EnergyIssuesStatewide NewsEnergy Prices and Adjustment Tools Debated in Interim Senate and Business Finance Hearing

In early February, the Senate Business and Finance Committee convened to discuss interim charges on energy tasked by Lt. Governor Dan Patrick.
February 24, 2020
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Texas is an energy-only market — wherein energy producers are paid only after they provide power. 

The state’s energy sector is operated by the Electric Reliability Council of Texas (ERCOT).  Most of the rest of the country operates as capacity markets which is a sort of energy wholesale model wherein producers sign contracts for production over a given period and are paid upfront.

Only ERCOT and the Southwestern Power Pool (SPP) — which supplies power to Kansas; much of Oklahoma; parts of Arkansas, Louisiana, New Mexico, and Texas — are non-capacity markets.

ERCOT oversees most of Texas’ energy market and operates its grid. One function it has at its disposal is the Operating Reserve Demand Curve (ORDC).

Created in 2014, the ORDC is a price regulator meant to incorporate energy reserve levels into the market pricing. Meaning, it adjusts the price per unit of energy based upon how much the grid has in reserve. When reserves are low, prices will increase to compensate. At root, it is a signal to the rest of the market that reserves are running low.

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ORDC’s purpose is to preserve a certain amount of energy in reserve in case of an emergency. But that energy, even when it’s not being used, still must be paid for.

Essentially, the ORDC distributes the cost-burden across all consumers, rather than focusing on what some say are the catalysts of reserve shortage and unreliability: renewable energy generators.

When reserves are trending low, price increases kick in so that less grid-electricity is bought until generation can be brought up to speed — not only to meet demand but to fill where the reserves have diminished.

The worry surrounding energy-only markets concerns possible instability surrounding demand uncertainty — essentially, that producers would be hesitant to build generation plants before the market to justify it is there. Energy-only supporters see the method as protecting competition rather than the individual suppliers — the latter of which a guaranteed contract certainly does.

On February 6, the Senate Business & Commerce Committee convened to discuss germane interim charges — specifically, “Assess the electricity market in Texas.”

Bill Peacock with the Texas Public Policy Foundation (TPPF) took issue at the hearing with the ORDC, arguing that increased intervention in the market has distorted prices and demand. According to Peacock, this is “forcing Texans to pay higher costs for a less reliable form of electricity.”

Pointing to renewable energy subsidies and the ORDC, Peacock views the former as being propped up by the government and the latter as hampering consumer access to cheap, reliable energy.

It is estimated, Peacock stated, that the ORDC added some $3.9 billion in electricity costs to ERCOT consumers in 2019. To address this, Peacock advocates for eliminating the ORDC and “instituting mechanisms that makes renewable energy providers pay for the cost they impose on the grid.”

The reason renewables “impose [costs] on the grid” is that wind and solar are not as reliable as other sources. 

Put simply, their reliability hinges upon the wind blowing and the sun shining. Whereas, non-renewable sources are currently so plentiful in Texas that reliability is mostly a non-issue unless there is a power plant shortage or one breaks down like it did this past summer during the same time renewable energy generation lulled.

TPPF also wants to see chapters 312 and 313 — renewable energy property tax abatements — removed from code. They believe these subsidies unfairly prop up renewable energy suppliers at the expense of more traditional energy companies. Texas also has a Renewable Energy Portfolio Standard, which requires a certain portion of the energy grid be comprised of renewable-generated electricity.

Texas’ renewable energy sector has, however, outperformed that requirement by a substantial amount.

One ORDC replacement Peacock suggested was to introduce “minimum offer” rules — meant to prevent artificially-low prices from warping the market price of energy. Due to the subsidies and ORDC, Peacock believes renewable companies are doing just that since without the cost buffers, renewable energy would increase in price.

He also stressed his concern that the ORDC is being overseen at an administrative level, rather than legislatively. He would like to see the legislature address this issue head on.

“We suggest that relying on the most competitive, efficient electricity market in the world, that we can eliminate a significant portion of the $6.4 billion in cost being imposed upon Texas by renewable energy,” Peacock concluded.

Michael Jewell, an advisory board member with Conservative Texans for Energy Innovation and a practicing energy-focused attorney, spoke with The Texan about the ORDC.

After the 2018 summer, Jewell stated, ERCOT “decided that the price increases should kick in a little bit earlier.” To do this, they shifted the “Loss of Load Probability” — one of the calculations going into the ORDC — about .25 percent for 2019. An additional .25 percent will be instituted for this summer.

Jewell added, “The prices really are the indicator of need for generation in a market.”  

“It’s a sort of balancing tool to ensure the prices are sending the correct economic signals to the market so that, unlike other parts of the country, we focus on an approach that pays people for performance,” he continued.

Jewell sees the ORDC as accomplishing what it was intended to.

He takes issue with TPPF’s position that the ORDC was implemented because of renewable energy’s impact on the market, calling it “erroneous” and “bunk.”

“Study after study has shown, empirically, that wind and solar are not responsible for the significant decrease in wholesale prices in ERCOT,” he stressed. 

Jewell pointed to a 2019 Lawerence Berkeley study which found wind and solar had a combined $1.10 per MWh impact on ERCOT’s market compared with natural gas and thermal’s combined $38.70 per MWh impact. This, he states, shows that the ORDC was not impelemented in response to wind and solar’s impact on prices. 

“When you look at impact of wholesale price in ERCOT, it’s not due to renewables. This position that renewables are impacting energy pricing ignores the facts.”

Regarding supervision of the system, Jewell stated, “the legislature decided it needed an expert body [to oversee the implementation of the ORDC] — which is a highly technical issue, that just like the market structure in the first place, was rightly decided in the first place.”

“The [Legislative] Commission made the decision on how the market was to be structured today and [the ORDC] is another element in ensuring the market is designed appropriately,” he added.

Moving forward, Jewell stressed, “The ERCOT market is showing that a robust, competitive market works. Frankly, we are very lucky that all that investment is coming to the market and it’s not being imposed on ratepayers that must pay whether it works out or not.”

“It’s at-risk capital coming to the market and that structure is benefiting Texas consumers and has facilitated the vast economic development we have experienced,” he concluded.

Texas is emerging from its most-successful energy-generating decade in its history. The Texas Legislature wants to ensure that continues going forward. Some, like Jewell, believe that can be done by preserving the status quo of what has worked. Others, like Peacock, want to see small, but not inconsequential, tweaks made to free up the market.

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Brad Johnson

Brad Johnson

Brad Johnson is an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad watching and quoting Monty Python productions.