFPLEnergy,LLCGexaGoodCompanyAssociatesGreenEarthFuelsGuggenheimPartnersHelioVoltCorporationHoustonCommunityCollegeInternationalPowerAmericaKohlbergKravisRoberts&Co.LamarUniversityLCRALinnEnergyLubrizol

LuminantPowerCo.MaerskOilAmerica,Inc.McClendonMorganStanleyNationalPetrochemicalandRefinersAssociationNRGTexas,LLCOccidentalPetroleumOfficeofPublicUtilityCouncilOncorOrganicFuelsOxeaCorporationPandaEthanolPanhandleProducesandRoyaltyOwnersPlattsPNMResourcesQuantumReliantEnergySafeRenewablesSanJacintoCollegeSiteControlsLtd.StandardRenewableEnergyStateEnergyConservationOfficeStreamEnergySuezEnergyN.A.TexasA&MUniversityTexasA&M/TXAgrilifeResearchTexasAssociationofManufacturersTexasChemicalCouncilTexasEconomicDevelopmentCoorporationTexasOilandGasAssociationTexasPublicPolicyFoundationTexasStateTechnicalCollegeSystemTexasTechUniversityTexzonUtilitiesTXAllianceofEnergyProducersTXUEnergyTheUniversityofTexasUniversityofTexas-BureauofEconomicGeologyValeroVulcanPowerWal-martWebkingLawFirmWestlakeChemicalWindCoalitionXCelEnergy

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Agencies’ Staff Contributors:OfficeoftheGovernorTobyBakerJenniferBealeSharonBuckleyKatherineCesingerMichaelChrobakMarkEllisonSarahFloerkeCherylFullerKeithGraffAnnGriffithAlanKirchhoffJoeMorinMarishaNegovetichDonnaNelsonEmilyNielsonBrianOwensLeeRectorLaurieRichWayneRobertsEdRobertsonJenniferRoweMichaelSchuttloffelLarrySilveyKathyWaltDavidYoungPublicUtilityCommissionofTexasJasonHaasBrianLloydDamonWithrow

RailroadCommissionofTexasStacieFowlerCarolTreadway

SecretaryofStateScottHaywood

TexasCommissiononEnvironmentalQualityEarlLottMarkVickeryDanielWomack

TexasDepartmentofAgricultureShannonRusing

TexasDepartmentofInformationResourcesDougHolt

TexasDepartmentofInsuranceDavidDurdenMikeGeeslin

TexasDepartmentofTransportationJeffersonGrimesAmadeoSaenz

TexasEducationAgencyNoellLambertAlleyMicheleMooreLizzetteReynolds

TexasHigherEducationCoordinatingBoardArturoAlonzo

TexasWorkforceCommissionBarbaraCambronLarryJonesKakiLeyensReaganMillerDougRidgeLarryTemple

2008 Texas State Energy PlanGovernor’s Competitiveness Council

July 2008