Energy Diversity Means Energy Security

Balanced Energy Weekly, Issue No. 3
March 4, 2011

What do mutual funds and the Texas power generation fleet have in common?

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The recent recession, and previously the dot-com bubble, have painfully demonstrated that diversification is paramount to weathering upheaval, change and uncertainty. Would you invest all of your retirement savings in one stock or would you diversify your investments in a range of different companies operating in different sectors in the economy? The emergence of mutual funds as a preferred retirement investment was fueled by the desire of millions of Americans to diversify their investments to protect their economic future.

By the same token, the future of energy security is found through energy diversity. Texas is a prime example of effective electricity diversity. Texas is blessed with abundant natural resources – including oil, natural gas, coal and renewables. But it is not just natural resources that have made Texas a successfully diversified state. Energy policies in Texas that use markets, not mandates, have resulted in the safe and cost-effective development of a wide array of our natural resources, which has in turn enabled our electric generation fleet to have a diverse portfolio of fuel sources to power the growing Texas economy and our burgeoning population. For example, as the figure below shows, no state has better parity between natural gas and coal, the mainstays of U.S. electricity generation, than Texas. This balanced portfolio is as diverse as any in the Nation and has been essential to Texas’ economic prosperity, which has consistently outperformed the national average.

Net Electricity Generation - 2010 Top 10 States

Market mandates that require picking only one fuel source destabilize and increase risk to our electricity supply, just as picking only one stock destabilizes and increases risk to one’s retirement savings. Given that affordable and reliable electricity is central to economic development, picking winners and emphasizing one source of electric generation over others could create the kind of unbalanced energy portfolio that would jeopardize Texas’ comparatively strong economy.

The global economy, world politics and the regulatory environment can change overnight – often directly affecting the affordability and availability of fuels. It is difficult for the electric industry to quickly respond to these changes, particularly because the development, construction and permitting of new generation sources is a long process. It takes years, and often decades, for new power plants to be put online. Therefore, Texas must invest in fleet diversity today, in order for the state to weather the uncertain storms of the future. So far, the market has done a good job of ensuring that the Texas generation fleet is diverse with the last 20 years of installed generation, including a healthy dose of gas (41,949 MWs), coal (4,192 MWs), wind (9,808 MWs), nuclear (2,430 MWs) and other resources (463 MWs).

As recent data suggests, Texas will need more of every possible energy resource to meet projected demand. According to the Electric Reliability Council of Texas’ (ERCOT) most optimistic scenario in terms of being able to extend the life of existing generation assets, we will be facing a capacity shortfall of approximately 18,245 MWs by 2020.i By 2030, the need for new generation is projected to be at least 50,000 MW.i As the figure below demonstrates, if you assume that the state will maintain its healthy fuel diversity, Texas will need a significant build-out of power plants relying upon a wide range of fuel sources.

Texas Capacity and Demand Projections

Given our abundant and balanced supply of energy resources, Texas is well-positioned to meet this projected demand. We must immediately pursue development of every resource available for electric generation – natural gas, coal, nuclear, wind, geothermal, solar and other renewable sources, such as biomass. Doing so will ensure we retain our economic advantages in the global marketplace in the years ahead.

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i Based on ERCOT, Report on the Capacity, Demand and Reserves in the ERCOT Region, May 2010 (as updated in December 2010 with a 13.75% reserve margin). The capacity needs would be greater if that reserve margin is increased to be more in line with the NERC recommended 15% capacity reserve margin.