The House State Affairs Committee met on May 10th to take up several bills. This report covers SB 2627 (Schwertner | et al.) & SJR 93 (Schwertner). The notice for the hearing can be found here. Part 2 of the hearing can be found here.
This report is intended to give you an overview and highlight of the various topics taken up. It is not a verbatim transcript of the discussions but is based upon what was audible or understandable to the observer.
SB 2627 (Schwertner | et al.) Relating to funding mechanisms to support the construction, maintenance, and modernization of dispatchable electric generating facilities.
- Chair Hunter – CS Laid out
- The Powering Texas Forward Act
- Increased reliability to dispatchable generation
- CS accomplishes the goal by targeting money at new steel in the ground in 2 ways
- Provides a completion bonus for new facilities
- Provides 0 interest loans for new dispatchable generation for generators to access capital to build the resources
- Loans can finance up to 75% of construction cost
- The project must be at least 100 megawatts and ready to provide power by December 31st, 2028, to qualify
- Creates resiliency grant fund for non ERCOT utilities
- Creates the Texas Energy Fund Advisory Committee made up of the Texas Legislature
- Safeguards to ensure the dollars are rewarded appropriately
- The funding will help support more reliable and resilient electrical systems
Thomas Gleeson, PUC – Neutral
- Resource witness
- Anchia – Is the estimate of about ~$725,000 just to set it up or does that include the FTEs to administrate the program?
- They are not currently set up to run a loan program, so they modeled their method off of other bills that had similar programs
- Anchia – Did you look at the water development board for this program?
- They had discussions about it but did more than just look at that
- Anchia – Is it the establishment or ongoing operations?
- Ongoing operations as well
- They have the proper amount of resources to implement the bill
- Anchia – Only contemplates the loan program and not a bonus mechanism?
- Correct, they would approve it through the loan program and then they would become open to a bonus
- Raymond – Did the senate appropriations or finance committee do they have a contingency rider for this bill in their budget?
- This bill was filed after the last version of the senate budget they had seen so currently no
- Raymond – So the fiscal bill is only your set up; what was the senate talking about in terms of a number?
- $10b
- Raymond – It seems that moving forward maybe they can say “for up to” 20 years instead of a flat 20 years so they can have flexibility with the loans?
- Yes, that is something that can be looked at moving forward
- Raymond – What was the senate contemplating?
- They spelled out the exact amount of money to all of the different programs
- Raymond – Did they just try to make it broad for flexibility?
- It was relatively broad with some specific money allocations
- Dean – It would be paid by the rate payers?
- It would be money that would be appropriated for them to give out from the state
- Dean – It would not be funded by the rate payer?
- Correct
- Dean – You are working on models for the reliability standard?
- Correct
- Dean – If this committee passed this they would develop and use the standards to allocate the dollars?
- Correct
- Dean – Of the $10b there would be $1b given to non-ERCOT areas for the upgrades?
- Correct, so it can also be used for transmission facilities and not only generators
- Does not believe pipelines are included
- Dean – Needs to make sure they are looking at infrastructure
- One of the things they have heard through the winter storms is a potential need for redundancy for the pipelines
- Dean – Does it open up a door to a lot more competition?
- They are removing a barrier to entry, and this can create new competition
- Dean – Do you think this is something the senate would go along with?
- Believes so
- Turner – Is there $10b for fortifying the grid?
- In the Senate bill there is a $10b written
- Turner – Could a generator qualify for a completion bonus if they hadn’t taken out a 0-interest loan?
- The completion bonuses are meant just for the facilities that they have reviewed and that applied for the 0-interest loan
- Turner – So anyone who applied for a 0-interest loan then they are eligible for a completion bonus?
- Correct
- Anchia – Have you done a market scan to determine whether or not there is financing available in the private market?
- No, they have heard there has not been an issue with getting access to capital
- Anchia – Should the government be involved when there is a robust private market?
- They have not done any analysis on the private market
- Anchia – This is not the governments money, is it?
- It is taxpayers’ money
- Anchia – So taxpayers would be fronting the money on a 0-interest basis to developers who would then privatize it
- Anchia – Have you looked at other government loan programs related to energy that have been criticized?
- Yes, they have looked at them
- Anchia – Is cheap money a barrier to get steel in the ground? Or is the real narrative that they can give people interest free money and they will jump at that chance?
