Texas lawmakers, energy experts, aren’t sure new ‘complicated’ electric grid market would work

AUSTIN – The agency charged with reviewing the Texas electric market has proposed an untested structure in hopes of keeping the free-market system somewhat blamed for blackouts during the 2021 winter storm.

Texas lawmakers ordered overhaul of the state’s deregulated energy market, which Public Utility Commission Chairman Peter Lake called “crisis-based” because it incentivizes electric companies to provide cheap electricity, at risk to reliability of the network.

The proposed “performance credit mechanism” — or PCM, as it’s known in the heavy jargon of energy insiders’ acronyms — offers energy producers a financial reward for having their plants available during times when Texans consume more energy.

The model balances network resilience with free-market sensitivity, Lake says. With his blessing, the PUC will adopt it or another bill before state lawmakers return to Austin for the legislative session starting Jan. 10.

Peter Lake, chairman of the Public Utility Commission of Texas, poses for a photo in the commissioners’ meeting room inside the William B. Travis Bldg in downtown Austin on Thursday, October 28, 2021. Lake was nominated by Governor Greg Abbott in April to a period set at the end of September 2023. The president is overseeing the redesign of the energy grid market. (Stephen Spillman / Special Contributor)

Lake says PCM will encourage companies to invest in new natural gas plants, a top priority for lawmakers and energy experts who fear the rise of cheap renewable energy in Texas will weaken natural gas producers. But some doubt Lake’s claim and are scratching their heads over the model, which he says would take four years to implement.

“This plan is so convoluted and has a long timeline to implement, that it’s a starting point to failure for everyone,” New Braunfels Republican Senator Donna Campbell said at a recent Senate Committee on Business Affairs hearing. and trade.

Senators from both parties appeared puzzled by the decision to prosecute the PCM.

Senator Charles Schwertner, a Georgetown Republican who chairs the committee, questioned why the PUC would create an untested new market mechanism to encourage companies to build new natural gas plants rather than directly providing government incentive money.

Report did not recommend the design

In a PUC-commissioned report released Nov. 10, consulting firm E3 evaluated several market designs and did not recommend PCM, which would cost about $480 million more annually than the current market.

The report recommends Texas pursue a structure similar to a capacity market, which pays power producers even when their generators are offline to subsidize their operations and maintain an adequate supply of electricity for periods of peak demand.

“It’s fascinating to see the PUC go against the advisers’ recommendation,” said Austin energy consultant Doug Lewin.

The independent network market monitor said the E3 analysis was based on fundamentally flawed assumptions. And other experts question the extent of the report, which failed to account for weather conditions during the deadly 2021 winter storm.

In the coming weeks, companies from every sector of the electrical industry will be submitting inputs to the PUC.

The public and interested parties have until noon on December 15 to comment on the proposal.

“I can’t wait to see what the market and people tell us,” Lake said.

How performance credits would work

If adopted, the PUC would create an additional annual market for the sale and purchase of so-called performance credits. Power generators would earn them by fulfilling a commitment made earlier in the year to produce certain amounts of electricity at certain times.

They could then sell the credit to energy suppliers, such as retail electric companies, municipal utilities and electric cooperatives.

The new CEO of ERCOT: You shouldn’t even think about the Texas power grid

The grid operator, the Electric Reliability Council of Texas, would determine how many performance credits energy providers must purchase based on the percentage of electricity used.

“It’s incredibly complicated,” said Alison Silverstein, an energy consultant who previously worked with the Federal Energy Regulatory Commission and the PUC.

Silverstein said he doubts the performance credit market would incentivize investments in natural gas plants because it’s unclear whether power plants will earn them.

“It’s the furthest thing from a predictable revenue stream that I can imagine,” he said.

The total market value of the yield credit scheme would be based on a demand curve that hasn’t been fixed, but would likely be designed to encourage the construction of new natural gas-fired power plants, which Lewin, the energy consultant, said to consider possible.

“To be clear, I don’t like it overall,” he said of the PCM, “but one of the benefits is that it offers a pretty strong incentive” for building new gas plants.

At the consumer level, utility companies may see the new market as a reason to promote energy conservation. The fewer performance credits ERCOT forces them to buy, the more savings they could pass on to consumers in their electricity bills.

But it’s not certain that that would happen and the overall cost of implementing the performance credit marketplace would be higher, according to the E3 analysis.

An alternative

Lewin said he prefers a cheaper alternative called backstop reliability service, or BRS.

It would contract some power plants to be available at ERCOT’s request for power generation. In return, ERCOT would finance the maintenance and operation of these facilities. It would keep some plants on the system that could be mothballed in the next few years.

At the Senate committee meeting, some lawmakers seemed to prefer the BRS because it would be the easiest to implement and have the least impact on ERCOT’s current market structure.

Lake rejected this hypothesis.

“We are paying for those generators not to participate in the market,” he said. “That’s one of the concerns.”

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