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Proposed Energy Grid Fix Is Not The Right Answer for Texas

While current weather conditions might suggest otherwise, winter is coming, even to Texas. Texans know that every summer will be hot, but winter arctic cold snaps are less certain. Nonetheless, Texas power systems must be ready for whatever Mother Nature throws at us. 

The deadly Winter Storm Uri in February 2021 set off a long, ongoing set of arguments and proposed remedies.  Everyone agrees we should “fix the grid,” including candidates on the political campaign trail and vandals spray-painting graffiti on our state Capitol.   

>>>READ: Texas Can Improve Energy Reliability without Abandoning its Principles

Since the summer of 2021, Texans have paid billions of additional dollars for temporary grid operations and pricing measures that may have had little impact on reliability, and hundreds of thousands of dollars for consulting reports that raised more questions than answers. Today, Texas leaders seem poised to make further changes to the system without clearly defining the problem they want to solve, much less full knowledge of how proposed changes would work or what they will cost. 

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The Public Utility Commission of Texas (PUCT) recently released a study on how to change the ERCOT market and plans to act on those changes early in the new year. The PUCT Chairman’s preferred plan for the Texas grid is a novel idea called the Performance Credit Mechanism (PCM). The PCM would create a new revenue stream for certain electric resources by awarding credits to power plants that are available to produce power during the tightest hours of the year and require load-serving entities such as retail electric providers and cooperative utilities to buy those credits. 

The concept of paying more for resources that deliver when grid conditions are tightest is sound, but the devil is in the details. The details of PCM are devilish indeed.  

The proposed PCM method is convoluted and complex. It includes a year-ahead voluntary auction that resources must participate in if they want to be able to earn these credits for the toughest hours, but it doesn’t determine which hours are the tightest and Performance Credit-worthy until after the end of the performance period.  The government will forecast when the tightest hours might occur during the upcoming year (or month if the compliance period is shortened), but reviews of the tightest hours during 2022 show that multiple factors can cause tight conditions, making them unpredictable. The point when electricity sellers must buy enough credits to cover energy use during those tight hours — at a cost that also is set by the government, not a market – doesn’t come until even later.  

All these after-the-fact determinations would make it hard for electricity producers to plan how and when to run or maintain their plants and create great uncertainty over producers’ future revenues. It will be even more difficult for retail electricity providers, municipally owned utilities, and electric co-ops to manage their purchases and costs.  Retail customers will lose their ability to have fixed price contracts to control their electricity bills – or pay much more to get that protection if those plans are available.

Sound confusing? If so, you’re not alone. The PUC’s own consultants hired to come up with the PCM plan don’t support it. The report itself says: “Implementation of the PCM entails significant risk because of its novelty”. That is consultant-speak for: “This is a bad idea, don’t do this.” The consultants actually recommended a different solution, but the PUC Chairman favors the PCM.  

The PUC Chairman offers an evolving, undocumented version of the PCM as the best way to get new natural gas power plants built. He also suggests that we exclude renewables from getting Performance Credits, even if it’s their generation that helps keep the lights on in those tight hours. The consultants warn, however, that ERCOT electric wholesale prices will rise, and renewable energy development will slow if renewables are excluded from PCM payments.

If you want to see who the plan favors, just look at who supports it – the owners of the existing thermal power plants in ERCOT, because those plants -– if they can remain operational during the tightest hours — will receive most of the revenues from this scheme.  These generators also will have huge opportunities to game this new design to their favor and at the expense of customers.

Power system reliability can’t be “fixed” just by adopting a new market scheme, particularly the complex, ill-defined PCM, and building more natural gas plants. Most observers agree the failings in Winter Storm Uri were not due to market design issues, but actually were due to operational failings by generators and fuel providers. It may not be physically or financially possible to build generation resources as quickly as Texas needs them, especially at the rate that our population and energy appetite are growing. This is a long-term, multi-dimensional problem that requires us to improve the maintenance and weatherization of existing generation resources, manage and reduce energy demand, and grow and diversify new electric supply. 

>>>READ: What Really Happened in Texas During WInter Storm Uri

Alternatives to the PCM more fully preserve the founding principles of our deregulated electricity market and could be implemented faster. The Backstop Reliability Service (BRS) would move power plants nearing retirement “on the side” so that they only operate when grid conditions get too tight.  The PUC’s report states that the BRS “contributes the smallest change to the existing market framework.” By allowing some plants to “retire” but still be kept available in case of rare emergencies, the BRS plan will encourage the construction of new dispatchable generation without first losing our old “steel on the ground.”   

Given the critical role of electric reliability for Texas’ citizens and economy, we should allow time for the Commission’s initial, extensive operational and market reforms to play out. These include enhanced power plant weatherization and increased revenues to existing resources. We should take the time to develop and analyze further wholesale electric market reforms as necessary.  

At the same time, we must improve Texans’ energy efficiency and demand flexibility options to reduce the magnitude and frequency of potential supply shortfalls. Meaningful increases in energy efficiency and demand response will improve grid reliability, lower all customers’ electricity bills, enhance the Texas economy, and create more jobs. 

Welch is the state director of Conservative Texans for Energy Innovation, a statewide organization that promotes free enterprise, increased competition, and less government regulation in our energy economy.

The views and opinions expressed are those of the author’s and do not necessarily reflect the official policy or position of C3.

Copyright © 2020 Conservative Coalition for Climate Solutions

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