Texas plan to stop next grid disaster could cost customers billions

Canary Media’s Down to the Wire column tackles the more complicated challenges of decarbonizing our energy systems.

Texas utility regulators are considering a dramatic overhaul of the state’s energy market with the goal of preventing disasters like the widespread blackouts of winter 2021. But the plan they’ve given the most attention so far could siphon billions of dollars from electricity customers into the coffers of the state’s dominant fossil gas plants — all while doing little or nothing to improve electric reliability.

That’s the stark conclusion of a report released last week by consultancy ICF on behalf of the Texas Consumers Association. It underscores rising concerns from consumer and energy industry groups that the Public Utility Commission of Texas (PUCT) is ignoring competing ideas for strengthening the state’s grid against extreme weather.

Lawmakers ordered the PUCT last year to take steps to prevent repeats of the February 2021 winter blackouts that left about 4.5 million Texans without power, many for up to a week, and led to hundreds of deaths and an estimated $100 billion in economic damage. Since then, the PUCT and state grid operator ERCOT have made several changes to how the state’s energy market operates with the goal of making sure that such a catastrophe never happens again.

But now, as the PUCT prepares to make a second round of policy changes in early 2023, a growing number of stakeholders are demanding that the commission consider a full spectrum of reform plans.

The ICF’s report puts hard cost figures on the controversial Load-Serving Entity Obligation (LSEO) proposal made by power plant owners NRG Energy and Exelon. The LSEO plan is the centerpiece of PUCT Chair Peter Lake’s strategy to meet the Texas legislature’s mandate to improve the resilience of Texas’ electricity market.

The ICF report indicates that instituting the proposal could increase wholesale electricity costs by $22.5 billion from 2025 to 2030. That’s nearly as much as the roughly $25 billion in wholesale electricity bought and sold across the ERCOT market annually. It’s also 90 percent more than the report’s cost estimates for the next-most-expensive reliability option under consideration at the PUCT.

What’s more, those costs would come ​“without causing much new significant capacity to be built or predictable reliability improvements over time,” Alison Silverstein, a former adviser to the PUCT and the Federal Energy Regulatory Commission who helped craft ICF’s analysis, said during a Wednesday press conference.

And because key details remain unclear about how NRG and Exelon’s LSEO plan would assess the costs of paying generators to remain available to provide power during grid emergencies, it’s possible that the plan could drive up costs to wholesale energy market participants by as much as $30 billion in 2025, the report finds.

That’s a burden that will be passed onto Texans in the form of higher electric bills, whether they get their energy from the retail providers that serve most of the state or from a municipal or cooperative utility.

The market changes instituted in Texas since last year’s winter grid collapse have already increased wholesale electricity costs by an estimated $1 billion in 2022, Silverstein noted. 

Meanwhile, ​“energy affordability is already a critical problem in Texas,” with residents’ electricity bills up by 50 to 70 percent this year alone, she said. One-third of Texans are low-income and energy-insecure, ​“which means that they are already having problems paying their electric bills,” she said.

The Texas Consumers Association hired ICF to conduct an analysis because neither the PUCT nor ERCOT have made their own assessment of the cost or reliability impacts of any of the plans under consideration, Silverstein said.

Rich Parsons, PUCT’s director of communications, said in a Friday email that the findings of the ICF study are ​“at best premature, given the PUCT has not yet completed its own study of market re-design.” This makes any third-party analysis ​“conjecture based upon incomplete information.”

He added that the PUCT ​“will consider the best elements of each solution to create a custom hybrid that will ensure grid reliability, incentivize construction of reliable power generation resources and do so at the lowest possible cost to ratepayers.”

PUCT has ordered a study of the costs and benefits of the LSEO plan from consultancy E3 that is expected to be made public in the coming weeks, Parsons said. Silverstein and other Texas market observers have questioned whether E3’s analysis will be an impartial assessment, however, given that E3 also developed the LSEO proposal for utilities NRG and Exelon.

“Yes, there’s a wide range of uncertainty around LSEO cost,” Silverstein said at Wednesday’s press conference. ​“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,” Silverstein concluded. 

