What you need to know about Texas’ complex — but important — electricity market reform plan

El Paso Electric's natural gas-powered Newman Generating Station in El Paso. The state's Public Utility Commission is proposing changes to the state's electricity market that aim to give companies a financial incentive to build more gas-fired plants or extend the lives of current plants. (Justin Hamel For The Texas Tribune, Justin Hamel For The Texas Tribune)

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The winter storm that hit Texas in February 2021 strained the state’s electricity grid so much that power had to be cut to millions of homes and businesses to prevent the grid’s complete failure. At least 200 people died, many from hypothermia and some from carbon monoxide poisoning.

Afterward, state legislators directed the Public Utility Commission, which regulates electricity in Texas, to make sure power generators prepared their infrastructure for extreme weather — those facilities have since been weatherized. They also instructed the PUC to find a way to keep lights on when wind and solar energy production lag.

To that end, in January, regulators proposed a major change to the way the electricity market works.

The PUC unanimously approved what it calls the performance credit mechanism. The controversial idea would require electricity providers — the companies, co-ops and municipal utilities that sell power to people — to pay additional money to generators that promise to be available when grid conditions get tight. Those extra costs could be passed on to consumers.

The concept is designed to incentivize companies either to build more of, or to extend the life of, what are known as dispatchable power facilities. Dispatchable power sources such as natural gas, nuclear and coal-fired plants can turn on any time, unlike renewable sources that depend on solar and wind energy. The big-picture goal is to make the grid more reliable.

“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 championed the idea. “That’s what it comes down to.”

There’s widespread debate over whether the proposal would indeed make the grid more reliable or just make electricity costs rise without improving it. The economists paid by regulators to monitor the market don’t support the idea. Nor do environmental and consumer advocates, oil and gas producers or industrial customers that use a lot of electricity.

Gas-powered electricity generators do support the change, as does Gov. Greg Abbott.

The Legislature now must decide whether to let the PUC proceed with its plan or direct the agency to pursue something different. The concept is complex and the language used to describe it is technical. So we’ve created a guide to help Texans understand how the proposed changes might work — or not.

The energy-only market 

Let’s start with the way the state’s electricity market currently functions. Texas is unique because most of the state is served by its own electricity grid — unlike the eastern and western halves of the country where utilities are interconnected.

Here electricity is bought and sold in an energy-only market. This means that power generators are paid for what they produce. A nonprofit called the Electric Reliability Council of Texas, or ERCOT, operates the grid and facilitates these transactions.

In recent years, more wind and solar energy producers have been built in Texas, which produces more wind energy than any other state. They offer cheap electricity in part because their fuel — wind and solar energy — is free. Wind and solar farms typically sell all the electricity they can produce. Last year, wind provided 25% of ERCOT’s total energy needs while solar provided nearly 5.6%.

Gas and coal plants, by comparison, must pay for their fuel and maintain more complex, aging facilities. Because ERCOT, which sets the prices for electricity in much of Texas, puts the least expensive energy on the grid first, whatever demand isn’t met by wind and solar is largely purchased from gas-, nuclear- and coal-powered plants that offer the lowest rates on any given day. Gas is commonly the last in line to help meet demand, according to ERCOT.

Some argue this landscape makes it too hard for those companies to compete in Texas.

“[I]t’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 consultant hired by PUC to evaluate different market reform ideas, told legislators during a February committee hearing.

But when the demand for dispatchable power rises — because of extreme heat or cold weather, for example — or when wind and solar aren’t producing as much energy, that’s when dispatchable plants make their money.

The problem

This system exists to bring Texans the cheapest power possible. But there also has to be enough power to supply the fast-growing state consistently, and it has to function properly. That’s the other part of ERCOT’s job; if ERCOT fails and demand exceeds supply, the whole system’s infrastructure could be so badly damaged that it would take weeks to get it fully back online.

That’s what nearly happened in February 2021, when people cranked up their heaters to ward off subfreezing temperatures as the unusually cold weather knocked power producers offline. Natural gas-fueled plants in particular had trouble getting enough gas from natural gas producers battling power outages, icy roads and frozen equipment.

Even when ERCOT set the maximum price for electricity to encourage more production, power producers couldn’t generate enough, triggering mass outages across the state that lasted for days. Electricity providers ended up paying astronomical rates for what power was available.

The Texas Legislature later voted to allow retail electric companies to seek state-approved bonds to cover those costs, a move that was expected to increase most Texans’ electricity bills by at least a few dollars a month for perhaps 20 years.

The PUC and ERCOT adopted some immediate changes to prevent a repeat in the aftermath of that storm, including:

  • Price increases: Power generators get paid more for electricity when the grid is not in crisis, and ERCOT is paying higher rates to power generators that can come online quickly — mainly those that run on natural gas.
  • Industrial shutdowns: ERCOT can now pay industrial and commercial customers to shut down sooner ahead of an emergency to lower demand on the grid.
  • Fuel storage: Some gas-fired power plants are paid by ERCOT as needed to keep some fuel on site in case freezing weather knocks out natural gas infrastructure.

Some experts say those changes are sufficient to keep the grid working properly.

The performance credit mechanism

The performance credit mechanism that the PUC approved in January would basically create an additional market on top of the existing energy-only market. Regulators would set a standard for what it means to have a reliable grid. For example, the PUC could decide how often it is acceptable for people to lose power because of grid problems.

To hit that reliability target, power generators would sell so-called performance credits — which are essentially a promise that they will produce extra electricity when grid conditions are tightest. In theory, any power producer — whether they own a gas-fired power plant or a wind farm with battery storage — would be able to sell a credit.

Power generators said the additional income would prompt them to build enough gas plants to add 4,500 megawatts to the grid. Another executive announced that his renewable energy company would be encouraged to increase its battery storage system development if the credits are adopted.

“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 companies that operate gas plants, during a February committee hearing.

Meanwhile, the buyers for these credits would be the electricity providers such as co-ops, retail companies and municipal-owned utilities that sell power to residential customers and businesses. Under the PUC vision, the providers could purchase credits in advance if they believed they could save money or if they wanted to lock in a set price. But that’s optional.

At the end of a yet-unspecified time period, all providers would have to buy or own enough credits to equal the energy they used during certain, to-be-defined tight times. Katie Coleman, energy counsel for the Texas Association of Manufacturers, which represents large industrial companies that use a lot of power and are worried about rising electricity costs, called the idea “an elaborate electricity tax” at the committee hearing.

The price of the credits would be set through a separate market that ERCOT would operate.

Some people call this a Texas version of a capacity market, a framework used in places such as Pennsylvania and nearby states that Texas has long resisted. In a capacity market, generators get paid years ahead for promising to supply power — and in Pennsylvania, they have to pay back money if they fail.

But the performance credit mechanism is almost entirely untested — it’s been used in Mexico, according to the PUC — and there’s still a lot of details to be worked out.

The optimistic view is that companies will build new power plants that can quickly be cranked up regardless of the weather and help make the grid more reliable.

Critics of the PUC proposal worry that dirtier, dispatchable power generators will get an influx of cash in exchange for promising they’ll provide power — and then do nothing differently. There’s no requirement that the money made from the credits will go to building new power generation facilities.

There will be a penalty for failing to provide power when it’s needed — but that penalty hasn’t been outlined yet.

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