By Tom Kleckner

AUSTIN, Texas — The Gulf Coast Power Association’s 32nd Annual Fall Conference last week attracted several hundred attendees to the Texas state capital. A panel of CEOs discussed their reactions to the U.S. Department of Energy’s recent Notice of Proposed Rulemaking to FERC, while other panels covered ERCOT market reforms, federal policy issues, industry changes affecting transmission and distribution companies, and the future of the state’s energy markets

Lively Price-Formation Panel

Likening himself to the annoying brother “in possibly the industry’s most dysfunctional family,” NRG Energy Director of Regulatory Affairs Bill Barnes explained his company’s push for ERCOT market reforms and the inclusion of marginal losses in LMPs.

Barnes participated in a lively panel discussion on marginal loss pricing, regional reserves and real-time co-optimization, where some attendees likened him to the “outnumbered” man on Fox News’ show by the same name.

But Barnes was happy to discuss recommendations made in a report commissioned by NRG and Calpine entitled “Priorities for the Evolution of an Energy-Only Electricity Market Design in ERCOT.” The report, written by Harvard University’s William Hogan and FTI Consulting’s Susan Pope, was the centerpiece of an August workshop at the Public Utility Commission of Texas. A second workshop is scheduled for Oct. 13. (See ERCOT, Regulators Discuss Need for Pricing Rule Changes.)

“Everything that [the report recommends] is in the spirit of maintaining a sustainable energy-only market,” Barnes said. “You structure the market based on competitive principles, and let the market decide who the winners and losers are. We’re not scrapping what we currently have, or throwing the whole thing out and starting over. But if we’re going to be committed to an energy-only market design, you can’t ignore some clear design deficiencies.”

Barnes said the study’s proposed changes are “all about pricing integrity” and must be “price-scarcity appropriate.”

“We have to have the right price signals to reflect proper supply-and-demand decisions, [and] consumption and production decisions systemwide,” he said. “Pricing integrity is what I would consider the first pillar of key energy-only market design.”

The second pillar is marginal pricing, Barnes said.

“Certainty [in ERCOT] is based on marginal-cost pricing principles,” he said. That … just doesn’t work for congestion. There are too many physical properties that affect the value of electricity from one location to another. A megawatt of electricity that is injected 100 miles away from a load has a different value than a megawatt that is injected closer to load. That is an undebatable, economic principle. Why would we not have the locational marginal prices reflect that?”

“That’s a lot to respond to,” said Thompson & Knight’s Katie Coleman, speaking for Texas Industrial Electric Consumers (TIEC), which represents the state’s 50 largest electricity consumers. “Probably the most offensive aspect of the priorities for the energy-only market paper is the locational aspect. You want to send scarcity pricing signals to encourage new investment in ERCOT. Industrials have been very supportive of sending appropriate scarcity-pricing signals. … What we don’t think is appropriate is creating sustained high prices in one area of the state [such as that created by Houston congestion], irrespective of what’s going on statewide.

“That’s concerning to us because from a resource-adequacy standpoint … the minute you get a new transmission line, you’ve just exacerbated your oversupply capacity for the rest of the state, and you’re also suppressing price signals in that area,” Coleman said.

She said TIEC’s other concern is that locational prices won’t result in “very significant” construction of new generation. “Generators understand how to build just to the point where the pricing is maintained. They’re never going to build to the point where pricing collapses, right? That’s sort of self-defeating.”

Amanda Frazier, Vistra Energy’s vice president of regulatory policy, doubled down on the Hogan-Pope paper’s focus on locational losses. She noted that losses only account for about 2.5% of the total LMP cost that loads pay on a load-ratio share.

“Ask yourself, why is NRG clamoring for marginal losses to reduce prices to consumers, create more efficiencies in the market and help the poor consumers who are overpaying for transmission losses? Consumers aren’t clamoring for that,” she said.

Any savings would come “at an incredible expense to generators who don’t have the ability to change their siting decision,” Frazier said, referring to wind farms.

“It’s not just a renewable issue,” she added. “All you’re going to do is penalize those generators for taking advantage of the resources in the state and providing low-cost power to Texans. It just doesn’t make sense to us. We think the fact it’s more economic and efficient is not enough.”

GCPA attendees disagreed, voting 77% in favor of implementing marginal losses in an online poll at the conference.

The Wind Coalition’s Jean Ryall focused on subsidies and their effect on free markets. “One person’s subsidy is another person’s tax incentive, so where does that stop?” she asked, suggesting attendees visit stopthesubsidies.com and sign a pledge to stop the incentives.

“Nearly every type of generation on the ground today in ERCOT has been built with tax incentives or subsidies of some kind,” Ryall said. “It was sited and built, based on the current rules of the market. It’s not like we can change the rules and everybody rush out, pack up your iron and move it to the center of the load in Houston.”

CEO Pans Proposal

Vistra CEO Curt Morgan cautioned against the market reforms being considered, saying the nodal market is working, but that it is “fundamentally overbuilt.” He noted 21 GW of new generation has been built since 2011, the first full year of nodal operations.

“The proposals designed to raise prices inside a load pocket, when the market has sufficient generation, seem wrong-headed,” he said, referring to congestion issues near Houston. “That is a temporary position that will be resolved with transmission buildout.”