What’s at stake for the Texas energy market 

Unlike the rest of the U.S., Texas does not have a ​“capacity market” or ​“resource-adequacy” structure in which it pays power plants and other energy resources for simply being available to serve the grid if demand for power outstrips supply. Instead, it has a unique energy-only market structure, where generators rely solely on spikes in energy prices to earn enough money to invest in building new power plants.

That energy-only market has managed to deliver low-cost power without major reliability problems over two decades of operation. But last year’s severe winter storm and the resulting grid collapse have thrown the viability of the Texas model into doubt.

PUCT Chair Lake has insisted that Texas is not considering creating a capacity structure for its electricity market. But the LSEO proposal would require all load-serving entities — an industry term for municipal and cooperative utilities and retail electricity providers — to obtain a certain amount of credits from power plants deemed to be reliable during times when the grid is most stressed. Critics say this would create a capacity market in all but name, which they fear could increase costs and undermine the unique structure of Texas’ energy system.

The LSEO plan put forth by NRG and Exelon is in fact the most expensive by far of the three options being considered by PUCT, Patrick Milligan, ICF’s senior manager for energy power markets, said during Wednesday’s presentation. That’s because it will create a market in which all retail electricity providers and municipal and cooperative utilities will be forced to pay generators, ​“and the costs of that are forecasted to be high, especially in the first couple of years of implementation.”

But two other market devices that have also been proposed would provide about the same reliability benefits while making less dramatic changes to the ERCOT market, according to the ICF report. They would also come with much lower costs.

The first plan being considered is a ​“Dispatchable Energy Credits” construct. It would require load-serving entities to pay a premium for energy purchased from ​“fast, flexible” resources. Those include fossil gas generators that can quickly ramp up their output and batteries that can store at least two hours of energy and discharge it to the grid nearly instantaneously.

Those types of resources could help meet Texas’ summer peaks in power demand when heat waves cause air conditioner energy use to spike up for hours at a time in afternoons and early evenings, Milligan said. It would be less useful in the winter, when freezing temperatures can cause much longer-lasting spikes in demand both for electric heating and for gas used for heating and for fueling the power plants that provide the majority of the state’s electricity.

But the credits construct would also be much less costly than the LSEO plan. ICF’s analysis showed that it would increase wholesale electricity costs by a total of about $1.3 billion through 2025, but then lead to lower overall costs over time, largely because ​“we will have a more efficient market with greater reliability,” Silverstein said.

The second plan being considered, called ​“Backstop Reliability Service,” would in essence pay coal and gas generators that would otherwise be expected to cease operations because they can’t earn enough money in the Texas market to remain available for emergency operations. The ICF report forecasts that the Backstop Reliability Service plan would cost about $2.6 billion between 2025 and 2030, which is about 90 percent less than the costs it forecasts for the LSEO plan put forth by NRG and Exelon.

The Backstop Reliability Service plan could also be more valuable for providing extra power during the longer peaks in electricity demand that are common in winter, Silverstein noted. “[Dispatchable Energy Credits are] more of a summer solution; [Backstop Reliability Service] is more of a winter solution,” she said. ​“We expect that the PUC could probably implement both.”

The chart below shows ICF’s estimates of the cost differences between the three options, with the LSEO plan’s costs far higher than its competing alternatives.

Unclear operations, uncertain price impacts 

Milligan highlighted another risk of the LSEO plan proposed by utilities: it could impose even more drastic costs on the utilities and retail electricity providers, depending on how they are required to secure reliability accreditation from the companies that own the power plants available during grid emergencies.

Critics of the LSEO model put forward by NRG and Exelon say they’re worried that the new structure could lack pricing transparency. ​“How credits are assigned can vary significantly,” Milligan said.

And because the PUCT and state grid operator ERCOT would be creating the program from scratch, the costs that might emerge are far less predictable than they are in other parts of the country where similar market constructs have been operating for decades.

In a worst-case scenario, utilities and retail electricity providers could find themselves unable to purchase the reliability credits they need at any price, which could expose them to penalties that could be quite high, Milligan said. If that happens, the costs of complying with the program could balloon to as high as $30 billion in its first full year of operation, as the chart below indicates. 