- Agrees, the revenue side has been the main impediment to getting steel in the ground
- Anchia – Have you done an interest rate analysis?
- No
- Anchia – What is the interest today?
- Does not know
- Anchia – 7 FTEs seems a little bit light?
- They have talked about leveraging the experience of the water board so they can support this program
- Anchia – Asks that they look at other loan programs for energy and to understand what the private market offers today; Is not sure why they are putting taxpayer money at risk without considering the private market
- Raymond – How much time are they looking at from the bill passing and the first loan going out?
- 18-24 months for SWIFT
- The timeline for this would be working on the rulemakings this summer
- Raymond – Doesn’t care how they get there but doesn’t want them to be at a place where they don’t have what they need to power this state; just wants them to make things move quickest
- Thinks they will see as the program is set up that there will be large incentive to meet the state timeline for the goal
- Dean – Everybody wants certainty; what does the taxpayer get out of us using their $10b? They get the certainty of a marketplace and energy grid they can depend on
- Dean – They need to come up with a number for the cap
- For their purposes they are trying to find a cost control that can still allow them to achieve the reliability they are looking for
- The analysis they have done shows a 1.25 cost of entry could get them what they are looking for
Sam Siegel, VISTRA – Neutral
- An effective PCM standing alone will incentivize dispatchable generation
- If the house chooses to move forward 0 interest loans, they should only be temporary
- Should include guardrails to protect taxpayers to make sure applicants are qualified
- Reducing the size of the program from 10k to 5k megawatts
- Recommend the competition bonus be used to pay back the loan principle
- Reducing the 75% to a combined 50% loan or completion bonus
- Chair Hunter – Knows they like the PCM; doesn’t need to hear that
- Chair Hunter – Knows industrials don’t like that; did you tell the senate you were neutral on the bill?
- Yes
- Chair Hunter – Didn’t sound very neutral when you were speaking
- Chair Hunter – Can you make this work?
- Believes that the loan program and the completion bonus will have a distortive effect on the market
- The concern is if the revenue portion isn’t changed and only the cost is changed then there will only be new generation and old generation will be retired
- If you build more power plants, they will just be cash flow negative
- Chair Hunter – We need to look at something innovative; the bill provides this new concept
- Chair Hunter – Lets take this tool and try to build something from it instead of only being negative about it
- Anchia – One of the ideas in the bill is workable and that is the bonus; how do we make this good for companies like VISTRA?
- The most important thing that they need to do is focus on sizing
- 5k megawatts is more than enough over 10k megawatts
- You want to set up a bonus structure that incentivizes the right targets in a good way to avoid incentivizing fraud
- A completion bonus that is targeted and sized correctly is the key
- Anchia – Sized on what metric?
- There needs to be significant equity from the operators so that if they build the plant they have the incentive the run it responsibly and not high risk high reward
- Anchia – What else do we want to incentivize?
- Speed; reasonable deadlines for what is necessary to build a plant and to move quickly
- Anchia – Would have to size the bonus itself so that it doesn’t juice returns without benefit to the taxpayer?
- Correct; there is a problem if there is such a large bonus that they rush to build a plant and they bet it all on the bonus and if they fail it isn’t a terrible loss
Bryan Sams, Calpine Corporation – Neutral
- Thinks PCM is investible by itself
- Doesn’t want to punish early actors by creating eligibility uncertainty
- A chilling effect can happen while rules are being decided
- Suggest they scrap the bonus for fairness
- As soon as you incentivize new stuff and not paying for the existing stuff it puts pressure on the existing stuff and it ends up retiring
- Trying to limit the out of market actions is important
- Chair Hunter – Should’ve just subtracted the first 7 seconds of your speaking
- Chair Hunter – Did you tell all of this to the Senate?
- Yes
- Chair Hunter – So this is identical to what you told the senate?
- Yes, but they had more time to digest it since then
- Chair Hunter – Wants them to be honest with the senate and the house without being under the guise of neutral
- Chair Hunter – Wants Calpine to provide their ideas on how we can build on this bill
- Can do that by Friday at 3pm
- Anchia – Mentioned a loan and bonus program could have a delaying effect; Is that because of new market entrants would wait until the loan program was available?
- Yes, people want to make sure that development that would be eligible for loans waits until it can get the loan or stays eligible which causes slow
- Anchia – If you are farther along than a competitor and your competitor can wait and get the loan then you will stop and wait as well
- Correct
- Anchia – Does the bonus program operate in the same way?
