Will Texas Fix Its Grid? Here is the Midterm Report Card

Today, after nearly three months of taking input from electric market participants, the Public Utility Commission of Texas (PUC) is now past the midway point of a lightning-fast effort (by the PUC’s historical standards) to come up with a market redesign plan by the end of this year. The open meeting held last week and the questions for comment submitted by PUC staff this week are important markers in this process and offer a chance to grade their efforts so far.

First, the PUC should be applauded for considering every aspect of the ERCOT market design. If the prevailing media narrative and much of the legislative impetus after Winter Storm Uri had been followed, the PUC would have focused primarily on weatherizing power plants and gas supply infrastructure and made only minor market tweaks such as promoting more demand response.

Those are important issues to tackle but far from sufficient for solving the problems exposed by Uri. Weatherization mandates without market reforms will only accelerate the retirement of gas and coal generation that is already losing money—not because those more reliable generators aren’t needed, but because market-distorting policies have made it almost impossible for them to compete.

Thankfully, the PUC seems to be very aware of the need for fundamental market reform. However, there continues to be a real danger that the PUC will only solve half the problem, namely that of increasing revenues to dispatchable generators. The main problem with the Texas grid is not a lack of investment, but an improper balance of investment between variable and dispatchable generators.

Wind and solar advocates frequently tout the $60 billion in capital investment in those resources in Texas. If $30 billion of that investment had been directed toward maintaining dispatchable generation, weather and fuel resiliency, and other reliability measures, there is no doubt the state would have been better off in February. Instead, Texas had $60 billion worth of generation that was producing less than 1 GW of the 75 GW of demand at the height of the storm on the night of February 16.

Unfortunately, this problem of misdirected investment is not going away anytime soon, as billions of dollars in federal subsidies will continue to flow into the ERCOT market for the foreseeable future. These subsidies have directed all the investment toward wind and solar while disincentivizing investments that ensure resource adequacy. The PUC needs a direct response to this problem.

Gov. Greg Abbott recognized this need in his directives to the PUC in July, one of which specifically asked the PUC to “allocate reliability costs to generation resources that cannot guarantee their own availability.” The Texas Senate Business and Commerce Committee also emphasized the need for this reform in its hearing a few days later.

However, it is easy in the confusion of the stakeholder process to lose sight of the most important reforms and to go down the path of least resistance by hiding reliability costs and placing them on ratepayers. Most of the proposals currently being considered, such as a proposal from a group led by NRG and Exelon, would do just that.

As long as the subsidies for wind and solar generation remain in place, imposing the cost of grid reliability primarily on ratepayers will turn the ERCOT market into an expensive, bifurcated system of subsidized wind and solar generation and subsidized backup generation. This cannot be allowed to happen.

As we proposed in a paper published last week and in comments to the PUC a few weeks ago, a firming ancillary service for wind and solar is a direct way to counter this problem. ERCOT is forecasting a large growth in reserve margins over the next several years, but those are phantom margins because of the unpredictability of wind and solar. By requiring wind and solar to procure enough firm capacity to meet their expected output during peak demand periods — either through backup generation, energy storage, or a demand response contract — those phantom margins will become real, healthy reserve margins.

There may be other, more efficient mechanisms for solving this problem, and the PUC should consider all its options. But this approach has two distinct advantages.

First, the quantity and cost of the firming service is transparent and controllable, unlike the changes to scarcity prices that have produced wildly inconsistent revenues year-to-year depending on the weather. Second, the quantity can be indexed to the growth of wind and solar so that no matter how hard the federal government pushes on the scale, variable generators will only be able to enter the market if they will not degrade its reliability.

For too long, the discussions at the PUC have been dominated by an ethos of keeping its regulations technology-neutral and fair to market participants. That ethos needs to be replaced with an ethos of doing whatever works best for all Texas ratepayers. A firming requirement for variable generators is a key part of producing that outcome, and the PUC must hold firm to it.