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The House Committee on State Affairs met on April 19th to take up several bills. Senate Business & Commerce Chair Schwertner’s SB 2012 involves the PUCT’s Performance Credit Mechanism (PCM). The committee substitute amended 2012 in several ways. It severely limits the impact of the PCM on market participants and reduced revenue potential for generators.  The CS is referred to as the “guardrail” bill. Chair Hunter mentioned that this bill was a work in progress.

The two added sections garnering the most attention were the sunset provision and the cost cap. The sunset provision would end the PCM in 2031 unless it were revived by legislative action. And the revenues generated from the PCM would be capped at $500M per year.

Thirty-nine people testified on CSHB 2012 (see list below). Entities with generator interests testified that the sunset should be removed, and the cost cap should go away or become a price cap (that would allow billions to flow into the PCM based on market conditions).

Spotlight on testimony:

SB 2012 (Schwertner) Relating to electricity services; increasing an administrative penalty.

  • CS laid out
  • Hunter – CS is known as the performance mechanism credit guardrail bill
  • Bill is intended to build on the attributes of the PUC purposed reliability service, while adding safeguards
  • CS stipulates that both ERCOT and the independent market monitor must conduct independent cost assessments to verify the true cost of the PCM, including the impact of the per diem on the ancillary service market
  • CS requires any rules adopted to implement the PCM, to include strong performance penalties and market protections
  • Bill adds a cost cap of $500m
  • Bill limits performance credits to be awarded to only those MW offered into the optional afford market on a seasonal basis, requires generators to be able to perform in real time in order to be compensated
  • Will get modified clarifying langue on the sunset

 

David Black, Shell – for

  • Aim is for safe reliable energy markets
  • Ask that one market segment isn’t favored, a market works best when risk and reward are allocated appropriately
  • Shell has built 1500MW of gas generation in the last few years without PCM
  • The independent market monitor says that Texas doesn’t have a capacity problem – it has an operational problem
  • If PCM is adopted without guardrails ,price signals will be silenced, PCM will shift money to PCM market rather than the energy market
  • Raymond – Is there anything in the bill that you would change?
    • Believe that the consumers are going to pay for this, think a cap is prudent because the PCM is new and could have unintended consequences
  • Raymond – you’re comfortable with the sunset part as well?
    • We don’t have a problem with that
  • Raymond – You said the IMM said we don’t have a capacity problem. Do you agree with that?
    • I do
  • Raymond – Do you have any feeling on when we might?
    • I think it depend on a lot of factors, load growth and the supply; its difficult to predict on what the future will hold, the PCM is a bit ambiguous so were hoping that would get ironed out today
  • Anchía – Are you for or against PCM generally?
    • The concern we have with PCM is that it’s never been done, think the PCM is a tool but not sure it’s the best tool;
  • Anchía – Would you be happy if the PCM moved forward without the guardrails?
    • No

 

Sam Siegel, VISTRA – For

  • Texas is facing a dispatchable capacity problem and is at risk of having insufficient dispatchable generation
  • A PCM is the competitive market solution that would address the problem
  • Current guardrails could be improved to make the PCM more effective, with these improvements VISTRA would build a new under a PCM mechanism
  • For a new generation to be investment worthy under the PCM the following updates would be necessary:
    • