* Hotter forecast pares ERCOT's previous summer outlook
* Conservation calls likely; rolling outages possible
By Eileen O'Grady
HOUSTON, May 1 (Reuters) - Hotter-than-normal weather expected in Texas this summer threatens to reduce the amount of surplus electric power to the lowest level in more than a decade, the state's power grid agency warned on Wednesday.
The Electric Reliability Council of Texas (ERCOT), which oversees the grid for most of the state, said power reserves - the minimum capacity needed to cushion against extreme weather or unplanned outages - will fall to below 9 percent this summer as temperatures rise.
Above-normal temperatures will eat into the 13.2 percent reserve margin ERCOT forecast last December. Wednesday's outlook indicates a cushion that is well below the agency's minimum target of 13.75 percent as power demand grows faster than generation is being built.
Some market players say the report is overly optimistic as it has overestimated reserves for a number of years. ERCOT has been working for months to address these issues and is also considering whether the 13.75-percent reserve target is adequate.
The dim summer outlook raises the prospect for more frequent calls for residents to conserve energy during peak afternoon hours on the hottest days, the grid agency said.
"ERCOT also may need to implement Energy Emergency Alert actions, with the possibility of rotating outages if needed to protect the grid," said Kent Saathoff, an ERCOT executive adviser.
A lack of new power plant construction and two extremely hot summers strained power supplies in 2010 and 2011, adding urgency to an ongoing discussion among regulators on ways to encourage new generation in the state's $35 billion deregulated market.
High temperatures drive electric demand for air conditioning in Texas. Residential customers use more than half the electricity consumed during peak hours, Saathoff said.
"Today's report is yet another confirmation that Texas needs additional generating capacity," said Todd Carter, president of Panda Power Funds, which is working to build more than 2,200 megawatts of new natural gas-fired generation, some of which is expected to be online in 2014.
"In a growing state like Texas, conservation can only get us so far," Carter said.
RECORD PEAK DEMAND
ERCOT expects peak power demand to reach 68,383 megawatts, slightly above the 68,305 MW all-time record set Aug. 3, 2011, during a prolonged statewide heat wave and drought.
The grid agency said it has 74,438 MW of generation to serve the region, including 727 MW of older, natural gas-fired units that NRG Energy will return from "mothballed" status to run this summer.
Additional supply this summer includes 925 MW of new generation from LS Power's Sandy Creek coal-fired power plant in McLennan County. The plant was delayed more than a year.
In Texas, one megawatt is enough electricity to power about 200 homes when electric use is highest.
The state's shrinking reserve margin has resulted in a host of wholesale market changes, but generators and power-plant developers say more changes are needed to be able to attract financing needed to build new plants.
Annual power demand in Texas eased 2.7 percent in 2012 due to mild weather compared to 2011's extreme temperatures, but the state's growing population and economy are expected to keep demand for electricity on the rise in coming years.
Sparsely populated areas of the state where demand growth was stagnant or declining are now seeing significantly higher demand as oil and gas companies extract and transport new energy resources from shale formations.
Looking forward, ERCOT said it expects the reserve margin to improve next year as some new generation comes online, but the margin falls below the target in 2015 and beyond.
Other power generators in the state include Luminant, a unit of Energy Future Holdings, which is owned by Kohlberg Kravis Roberts & Co LLP ; Calpine Corp ; NextEra Energy Inc and Exelon Corp.