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Texas grid regulators spent $600k on a market redesign study that doesn’t consider extreme weather

The PUCT just spent 600,000 taxpayer dollars on a consultant’s report to recommend a new market design. Surely the consultant—California-based E3—modeled the kinds of conditions that devastated Texas less than two years ago, right?

When someone offers up a solution, they should—at the very least—know what problem they’re trying to solve. 

You might assume that, in “solving” the issue of Texas’ ERCOT electricity market, the Public Utility Commission of Texas is focused on solving the reliability problems that led to days of blackouts and hundreds of deaths during Winter Storm Uri.  

If you did, you’d be wrong.

The PUCT just spent 600,000 taxpayer dollars on a consultant’s report to recommend a new market design. Surely the consultant—California-based E3—modeled the kinds of conditions that devastated Texas less than two years ago, right?

Nope. The study “does not include the extreme cold weather event caused by Winter Storm Uri… Such analysis is beyond the scope of this study,” it says on page 35. 

It gets worse.

The study also did not look at the availability of fuel. “The availability of fuel for thermal resources is not considered in this analysis; all thermal resources are assumed to have unlimited access to fuel when needed. The potential for fuel limitations is beyond the scope of this analysis” (page 56).

The Federal Energy Regulatory Commission and North American Electric Reliability Corporation cited lack of fuel as a major cause of the blackouts. Less than a month ago, FERC released its Winter Assessment for this year and this remains a problem. 

But neither E3 in its report, nor the PUCT in its market design solution, seem to even acknowledge the problem. 

The report essentially tells the PUCT how to redesign the market so that the grid is reliable in an average year. Average years aren’t the problem. Unfortunately, after winter 2021 and summer 2022, Texans don’t seem to be experiencing many average years anymore. Climate change is driving higher frequency and intensity of extreme weather. 

These are massive flaws in the E3 study. Unsurprisingly, they led to a flawed product.

Texas Power Podcast host Doug Lewin discussed the electricity market redesign proposals in front of the Public Utilities Commission with Ideasmiths CTO and University of Texas at Austin researcher Dr. Joshua Rhodes. Subscribe to the Texas Power Podcast wherever you get your podcasts.

A capacity market by another acronym

The PUC’s consultants ended up proposing a straight-up capacity market, in which Texans would spend far more money on excess electricity that they would not use. It’s a model that the Texas Legislature has consistently opposed. Perhaps recognizing the political opposition to a capacity market, PUCT Chairman Peter Lake introduced a new concept: the Performance Credit Mechanism, or PCM.

But don’t let the new acronym fool you: it’s still a capacity market.

Before I explain what they are and how they’d work, look at this graph with a particular focus on the red and green bars:

Notice anything? The capacity payments in the straight-up capacity markets (LSERO & FRM) are nearly identical (actually $100m less) than in the PCM.

If the LSEO (Chairman Lake and large energy generator NRG’s previous favored design) was a California-style “capacity market in drag”, PCM is a California-style capacity market with a cowboy hat on. 

They’re working hard to dress it up and disguise it but it’s not hard to see past the veneer.

Under the PCM, generators would be awarded performance credits based on how much capacity they make available during some as-of-yet-undefined number of hours of electricity scarcity. Load-serving entities—retail electric providers, co-ops, and municipal utilities especially—would be obligated to buy those credits from generators, generally passing costs on to customers.

E3 says in the report this system has never been used anywhere in the world. It’s administratively complex and would take about four years to implement. It would also add—in an average year, without extreme weather incidents like Winter Storm Uri—at least $460 million in additional capacity payments, money that would come straight out of Texans’ pockets, with no assurance whatsoever that it would help the state withstand another cataclysmic winter storm. It also would result in $5.7 billion moving from the energy market to the new PCM/capacity market.

Add it all up, and you get a system where Texans are still vulnerable to extreme weather, but they’re spending a lot more money for electricity they won’t necessarily use … in other words, a capacity market.

The real goal: bashing clean energy?Amazon Wind Farm Texas (JORDAN STEAD / Amazon)

So what problem is the PUCT trying to solve? From the looks of it, they’re trying to punish Texas’ nation-leading clean energy industry. As E3 itself noted on pages 74 and 75 of its report while describing the PCM (emphasis added):

“An alternative implementation of these designs could create eligibility criteria based on technology specifications that might exclude certain technologies from participation. One such implementation of interest to a subset of PUCT Commissioners would exclude the participation of wind and solar resources… in the long-run, this reduction in compensation could result in smaller wind and solar buildout… which would have the effect of increasing energy prices.