Indeed, ERCOT’s $590 million Houston Import Project is designed to address the congestion in and around Houston. Morgan said Vistra thinks the NRG-Calpine proposal is a one-sided solution.

“The proposal helps a few generators in Houston and increases expenses to others in the market,” he said. “It would threaten indispensable generation outside the Houston zone and perpetuates high prices in the Houston zone. It does nothing for renewables and sends the wrong message to those already invested in the current market structure.”

Morgan agreed that subsidized renewable energy is creating price pressure in ERCOT. He suggested an adder be used for real-time pricing when thermal units are needed to serve load but do not set the price.

“Low prices are great when the result of market fundamentals, but distorted when they’re not,” he said. “They’re happening even when traditional generation is needed to serve load. That ignores the real cost those units incur to stay online and serve load. Those resources are not receiving revenues needed to cover the short-term marginal cost.”

Legal Experts: Environmental Rollback no Sure Thing

A panel of legal and regulatory experts agreed that the Trump administration will work to roll back environmental regulations, but it remains to be seen how far those efforts will go.

“It is too soon to predict what the Obama legacy on environmental issues will look like,” said Kathleen Magruder, vice president of U.S. regulatory affairs for BP Energy. “On the one hand, several courts — including the Supreme Court — are reviewing Obama-era regulations, such as the Clean Power Plan. On the other hand, we have a number of states and cities saying they plan to adhere to the goals of the Paris Agreement, even if the United States does withdraw. It will take some time to see how this all lands.”

“Whatever the legal challenge, however they turn out, I think the Obama legacy will have a lasting impact,” said Chris Jones, a partner with Troutman Sanders. “The changes to the fleet nationwide are irreversible. If you have a new federal dictate that coal plants are reliable and resilient … how far does that go? Will investors feel comfortable putting capacity in these coal plants, based on that rule?”

Asked by panel moderator Jimmy Glotfelty, with Clean Line Energy Partners, whether a coal pile is the only way to have a resilient grid, Jones referred to problems caused by last winter’s so-called “polar vortex,” saying: “You need a diverse fleet to manage different challenges. I don’t care how much coal you have on site, when it’s frozen, it ain’t no good.”

Marquez: PUC Relies on Transmission Policies

Texas PUC Commissioner Brandy Marty Marquez sat down with the commission’s director of wholesale market policy, Julia Harvey, for an informal discussion of issues facing the state’s regulators.

Marquez told Harvey the commission may be over-reliant on transmission policy “because it’s the one aspect of the market we can control.”

“We have a really interesting market here in Texas,” Marquez said. “We want it to be free, but boy, the lights better stay on. That’s a tricky balance.”

Asked by an audience member what generation owners should do with their older, out-of-the-market plants, Marquez said that’s a decision market participants need to make.

“It can be argued one of the challenges we have in Texas is that we have too much power,” she said. “Everyone’s waiting for that shoe to drop. If it were me, I’d probably want to hang on for as long as possible. We hear from [market participants] we’re not seeing scarcity pricing, but when there’s not a lot of scarcity, there’s not a lot of scarcity problems. That’s not a bad problem to have, because power is cheap.”

Advanced Technologies: A Boon or a Challenge?

Wires company representatives discussed their learning experiences with advanced technologies such as smart meters, distributed energy resources and microgrids, and the challenges they pose.

“It’s forced us to be more thoughtful about how we’re stepping into the future,” said CPS Energy’s Rudy Garza, vice president of distribution services and operations. “We’re still trying to figure out how we want to position ourselves.”

With its New Energy Economy program, CPS is partnering with renewable developers and businesses that “share [its] vision for clean energy, innovation and energy efficiency.” Garza said the utility has deployed 85% of its smart meters to residential customers.

“I don’t think there’s any utility out there that has figured it out. Those that are out there playing and trying to understand these technologies will get there a little quicker,” Garza said. “Now we have all this information we didn’t have before. We have to match [the data] to know where outages are happening or know where they might happen. That’s the future. That helps save dollars, before the trucks start to roll or the trouble calls start to come.”

Bob Bradish, American Electric Power vice president of grid development, said his company has installed one battery storage system in Texas, with the understanding from the PUC “that this was a one-and-done type of deal.”

“When you look at those technologies as an alternative to transmission solutions, there is a difference to what they bring to table,” Bradish said. “Transmission will bring additional capacity, it will bring permanence. It can be there for 90 to 100 years. How long is a battery, or a DER, going to be there? What is its reliability going to look like? You’re going to have to get comfortable with that.”

“Batteries are coming faster than maybe mankind can appreciate,” CenterPoint Energy’s Kenny Mercado said. “As that demand grows, we’re going to be learning about its behavior. With our regulated responsibility, we have to think about [batteries] differently. We have to be more insightful about their functionality, their capability. Like the advanced meter, it’s owned by the utility, but its [data] is used by the market. The market wins.”

Mercado noted the advanced technologies do have their drawbacks, a point that was driven home when Hurricane Harvey submerged much of CenterPoint’s system.

“When they’re submerged in water, they don’t work. They won’t tell you if they’re drowning,” he said.