AUSTIN, Texas — Keynoting the Energy Bar Association Texas Chapter’s Energy Symposium last week, Lori Cobos, the only lawyer sitting on the state’s Public Utility Commission, said ERCOT stakeholders will soon get a look at the market’s long-awaited redesign.
“Around Nov. 10,” a consulting firm will release its review of the PUC’s market redesign blueprint, Cobos said, which the commission agreed to almost a year ago. The PUC has since added an open meeting to its calendar for that date. A spokesman confirmed the commissioners plan to take up and discuss the consultant’s report and recommendation.
Expect the recommendations to be heavy on dispatchable generation, which includes the usual thermal resources and energy storage. Since the February 2021 winter storm crippled ERCOT’s system, the PUC, ERCOT and Texas legislators have prioritized baseload generation over renewable resources. (See PUC Forges Ahead with ERCOT Market Redesign.)
“If Texas is to continue to lead the country as an economic powerhouse, that will require a reliable, resilient and affordable supply of power to fuel our economy and serve our growing population base,” Cobos said during the symposium Nov. 1. “Texas must maintain year-round reliability under all weather conditions, and to do this, we will need to drive investment in new and existing dispatchable generation through market-based price signals and a reliability-driven framework.”
She said the market must incentivize “fast-responding dispatchable generation” that can respond to wind’s and solar’s variability and retain the existing baseload generation “that is available 24/7 to meet our continuously growing electricity demand and extreme weather conditions.”
A load-side reliability mechanism, proposed in a study funded by generation heavyweights NRG Energy (NYSE:NRG) and Exelon (NASDAQ:EXC), is expected to be the central recommendation. Referred to as the load-serving entity obligation (LSEO), the study’s authors have said it will directly address resource adequacy concerns by introducing a formal reliability standard and the mechanism to ensure an LRE has sufficient resources to meet this standard.
PUC Chair Peter Lake quickly latched onto the LSEO proposal late last year. The other commissioners at the time offered some pushback but agreed to include it on the new market blueprint.
Indirectly responding to criticism from some that the LSEO would be a “capacity-light” market, NRG’s Bill Barnes, senior director of regulatory affairs, said, “People think, ‘Oh, NRG, they just want a capacity market.’ No, we want a competitive market that can survive through reliability events, so that we can preserve our successful market structure. That’s the No. 1 priority for us.”
Barnes did not mention that the consultant reviewing the PUC’s blueprint, E3 Consulting, is the same firm that produced the NRG-Exelon report. The commission chose E3 over ERCOT’s Independent Market Monitor, the only other bidder on the contract.
Energy consultant Alison Silverstein, a former PUC and FERC staffer, has worked with the Texas Consumer Association (TCA) and ICF International, a global consulting services firm, to produce an analysis on the cost and reliability impacts of ERCOT’s recent and proposed market changes. She said deep concern over “a teeny bit of bias and conflict of interest” of E3’s ability to fairly review the PUC’s proposal led to their own analysis.
“The PUC hired E3, apparently untroubled by that same concern, and E3 went off and did the study, and nobody’s heard anything,” Silverstein said, speaking on the same panel with Barnes.
The commission’s blueprint also includes a backstop reliability service (BRS) and the use of dispatchable energy credits (DECs).
BRS would procure accredited new and existing dispatchable resources as an insurance policy to help prevent emergency conditions. Its principles include nonperformance penalties and clawbacks for noncompliance; deploying resources in a manner that doesn’t negatively affect real-time energy prices; and allocating costs to load based on a load-ratio share basis measured on a coincident net-peak interval basis.
The DEC proposal would establish a dispatchable portfolio standard for certain qualifying generators to create the DECs, which would be bought, sold or traded is the same manner as ERCOT’s existing renewable energy credit program.
“Does our market structure provide the right incentives for reliability?” Barnes asked, referring to the market design discussions. “It’s efficient. It’s cost efficient; brutally efficient. So, you’re getting the lowest-cost solution out of our current market design, but that doesn’t always mean reliability.”
Cobos assured her EBA audience that the commission will take public comment before making a final decision in January. She said the Texas Legislature, which begins its 2023 session on Jan. 10 and runs through Memorial Day, will also provide feedback on the blueprint, “in addition to looking at investments in dispatchable generation.”
PUC’s Market Design Costs
The PUC “had three primary options that have been sitting around, and to date, there has been minimal information released about what the specifics of those proposals were, or what the design and cost and reliability implications of those would be,” Silverstein said.
ICF analyzed the proposed designs using available public information and various models. Based on that, it said none of the current proposals would, by themselves, improve reliability enough to yield one outage every 10 years, the industry’s generally accepted standard of 0.1 loss-of-load expectation (LOLE).
“We thought it was a very reasonable set of assumptions and scenarios and methodology,” Silverstein said.