- It hurts retention of existing resources; you want to have a market that lifts all ships instead of one that only pays for the new stuff
- Imagine only paying bonuses to new employees at a company making old employees look for new jobs
- Anchia – That could be mitigated by changing the finish line and make it so that the PCM rewards you for existing assets
- Thinks it still puts pressure on the older generation
- Anchia – But it is not competitive right now?
- Correct
- Chair Hunter – Requests VISTRA does the Friday 3pm homework assignment
Mike Alvarado, Watt Bridge – For
- Watt Bridge has invested $2b in new dispatchable generation
- They are prepared to invest and build up into another 2500 megawatts all operating by 2026 based on implementation of this bill in largely its current form
- This is based on their current financing and projects
- They built 2400 megawatts in the last 36 months
- The existing infrastructure has not yielded the desired outcome
- We need to do something different, and this bill is that
- They support PCM as well
- Spiller – How did you come up with the funding for $2b?
- Bank loans and their own equity combined with market raised equity
- Spiller – Has a concern with the fact that they are using taxpayer funds to implement this; doesn’t know that this is the answer
- Is there going to be a bigger problem 3 years from now?
- They still don’t have any dispatchable generation, and the load continues to grow
- Spiller – Can you otherwise raise the money or capital and if so, why do we have to use taxpayer money for this bill?
- In the current market it is not an investable proposition
- They have a cost structure that is half of everybody else and without this bill they would have stopped plans to invest
- Spiller – Isn’t the PCM sufficient?
- Only on the revenue side and the loan program coupled with the bonus program is sufficient
- Spiller – The PCM model is good, but this bill is required to make things work?
- Correct
- Spiller – If PCM fixes the revenue side then why is this bill necessary?
- Because you are not keeping them in business doing it when they are building new generation only keeping already existing generation available
- Anchia – What will provide the most marketable incentive?
- Revenue and access to capital
- Anchia – So if we did the loan program with the PCM would they invest?
- Would still likely invest
- Anchia – If they did PCM without the loan program would you invest?
- Yes, but nowhere near the same amount
- Anchia – What do you think the sweet spot is?
- Will come by the office with the answer
- Chair Hunter – It is incorrect to say that this bill is putting it on the taxpayers; if we do the PCM it does the same thing
- That is correct
- Turner – What is the more appealing part of the bill; 0 interest loan or completion bonus?
- Thinks you’ve got to have both; it matters a lot how you get to construction and the access to capital is necessary
- Turner – So you need the loan to get started?
- Yes, they are still putting their equity in
Julia Harvey, Texas Electric Cooperative – Neutral
- Downsides, low interest loans and grants won’t solve underlying deficiencies in the wholesale market design and could even exacerbate them
- Positive side the concept would support new investment in dispatchable generation and doesn’t raise the same concern as fully funded state generation
- Support outside of ERCOT grant program assuming electric coops are eligible
Michelle Richmond, Texas Competitive Power Advocates – Neutral
- Think the number of MW at 10k for the program is too high would put it at 5k
- Should be a 50/50 capital structure
- Think the program should have a completion bonus or 0% interest not both, as it stands would be funding 95% of the cost of a new powerplant; creates mass subsidy and market distortions
- Hunter – that all sounded bad, tell me something positive about the bill?
- It’s not as substantive as SB 6 and think the sunset bill is appropriate
- AnchĂa – You said it’s a 95% subsidy but a 75% loan, help me understand how that math works?
- It’s a 95% loan but with a 20% completion bonus it becomes 75%
John Gordon, Self – OpposedÂ
- Bill will only repair the base load and bring in subsidized intermediate duty units
- There is no revue to fund the free debt
- Taxpayers should not be paying for this it’s the electric rate payers
Mark Spencer, LS Power Development – Neutral
- Subsidies tend to discourage investment in anything that doesn’t receive a subsidy
- Interest free loans improve a projects economics incrementally, they do not address for predictable income streams
- Taxpayer money is at risk, there have been other projects that have defaulted
- State needs to incent backup fuel with sufficient performance and penalty structures
- Recommend loans that are less out of market and more in market
- Recommend putting teeth in the statute with operational performance requirements
- Hunter – don’t you agree that the taxpayers are involved in all these programs
- I believe the rate payer is going to
- Hunter – Pay in all these instances, correct?
- Yes
- AnchĂa – Why do you think the bonus program could be counterproductive?