E3 also noted that in every market structure it modeled, a high-renewable energy scenario tracking the growth of Texas’ booming solar and wind industries saved $4 billion annually — with no degradation of reliability. 

So you can add “high power bills” to the list of problems that the PUCT is not trying to solve with this redesign.

A better way 

The Senate Business & Commerce Committee meets November 17 and House State Affairs in early December to discuss this proposal and, presumably, other alternatives — some of which actually increase reliability, save money, and hold true to the competitive, market-driven spirit of Texas’ energy-only system.

One alternative called the Backstop Reliability Service (BRS), put forward by Commissioner Cobos more than a year ago, would ensure that older power plants set to retire instead remain operational, but that they only run in case of emergencies. E3, and a separate report written for Texas Consumer Association by ICF Consulting, both showed that the BRS is the quickest strategy to implement and the most-cost effective solution available. 

In addition, the Dispatchable Energy Credit (DEC) program, first proposed by Commissioner McAdams, would give credits to fast-acting, high-efficiency gas plants and/or 2-hour battery storage systems—i.e., highly dispatchable resources. The report authored by ICF showed this would be far cheaper than a capacity market and actually return money to consumers. (Unfortunately and unhelpfully, E3 modeled a fundamentally different system than the DEC but called it by the same name.)

Episode 24 of the Factor This! podcast is a crossover with Renewable Energy World’s Texas Power Podcast, examining what has changed in the state since Winter Storm Uri left millions without power.

Host John Engel is joined by Doug Lewin, host of the Texas Power Podcast, as well as Caitlin Smith from Jupiter Power and Apex Clean Energy’s Mark Stover. Subscribe wherever you get your podcasts.

Juking the stats

When you dig into the methodology, it’s clear that E3, or someone else, put a thumb on the scale in evaluating the state of Texas’ existing market—and in justifying the need to change it.

E3 assumed that Texas will see 11GW of thermal retirements in the next three years. The last three years, however, there have been only a small fraction of that.

This is an absurd assumption, and it calls into question the very nature of this report. And even E3 shows that Texas’ current energy-only system could absorb 5.5GW of power plant retirement and remain at or better than the target of 1 major outage every 10 years (see page 47).

Again, what’s the problem? If it’s to avoid prolonged winter outages, policymakers should focus on implementing a Backstop Reliability Service—which E3 said would have “the shortest implementation timeline” and would “largely preserve the current energy-only market dynamics” and competition (page 8). Energy efficiency would also help to bring down demand driven by inefficient heat in poorly insulated homes and buildings. 

If policymakers want to address “ramping” periods, when the sun goes down but demand remains high, they can do that through a Dispatchable Energy Credit program, increased ancillary services, more energy storage, and better demand response.

If policymakers want to ensure Texas’ gas infrastructure holds up during winter storms—Senator Lois Kolkhorst rightly said at a Senate hearing in 2021 that the gas supply is the “achilles heel” of the system—the Legislature can set out more stringent standards and require the Texas Railroad Commission to actually enforce them. 

And if the state wants to strengthen the grid in ways that actually save consumers money, they can beef up Texas’ anemic energy efficiency programs which are 80% lower than the average state’s goals. FERC and NERC also recommended that Texas increase energy efficiency to lower demand during periods of scarcity, but the state has refused to take action for years—even after Winter Storm Uri.

Instead, with the E3 report and proposals like the Performance Credit Mechanism, the PUCT is showing that it really wants … something else. A lot of bad things caused the outages of 2021, but a lack of capacity wasn’t one of them. A capacity market—no matter what they call it—won’t prevent future outages under similar conditions. And the PUCT can’t credibly argue otherwise, because its own $600,000 study didn’t even look at that problem.

So, nearly two years and untold tax dollars later, we still need to know more. We still need to be clear about the problem. We still need real long-term solutions.

On its way back to the drawing board, the state should move quickly to implement a Backstop Reliability Service, more ancillary services, better energy efficiency and demand response programs, and substantive, proven solutions to real problems that Texans are facing.

Winter is coming.

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