Texas legislators ordered the overhaul of the state’s deregulated energy market, which Public Utility Commission Chairman Peter Lake has called “crisis-based” because incentivizes power companies to provide low-cost electricity, at the risk of the grid’s reliability.
The proposed “performance credit mechanism” — or PCM, as it’s known in the acronym-heavy parlance of energy insiders — offers power producers a financial reward to have their plants available during times when Texans are consuming the most energy.
The model balances grid resiliency with free-market sensibilities, Lake says. With his blessing, the PUC will adopt it or another design before state lawmakers return to Austin for the legislative session that starts Jan. 10.
Lake says the PCM will encourage companies to invest in new natural gas plants, a top priority for lawmakers and energy insiders who are concerned that the ascendancy of cheap renewable energy in Texas will weaken natural gas producers. But some doubt Lake’s assertion and are scratching their heads over the model, which he said would take four years to implement.
“This plan is so convoluted and has a long timeline to put in place, that it is a set up for failure for everyone,” New Braunfels Republican Sen. Donna Campbell said at a recent hearing of the Senate Committee on Business and Commerce.
Senators from both parties appeared perplexed by the decision to pursue the PCM.
Sen. Charles Schwertner, a Georgetown Republican who chairs the committee, questioned why the PUC should create a new, untested market mechanism to encourage companies to build new natural gas plants rather than directly providing government money as the incentive.
Report Didn’t Recommend Design
In a PUC-commissioned report released Nov. 10, consulting firm E3 evaluated several market designs and did not recommend the PCM, which would cost about $480 million a year more than the current market.
The report recommends Texas pursue a structure similar to a capacity market, which pays power producers even when their generators are offline to subsidize their operations and maintain an adequate supply of electricity for times of peak demand.
“It is fascinating to see the PUC go against the recommendation of the consultants,” Austin-based energy consultant Doug Lewin said.
The grid’s independent market monitor said the E3 analysis was based on fundamentally flawed assumptions. And other experts question the scope of the report, which did not take into account weather conditions during 2021′s deadly winter storm.
Over the next several weeks, companies from every sector of the electric industry will be submitting input to the PUC.
The public and stakeholders have until noon, Dec. 15, to submit comments on the proposal.
“I’m looking forward to seeing what the marketplace and people tell us,” Lake said.
How Performance Credits Would Work
If adopted, the PUC would create an additional yearlong market for the sale and purchase of so-called performance credits. Power generators would earn them by meeting a commitment they make at the start of the year to produce certain amounts of electricity at certain times.
They could then sell the credit to power providers, such as retail electric companies, municipal utilities and electric cooperatives.
The grid operator, the Electric Reliability Council of Texas, would determine how many performance credits power providers must buy according to the percentage of electricity they used.
“It’s incredibly complicated,” said Alison Silverstein, an energy consultant who formerly worked with the Federal Energy Regulatory Commission and the PUC.
Silverstein said she doubts the performance credit market would incentivize investment in natural gas facilities because it’s unclear whether power plants will even earn them.
“It’s the farthest thing from a predictable revenue stream that I can imagine,” she said.
The total market value of the performance credit system would be based on a demand curve that has not been set, but likely would be designed to encourage the construction of new natural gas power plants, which Lewin, the energy consultant, said he thinks is possible.
“To be clear, I don’t like it overall,” he said of the PCM, “but one of the things that it has going for it is that it offers a pretty strong inducement” for building new gas plants.
At the consumer level, power companies might see the new market as a reason to promote energy conservation. The fewer performance credits ERCOT forces them to buy, the more savings they could pass on to consumers in their electricity bills.
But it’s not certain that would occur, and the overall cost of implementing the performance credit market would be higher, according to the E3 analysis.
An Alternative
Lewin said he prefers a cheaper alternative called the backstop reliability service, or BRS.
It would contract certain power plants to be available at ERCOT’s demand to produce energy. In exchange, ERCOT would fund those plants’ maintenance and operations. It would keep some plants on the system that could be mothballed in the coming years.
At the Senate committee meeting, some lawmakers appeared to prefer the BRS because it would be the easiest to implement and have the smallest impact on ERCOT’s current market structure.
Lake pushed back on that assumption.
“We are paying for those generators not to participate in the market,” he said. “That is one of the concerns.”
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