- The bonus program will distort market signals that you need for a long-term market
- Anchia – What if you have a market design like a PCM and you put it in bonus structure, would the bonus structure have the effect of lowering the PCM cost?
- If there is an overbuild situation there is a potential that it will deflate the value of PCMs, and you get into a boom-and-bust cycle
- Anchia – So you put this bonus out here it sends a signal that velocity to market is going to be important, so there’s a bunch of capacity that comes online in the market and that could create a surplus before you achieve some type of equilibrium overtime you would get a surplus which would drive down the cost of PCM which for the taxpayers are desirable is it not?
- In the long term that would increase the cost to the rate payer
- Anchia – Wouldn’t the PCM fatten up to deal with that?
- It will eventually but typically because of how large the investments are there is a delay
- To minimize the cost to the rate payer there needs to be consistent revenues
- Anchia – The only defaults are not exclusively in loan programs, and they exist frequently in the private market is what you were saying?
- Yes, while there are many well-intended developers, they are all tethered together to even those that come later
- So, if we overbuild the economics may be artificially lowered
Katy Coleman, Texas Association of Manufacturers – For
- They are in support of it because it supports new investment
- They are just providing a 0-interest loan and it does not have the downsides of government procurement
- There is an uneven playing field, and this provides more competitive access to capital
- The impact of new investment on revenues for existing units; When you have new investment it reduces the revenues for older generators
- That is going to be the same under the PCM or anything
- Urges them not to put a megawatt limit because it limits what the program can do
Cyrus Reed, Lone Star Chapter of the Sierra Club, Neutral
- This is a much better approach than SB 6 was
- Does not think they should prohibit storage
- Environmental criteria should be added; making sure that the folks that are funded actually have permitting in place or in process
- Language in the bill saying it is not subject to public information; there should be some summary information available to the public, so they know where their taxpayer money is going
- Does not think there needs to be a megawatt limit; $200k per megawatt is a pretty high bonus
Bill Barnes, NRG – Neutral
- Structure in SB 27 is much preferred to that of SB 6
- Any loan program must be temporary only with a clear end date and megawatt limit
- Must be paired with a reliability standard and a functional PCM
- Loan program can be the accelerator to build it and the PCM would be a brake pedal
- If they are disciplined, then the competitive market ends up solving the problems
- Chair Hunter – You and your company provide the Friday 3pm assignment
David Carter, Self – Neutral
- We don’t need loans we need reliable revenue from the customers to pay the cost of these new plants
- Sees missing from all the discussions is an extra big hand or two that can handle about 2-3 days in July and about 5 or so days in January
- You aren’t going to get many investors loaning money like this
- Raymond – Isn’t that what the senate wants to do?
- This bill needs to focus on the fact that they have a base load that runs forever an intermediate and the peak load is a very short period of time
- Recouping that cost needs to be in the bill
- Raymond – Is that what the senate wants to do?
- The senate had a horrible bill
- Raymond – You said we need a bill that recoups the 2 and 5-day periods and asked about whether or not that is what the senate wants to do?
- Doesn’t think so
Susan Meredith, Self – Against
- Advocates for a balanced energy economy
- This bill is a way to build a new energy future; emissions need to be included as a criteria
- Energy storage needs to be in this bill for every reason reliability is important
- Turner – Are CO2 emissions what you have in mind?
- CO2 equivalent is how it is handled; it encompasses all emission types
- Turner – Could you get them suggestions on what emissions criteria would look like?
- Will do their best
Casey Kelley, Constellation Energy Generation – Neutral
- Does not believe that the bill is needed
- It is important to make sure that they get through this delicate needle
- Most of their recommendations have been said or submitted elsewhere
- Anchia – Can you work with your association and let them know what their cost to capital is?
- Yes
Closing –
- Chair Hunter – Everybody on the committee will get the homework assignments
SB 2627 left pending
SJR 93 (Schwertner) Proposing a constitutional amendment providing for the creation of the Texas energy fund and the authorization of other funding mechanisms to support the construction, maintenance, and modernization of electric generating facilities.
- CS laid out
- Hunter – CS is a purposed constitutional amendment for creating a Texas energy fund to support the construction of dispatchable generation
John Gordan, self – opposed
- We had good ideas up to 2000 the ideas that got us there are still valuable today
- Opposed because it’s from taxpayers not the ratepayers
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SJR 93 left pending