Deciphering The Texas Electricity Market Reform Plan: What You Need To Know

The February 2021 Texas winter storm overstressed the state’s electricity grid, forcing millions of homes and businesses to lose power. Hypothermia and carbon monoxide poisoning killed 200 people.

The Texas Public Utility Commission, which regulates electricity, ordered power generators to weatherize their infrastructure afterward. They also ordered the PUC to keep lights on during wind and solar energy shortages. In January, regulators proposed a major electricity market reform.

The PUC unanimously approved the performance credit mechanism. The controversial idea would require electricity providers—companies, co-ops, and municipal utilities that sell power—to pay generators that promise to be available when grid conditions get tight. Consumers may pay extra.

The idea encourages companies to build or extend dispatchable power facilities. Natural gas, nuclear, and coal-fired plants can turn on at any time, unlike renewable sources like solar and wind. The goal is grid reliability. “That’s the crux of this whole thing: We have to make sure we have adequate power when it’s really hot, when it’s really cold when the wind’s not blowing and the sun’s not shining,” said PUC Chair Peter Lake, who supported the idea. “That’s it.”

The proposal’s impact on grid reliability is disputed. Market-monitoring economists oppose it. Environmentalists, oil and gas companies and heavy electricity users don’t either. Gov. Greg Abbott and gas-powered generators support the change.

Jonathan Rincon Lopez has posted a Tweet about the situation. You can see the Tweet below.

The Legislature must decide whether to let the PUC proceed with its plan or direct it to pursue something else. Complexity and technical language describe the concept. We created a guide to help Texans understand how the proposed changes might work—or not.

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Energy-only market Start with the current state electricity market. Most of Texas has its own electricity grid, unlike the east and west, which share utilities. Energy-only markets sell electricity here. Power generators are paid for their output. ERCOT, a nonprofit, runs the grid and facilitates these transactions.

Texas, which generates the most wind energy, has built more wind and solar energy producers recently. Because their fuel—wind and solar energy—is free, they sell cheap electricity. Wind and solar farms sell all their power. Wind supplied 25% of ERCOT’s energy last year and solar 5.6%.

Gas and coal plants must buy fuel and maintain older, more complex facilities. ERCOT, which sets electricity prices in much of Texas, prioritizes the least expensive energy on the grid, so gas-, nuclear-, and coal-powered plants meet the rest of the demand. ERCOT says gas usually meets demand last.

Deciphering The Texas Electricity Market Reform Plan: What You Need To Know
Deciphering The Texas Electricity Market Reform Plan: What You Need To Know

Some say this makes it hard for those companies to compete in Texas. “It’s a very well-established and understood relationship that when renewable energy comes online, that reduces the profits for all of the other generators that are on the system, specifically and particularly dispatchable resources, like natural gas and coal, and causes them to exit the system because they are not earning enough revenues to cover their costs,” Zachary Ming, a PUC-hired consultant to evaluate market reform ideas, told legislators during

However, dispatchable plants profit when demand for power rises due to extreme heat or cold or when wind and solar aren’t producing as much energy. Issue This system gives Texans the cheapest power. There must be enough power to supply the fast-growing state consistently and properly. ERCOT’s other job is to prevent demand from exceeding supply, which could damage the system’s infrastructure and take weeks to repair.

In February 2021, when unusually cold weather knocked power producers offline, people turned up their heaters to avoid subfreezing temperatures. Natural gas producers struggled to supply natural gas-fueled plants due to power outages, icy roads, and frozen equipment.

Even though ERCOT set the maximum price for electricity to encourage production, power producers couldn’t generate enough, causing days-long state-wide outages. Electricity providers paid exorbitant rates for available power. The Texas Legislature later allowed retail electric companies to seek state-approved bonds to cover those costs, which was expected to raise most Texans’ electricity bills by a few dollars a month for 20 years.

After That Storm, The Puc And Ercot Made Immediate Changes To Prevent A Repeat, Including:

  • Price increases: When the grid is stable, ERCOT pays power generators, especially natural gas ones, more for electricity.
  • Industrial shutdowns: ERCOT can now pay industrial and commercial customers to shut down before an emergency to lower grid demand.
  • Fuel storage: ERCOT pays gas-fired power plants to store fuel in case freezing weather damages natural gas infrastructure.

Experts say those changes are enough to maintain the grid. Performance credit The PUC’s January performance credit mechanism would add a market to the energy-only market. Regulators would define grid reliability. The PUC could set a limit on grid-related power outages.

Power generators would sell performance credits—essentially a promise to produce extra electricity when grid conditions are tightest—to meet that reliability target. Any power producer—whether they own a gas-fired power plant or a wind farm with battery storage—could sell a credit.

Power generators said the extra revenue would spur them to build 4,500 megawatts of gas plants. Another executive said the credits would encourage his renewable energy company to develop more battery storage systems.

“It sets up a market that says there’s a pool of money here that is intended for you to reliably perform if you’ve got an on/off switch and are willing to make the commitment to be there when we need you for reliability,” said Michele Richmond, executive director of the Texas Competitive Power Advocates, which represents gas plant operators, during a February committee hearing.

These credits would be purchased by residential and business electricity providers like co-ops, retail companies, and municipal utilities. The PUC vision allowed providers to pre-purchase credits to save money or lock in a price. That’s optional.

All providers would have to buy or own enough credits to match their energy use during tight times after an unspecified time period. At the committee hearing, Katie Coleman, energy counsel for the Texas Association of Manufacturers, which represents large industrial companies that use a lot of power and worry about rising electricity costs, called the idea “an elaborate electricity tax.”

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ERCOT’s separate market would set credit prices. Some call this a Texas capacity market, a framework used in Pennsylvania and nearby states that Texas has long resisted. In Pennsylvania, capacity market generators must repay the money if they fail to supply power.

The performance credit mechanism has only been used in Mexico, according to the PUC, and many details remain to be worked out. The optimistic view is that companies will build new power plants that can be quickly cranked up regardless of weather and make the grid more reliable.

Critics of the PUC proposal worry that dirtier, dispatchable power generators will get money for promising to provide power and then do nothing. Credits don’t have to fund new power plants. The penalty for not providing power when needed has yet to be determined.

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