The novel and uncertain structure of the market proposed in NRG and Exelon’s LSEO plan could also create a risk of market manipulation by gas-fired generators in Texas. Because these companies would be the most likely sources of reliability credits under the LSEO plan, they could ​“game the program in a way that could significantly increase costs,” Silverstein said.

That’s a potentially huge problem in the state, she said. NRG Energy is among a small number of companies known as ​“gentailers” in the ERCOT market, a portmanteau of ​“generators” and ​“retailers,” because they own a significant number of the power plants in Texas and are also major players in the retail electricity space.

Without adequate policing by ERCOT, those companies could offer their own retail electricity providers more favorable costs and terms for reliability credits from the power plants they own, and raise the price of or withhold reliability credits for retailers that compete with them, Silverstein said.

James McGinniss, CEO of energy retailer David Energy, echoed those concerns in a Friday interview. ​“You have NRG and the gentailers essentially saying, ​‘We’re just going to build more gas and centrally plan this economy — and you’re going to have to pay us for it.’ And it’s going to crush competition and eliminate innovation.”

The LSEO plan’s structure also doesn’t have a clear lever to incentivize the building of new power plants or other resources available to help the Texas grid ride through peaks in demand, which is seen as a key way to improve grid reliability, he said. ​“It’s not an obligation to build; it’s an obligation to buy,” he said. ​“From who? From the big guys.”

Silverstein agreed that the LSEO plan, depending on how it’s structured, could allow gentailers such as NRG to use their market power to earn disproportionately high capacity revenue for the power plants they already have and not reinvest the profits in building new power plants.

The ICF report’s analysis forecasts that a relatively small amount of new generation would likely be built in response to the market signals proposed in the LSEO plan. But that new generation would be slightly less than the amount of new battery storage encouraged by the market structure proposed in the Dispatchable Energy Credits plan, and quite a bit less than the amount of generation that the Backstop Reliability Service structure would encourage to stay open rather than close down.

Using these projections, the ICF analysis forecasts that the LSEO plan would not yield better reliability improvements than the Dispatchable Energy Credits model. What’s more, it would yield significantly fewer reliability improvements than the Backstop Reliability Service plan, while increasing costs far more than either of those two options, as the chart below indicates.

An NRG Energy media relations spokesperson did not respond to multiple phone messages requesting comment on the ICF report and the critiques of the LSEO plan.

Looking beyond big power plants for better grid reliability 

The truth of the matter is that none of these three interventions, either alone or in combination, will deliver the grid stability Texas needs, Silverstein emphasized. That’s a real problem, especially given that the Federal Energy Regulatory Commission recently determined that Texas has not yet taken sufficient action to reduce the risk of unusually cold weather causing the same kind of catastrophic grid problems that the state has in 2021.

Meanwhile, low-cost renewable energy is becoming increasingly important in keeping Texas power prices from escalating. Last week, consultancy IdeaSmiths released a study that found renewable energy has reduced electricity costs in Texas by roughly $27.8 billion since 2010, including $7.4 billion in savings in the first eight months of 2022 as wind and solar energy displaced power generated from increasingly expensive gas.

Texas Governor Greg Abbott, a Republican, has blamed renewable energy for the February 2021 grid emergency, citing the fact that some wind farms failed to operate during the sub-freezing weather. But the central cause of last winter’s problems was the failure of the state’s fossil gas infrastructure to operate in unusually cold weather and deliver the fuel needed by the generators that provide most of the state’s electricity.

The PUCT’s focus over the past year has been on market structures that could encourage more fossil-fired generation to be available for serving peak demand on the Texas grid. But a number of stakeholders have questioned this focus, noting that renewable energy is increasingly cheaper than fossil fuels for serving grid needs throughout most of the year.

At the same time, Texas also needs to encourage more investment in making its homes, businesses and industrial facilities more energy efficient and in managing their power use to better balance peaks and troughs in grid supply and demand, Silverstein said. What the state doesn’t need, she said, is a market change that ​“breaks our wallets before it can fix the grid.”