Texans should expect, on average, about five outages every 10 years (a 0.5 LOLE), ICF said. It noted reliability is expected to further deteriorate by 2030 if no further policy measures are taken.
Calling the LSEO proposal a “California-style redesign” of the ERCOT market, in that consumers would pay more for power plants that might not operate, ICF’s study found it would cost Texans an additional $22.8 billion from 2025 to 2030, including $8.5 billion more in 2025 alone, without significantly increasing the grid’s reliability. It forecast the LSEO would add another 2.5 GW of gas generation by 2030.
ICF said the BRS proposal, based on an energy storage entity’s recommendation, would yield less than two outages a decade (0.17 LOLE) at a total cost of $2.6 billion from 2025 to 2030. It projected the BRS would also retain about 8 GW of capacity that would otherwise retire under the current market construct.
The DEC proposal would cost consumers $1.3 billion during its first three years (2023-2025) but would then reduce the total costs to consumers by approximately $2 billion each year from 2027 to 2030, ICF said. It forecasts DEC, based on an energy storage provider’s recommendation, to bring online 3.4 GW of additional two-hour battery storage by 2030.
“Yes, there’s a wide range of uncertainty around LSEO cost,” Silverstein said during an Oct. 26 virtual press conference unveiling the study. “The one thing that is not uncertain, that is absolutely clear, is the LSEO costs are potentially huge. And as of now, the program is so significantly undefined that there is no way to narrow in the parameter for how expensive it could be or how effective it could be at improving reliability.
“Texans need a reliable grid, but not at any cost,” she said.
New Study on Energy Efficiency, DR
TCA plans to release a companion report later this month comparing the cost and reliability effects of using high levels of demand-side resources to improve reliability, with the results contrasted with its supply-side analysis.
Silverstein called it a follow-up, parallel piece to “the one scenario that the PUC chose not to study.”
“What happens if we actually do what customers do a lot more of with energy efficiency and demand-responsive distributed assets?” she said. “What does that do for reliability and affordability in ERCOT?”
Silverstein said Texas energy efficiency requirements are tied for last among the 28 states with such requirements. “We deliver such minimal energy efficiency to so few Texans, it’s criminal,” she said.
Liz Jones, Oncor’s vice president of regulatory affairs, said she expects energy efficiency to be one of the key issues debated within the legislature next year.
“There is a cottage industry about what kinds of programs are effective and efficiently implemented,” Jones said. “There is always a struggle because when we undertake energy-efficiency measures, we are collecting funds from all customers, and we are dispersing them to the customers who are qualified for the energy efficiency. It turns out it takes a lot of money to weatherize. Is it crucial for the person that lives in that home? Yes, and so we’re going to see a fight, I think, at the legislature about how we spend on energy efficiency.”
“The programs today are all over the map. They are not always focused, and they are tiny,” Silverstein said, agreeing with Jones. “The reason the winter storm caused so much damage is because Texas homes are under-insulated, because Texas heaters are ineffective and because the energy demand before the power started going out was 20% above anything that ERCOT had forecast. That was because of a lack of energy-efficient homes and lack of energy-efficient heaters. We deserve better, both for winter and for summer.”
Market Provides Expert Feedback
Jones and NRG’s Barnes both said market participants need to have a greater role in the rulemaking process. They and other ERCOT participants have seen their input sharply reduced with Senate Bill 2, which passed by last year’s 87th Legislature. The legislation created an independent board at ERCOT and gave more accountability to the PUC.
“One of the issues is how much should market participants — like Oncor; like NRG; like the city of Austin — have in making ERCOT rules. I would contend that you need us,” Jones said. “First of all, we’re free labor. We can provide feedback about how a particular rule would or would not be able to be effectuated in real-time operations or in planning. One of the things that I’m personally very interested in is making sure that the ERCOT rulemaking process, like the PUC rulemaking process, incorporates the feedback of interested parties in making those rules. It’s procedural due process, substantive due process. It’s a sensible way to try to do this.”
“I completely agree with Liz’s comments on Senate Bill 2,” Barnes said. “As a stakeholder in a marketplace, we have a stake in it. We have invested a lot of money [and] people time, and we should have a voice. Our folks are the experts. They’re the ones that turn the wrenches to start the power plants, and ERCOT needs to hear from us.”
Barnes added that he hopes the legislature avoids “tinkering” with market rules that have already passed. He pointed to the PUC’s weatherization requirements for power plants and transmission facilities as an example of changes that have already been instituted and that work.
“We like to have rules that are predictable and are certain to be done,” he said. “It would be great for the legislature to let that process play out, but they’re not going to. I would hope that there will be a lot of robust debate and discussion at the legislature, but let’s let the process play out at the PUC where the experts are. It will take time. It’s not like we’re going to be to snap our fingers and have an answer. These things are complicated, and we want to make sure we get them right.”
