87th LegislatureEnergyState SenateFight Over Renewables’ ‘Distortion’ of the ERCOT Market Featured in Texas Senate Hearing

The Texas legislature's directed power grid reforms remain a work in progress as state officials deliberate the future of ERCOT.
October 4, 2021
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“Dispatchable power” is technocratic jargon that simply means generation that can be kicked into gear when called upon. But what falls under that term is a point of zealous disagreement in the wake of Texas’ February blackouts and subsequent effort to ensure it doesn’t happen again.

Almost as soon as the Senate Business & Commerce Committee hearing kicked off last week, so did the debate over Texas’ massive addition of renewable generation at the expense of aging thermal plants.

From 2015 to 2023, Texas is set to lose well over 25,000 megawatts (MW) of coal and natural gas generation while it gains more than 30,000 MW of wind and solar generation.

Data from the Energy Information Administration

For context, the lost thermal capacity is roughly one-fourth and the gained renewable capacity is about one-third of the ERCOT grid’s total capacity. That’s a massive shift, not only in priority but also in the sources on which the grid’s reliability is bet.

This raises the question of dispatchability and the legislature’s directive to incentivize more dispatchable capacity.

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“Why do we have to incentivize somebody to do their job?” Sen. John Whitmire (D-Houston) quipped at the meeting’s outset. “It’s like we don’t have to incentivize a senator to represent their district.”

Sen. Robert Nichols (R-Jacksonville) responded, saying, “Companies are here to make money and if they don’t see an opportunity to get a reasonable return on their investment, with some certainty, they’re not going to invest.”

There are currently zero planned thermal generation investments for the ERCOT market. To friends of renewable sources, that matters little since more generation capacity is being built than lost. But others, like Nichols, see that as a vulnerability for the grid. Dispatchability requires prompt availability and that’s something variable sources, like solar and wind that depend on the elements, cannot commit to.

Thermal sources are by no means impenetrable, failing in large quantities during the February winter storm too as natural gas could not reach the plants for a multitude of reasons — including wellheads being cut off from power because they weren’t designated as critical infrastructure.

Senators on the committee spent a substantial amount of time grilling the Railroad Commission’s (RRC) representative present at the meeting over how it will prevent that mishap down the road — and for its plan on reforming the natural gas pricing system which the RRC oversees.

But at the end of the day, a natural gas plant can be brought online in a matter of hours while the windmills and solar panels in West Texas are dependent on the wind blowing and sun shining.

The Public Utility Commission (PUC) is deep in discussion over market tweaks or larger reforms that establish more incentive to build additional thermal generation. Nothing is decided yet and the PUC is slated to unveil its final plan in December.

But the debate over financial incentives raises an equally important disincentive that exists with the state’s power grid. Subsidies to energy source developers are handed out by the federal, state, and local governments like candy on Halloween. But renewable developers benefit from them in a far larger proportion than thermal sources — nearly three-to-one in the case of oil and gas developers.

These subsidies allow renewable generators to break even on electricity prices at negative figures. “The problem is you don’t have a free market system,” Nichols said, continuing, “when you have people that can sell power for zero, would you want to put investment into a market like that?”

Nichols and others who share his beliefs on Texas’ increasing reliance on renewable generation refer to this as “distortion” of the ERCOT market. 

Whitmire objected to the idea he, himself, laid out of the state increasing its subsidies of “dispatchable” generators to put them on a level playing field with the “non-dispatchable.”

Just how to incentivize that generation is currently a fuzzy array of suggestions that must, if they are to be successful, be hammered out into a specific slate of policies. One suggestion is to reduce the wholesale electricity price cap and to actually set a cap on ancillary services — a sector of emergency use plants used in times of tight margins between available supply and momentary demand.

Because they’re for emergencies, ancillary service generators don’t run often and receive premium rates for their electricity. However, during periods of high projected demand, i.e. most often the summer heatwave, those plants operate in something called “spin” which keeps them ready in the wings should they need to be called upon.

The lowering of that price, chair of the committee Sen. Charles Schwertner (R-Georgetown) suggested, would incentivize those generators to produce electricity more often to offset the losses in the premium pricing on which they currently rely.

Texas has a scarcity pricing, energy-only market in which producers are paid for the generation they provide. Another model used in most other states is called a capacity market, in which a set amount of generation and the pricing for it is negotiated upfront.

Capacity markets have their own supporters here in Texas, especially after the blackouts. “It seems like there’s a blood-chilling terror of a capacity market,” Sen. Nathan Johnson (D-Dallas) said during the hearing, adding, “and I’m still not sure why but I think it’s because it raised prices.”

Texas made its switch to an energy-only market in the late 1990s from something in between a capacity market and its current form.

One proposal being pushed heavily by one of the nation’s largest corporations, Berkshire Hathaway, would create 10 new natural gas power plants meant for emergency use. That fleet would be financed by a monthly charge on ratepayers’ bills.

Intended as an “emergency backstop,” the legislation was opposed by current generators for “creat[ing] an unfair economic advantage.” While not an explicit switch to a capacity market, it is a capacity function — negotiating a specific amount of available generation upfront for a set rate.

And, as has occurred with renewable tax credits, choosing favorites in a market comes at a cost in its competitiveness. As Nichols said, companies are here to make money and Berkshire Hathaway sees an opportunity to jump into a market in which it has already eyed — it agreed to purchase Oncor Electric Delivery Company in 2017 but then terminated that purchase a month later.

The legislation authored by Schwertner failed to emerge from its committee.

Texas’ power grid deliberations will continue for the next few months and whatever reform is made will hope to meet the legislature’s objective: a more reliable grid with some expectation of increased costs.

Editor’s Note: This article has been updated to reflect Berkshire Hathaway’s termination of the Oncor purchase.

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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 quoting Monty Python productions and trying to calculate the airspeed velocity of an unladen swallow.