Luminant readies new gas capacity — in case power prices justify it

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The Luminant unit of Energy Future Holdings is pursuing permits for several gas-fired power projects to meet possible capacity needs in the Electric Reliability Council of Texas region, said Energy Future Holdings in an April 30 Form 10-K annual report.

Notable is that Energy Future Holdings and many of its subsidiaries on April 29 sought Chapter 11 bankruptcy protection as part of a prepackaged reworking of their finances. They are expected to emerge from Chapter 11 within a few months.

In August 2013, the Texas Commission on Environmental Quality (TCEQ) granted air permits to Luminant to build two natural gas combustion turbine units totaling 420 MW to 460 MW at its existing DeCordova generation facility. In February 2014, the TCEQ granted air permits to Luminant to build two natural gas combustion turbine units totaling 420 MW to 460 MW at its existing Tradinghouse generation facility.

In January 2014, Luminant filed an air permit application with the TCEQ to build a combined cycle natural gas turbine unit totaling 730 MW to 810 MW at its existing Eagle Mountain generation facility. In February 2014, Luminant filed an air permit application with the TCEQ to build two natural gas combustion turbine units totaling 420 MW to 460 MW at its existing Lake Creek generation facility.

“While we believe current market conditions do not provide adequate economic returns for the development or construction of these facilities, we believe additional generation resources will be needed to support future electricity demand growth and reliability in the ERCOT market,” said the Form 10-K.

Luminant already owns a fleet of 26 natural gas-fueled units, of which 11 are steam generation units totaling 4,135 MW of capacity and 15 are combustion turbine generation units totaling 975 MW. Of the steam units, four units representing 1,655 MW of capacity are currently mothballed. The natural gas-fueled units predominantly serve as peaking units that can be ramped up or down to balance electricity supply and demand.

ERCOT's current target reserve margin is 13.75 percent, which is a level anticipated to provide reasonable assurance of reliability of electricity supply, Energy Future Holdings said. ERCOT publishes a Capacity, Demand and Reserves report (CDR Report) twice each year that projects the reserve margin in ERCOT over a ten year horizon. In its February CDR Report, ERCOT projected that reserve margins in the ERCOT market would not fall below the current target reserve margin of 13.75 percent until 2017. The CDR Report projects reserve margins of 12.8 percent in 2017, 13.4 percent in 2018 and 10.9 percent in 2019.

The February CDR Report employed revised forecast methodologies that indicated a slower pace of peak demand growth as compared to the May 2013 CDR Report, which projected that reserve margins would fall below the target reserve margin beginning in 2015.

In August 2013, the Public Utility Commission of Texas (PUCT) directed ERCOT to work with the Brattle Group, an independent consulting firm, to conduct a study of the ERCOT wholesale electricity market and estimate an economically optimal planning reserve margin. In January, the Brattle Group released its study and concluded that the economically optimal reserve margin, which balances the marginal costs of additional reserves against the marginal costs of unserved load, is approximately 10 percent, while the current ERCOT market design would generally result in a reserve margin of 11.5 percent over the long-term. The report further concluded that mandating a planning reserve margin in the 13 percent to 15 percent range would result in modest cost increases to electricity consumers while offering meaningful risk mitigation benefits for both policymakers and market participants.

“Forecasting generation resource availability and consumption demand is inherently complex, particularly considering the volatility of natural gas prices, inevitable weather extremes and changing environmental rules and regulations,” the Form 10-K said. “We believe that the prevailing wholesale electricity market conditions in ERCOT currently result in wholesale prices that do not provide adequate economic returns for the development of the additional generation resources that will ultimately be needed to support economic and population growth and electricity reliability in Texas.”

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