Public Utility Commission Settles on ERCOT Market Redesign Plan, Legislators Push Back

The Public Utility Commission of Texas (PUC) approved the long-awaited plan to tweak the state’s main electricity market and summarily drew rebukes from legislators.

In a 5 to 0 vote, the PUC agreed to move forward with the Performance Credit Mechanism (PCM) plan but stipulated they’d wait for input from the Texas Legislature, which is in session until May 29.

The entire Electricity Reliability Council of Texas (ERCOT) redesign project has been geared towards one main purpose: ensuring the development of more thermal generation in the market. The PCM aims to accomplish this by awarding financial credits to generators for producing during times of high demand or tight grid conditions. A similar option — the Forward Reliability Market plan — would provide those incentives based on forecasts, not actual performance.

According to the report by the PUC’s consultant, the PCM is estimated to cost $5.67 billion per year with an estimated addition of 5,630 megawatts of natural gas generation development over time. In contrast, maintaining the status quo system was estimated to cost $22.3 billion per year moving forward, largely from premium-priced generation during scarcity pricing periods.

Electricity prices across Texas have been noticeably higher since the 2021 event for a number of reasons, including the additional caution with which the state currently operates — bringing on ancillary services and reserve generation online sooner, and for longer, than before.

Under the analysis, the PCM system carries with it a loss of load event expectation of 0.1 days per year; the status quo has a 1.25-day estimate.

The PUC also agreed to consider more intensively a possible “reliability standard” — the criteria by which reliable performance is gauged and generators are financially rewarded.

We heard Texans loud and clear; they demand a reliable grid. Landmark reforms have proven effective in enhancing the reliability of the grid we have today by providing electricity during record heat and arctic blasts over the past year,” said PUC Chairman Peter Lake in a statement following the vote. “Today, we take another historic step towards building the grid of the future by adopting a new reliability service — the Performance Credit Mechanism.”

The PCM is a good-faith effort at some form of a hybrid system [between the energy-only market and a capacity market],” PUC Commissioner Will McAdams said during the meeting.

It comes about a week after Gov. Greg Abbott weighed in on the long-running redesign debate, backing the PCM and urging the PUC to move forward with the plan. In his letter, Abbott was satisfied that the PCM would provide enough financial incentive to goad companies into investing capital towards constructing more thermal generation sources.

But that posture conflicts with that of the Legislature. Last month, House and Senate committees harangued PUC Chairman Peter Lake for moving on the redesign without getting more input from them.

Lake then agreed to wait for the body to weigh in during the 88th Legislative Session.

The final bullet point in Lake’s agenda on the PCM reads, “The Commission directs PUCT staff and ERCOT to delay implementation of the PCM until such time as the 88th Legislature has had an opportunity to render judgment on the merits of the PCM and/or establish an alternate solution.”

But the decision drew the ire of some in the Legislature. Sen. Charles Schwertner (R-Georgetown) released a letter to the PUC lambasting the PCM.

As the author of Senate Bill (SB) 3, the [PCM] adopted by the [PUC] at today’s open meeting represents a substantial departure from the legislative intent of SB 3, specifically Section 18, which relates to the development and procurement of a new ancillary or reliability service to incentivize new dispatchable generation,” Schwertner wrote.

To be clear: SB 3 did not direct the PUC to replace the state’s energy-only market with an unnecessarily complex, capacity-style design that puts the competitive market at risk without guaranteeing the delivery of new dispatchable generation.”

SB 3 was the Legislature’s broad response to the February 2021 blackouts during the 87th legislative session. That bill punted evaluation of the redesign to the PUC; one section reads, “The commission shall … evaluate whether additional services are needed for reliability in the ERCOT power region while providing adequate incentives for dispatchable generation.”

Dispatchable generation” is defined as generators whose output is not “controlled primarily by forces outside of human control” — thus excluding wind and solar generation, which are dependent on weather conditions to produce electricity.

Schwertner contends that the PCM does not meet the Legislature’s directive to the PUC that redesign ensures the development of dispatchable power.

Back in November, Lt. Gov. Dan Patrick named adding more dispatchable generation to the ERCOT grid as a top priority for the Legislature and said that using a portion of the surplus record to subsidize that development is an option that should be considered.

Industry members — the Texas Oil and Gas Association (TXOGA) and the Texas Association of Manufacturers — both registered misgivings about the PUC’s action.

[C]oncerns remain regarding shifting risk away from generators and towards consumers as the Performance Credit Mechanism (PCM) model is crafted and continues to evolve,” TXOGA President Todd Staples stated. “The PCM modeled by E3 reflected a cost of $5.7 billion annually and focused on availability rather than performance. The conversation today discussed pay for actual performance which is encouraging but not sufficiently defined and has yet to be modeled to understand the full cost to consumers.”

Staples then called for a state-sanctioned fund to issue loans to developers who invest in new dispatchable generation; an extension of property tax abatements to power generation projects; and the creation of a new reliability service.

TAM President Tony Bennett said, “TAM is concerned with today’s action by the PUC to approve a novel proposal that is not well understood, and has not been modeled, but appears to be designed to ensure a certain profit level for existing generation.”

Bennett also echoed support for the three things Staples mentioned.

State Rep. Jared Patterson (R-Frisco), who works in the energy industry for his day job, further criticized the PUC’s decision.

I have very serious concerns about the PCM model adopted at the PUC today,” he wrote on Twitter. “One of the biggest items we tackle this session must be securing the long term competitiveness and affordability of the grid. The PCM falls short on both.”

Before tackling any type of market structure change, the [Texas Legislature] should review all of the administrative actions taken by the PUC over the past decade, including shifts in the [Operating Reserve Demand Curve] and the more recent changes to the price cap and ancillary market. Next, we should have a robust discussion about the actual problem on the grid, the lack of dispatchable generation sources instead of intermittent resources.”

The Operating Reserve Demand Curve adds another hurdle to this redesign; it’s the price adder responsible for premium electricity pricing during times of tight grid conditions. That comes on top of the current influx of renewable generation onto the ERCOT market at the expense of dispatchable development enabled by tax credits and breaks, especially from the federal government in the form of the Production Tax Credit. That credit is awarded to renewable generators per kilowatt-hour produced and was just extended another decade by Congress.

Critics like Patterson say this has caused a distortion of the ERCOT energy-only market and warped it beyond what it once was: paying generators for electricity actually produced along a supply-demand curve in constant equilibrium.

But ultimately, much of the debate on market redesign toes the fault line between the ERCOT market as originally constituted and capacity market characteristics that have been added to the mix.

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