Ryan Reynolds says, “When you have expectations, you are setting yourself up for disappointment.” But when it comes to Texas and our electric grid, we must have high expectations—our modern lives are completely dependent a reliable supply of electricity to our homes.
And the reliability of electricity supply is the fundamental problem facing the ERCOT market today. Currently, dispatchable thermal power plants, which usually have greater than 90% availability during peak hours with ±3% variability, are being replaced with wind and solar power plants whose output during peak hours can vary by ±20% and sometimes drop almost to zero. There are costs to this increased variability, and ratepayers shouldering those costs.
Maintaining the reliability levels that Texas ratepayers expect requires ensuring adequate replacement power is readily available when wind and solar generate less than expected. That’s why Governor Abbott, in a July 2021 letter to the Public Utility Commission of Texas (PUC), said, “To ensure reliable power generation … we must ensure that all power generators can provide a minimum amount of power at any given time.”
However, the PUC declined to follow this directive and instead developed a proposal called the Performance Credit Mechanism (PCM) that asks ratepayers to shoulder the full cost of replacement power. Because their plan does not require variable generators to provide more firm power, it risks foisting a lot more reliability costs on consumers without doing enough to address the increasing variability of electricity supply. As we noted in our December 2022 comments on the PUC’s plan, the primary way to address this problem is to allocate the cost of the reliability service “… among intermittent generators, non-performing dispatchable generators, and loads that are driving the need for the service.”
Furthermore, there is no cap on the size or cost of the PCM. Consumers will be on the hook for whatever amount of money is needed to pay dispatchable generation to provide the backup power the plan requires. As the growth of variable wind and solar generation increases the variability of electricity supply, the PCM will have to pay dispatchable generation more and more to be available when wind and solar are not available. This is not market reform. It is chasing subsidies with more subsidies, and consumers will be the losers.
Fortunately, Texas Senate Bill 7, authored by Senator Charles Schwertner and passed unanimously out of the Senate, provides a clear framework for allocating reliability costs and incentivizing all market participants to improve their reliability. The bill also provides other guardrails, such as a cap on the net costs of reliability services and protections against market manipulation, that will ensure the PUC’s market redesign addresses the needs of all Texans and not just the whims of the electric market participants that lobby the commission every day.
Most of the market reform discussion since Winter Storm Uri has been centered around how to increase the amount of dispatchable generation in ERCOT. But that is only half the problem. The underinvestment in reliability in ERCOT cannot be addressed without first addressing the overinvestment in variable wind and solar generation caused by the federal production and investment tax credits. Over $90 billion in private capital and $20 billion in federal and state subsidies have supported the massive buildout of wind and solar infrastructure in ERCOT, but that infrastructure produced only 10% of the state’s electricity during Winter Storm Uri.
If Senate Bill 7 is enacted, variable generators will have a strong financial incentive to firm up their supply during the times of highest system stress and ensure that their activity does not degrade the overall reliability of the grid. Those generators will be bidding into the market at closer to their true price, instead of being free to undercut the market, because they will have to absorb some of the reliability costs that they place on the system. Despite the distortions of the federal subsidies, the market will have a mechanism to correct for the overinvestment problem and guide it toward a more balanced portfolio of dispatchable and variable generation.
It is clear that a new service is needed to maintain reliability in the ERCOT market. However, for the service to be effective, it must be properly sized, targeted to incentivize resource adequacy during the times of greatest system stress, and most of all, include holistic cost allocation. Simply asking ratepayers to pay for extra backup power, as the PCM does, will not fix the market and will lead to spiraling costs as more backup power is required to close a growing reliability deficit. Senate Bill 7 will empower the market to find the right balance of intermittent and dispatchable generation and achieve the reliability that Texans expect at the lowest possible cost.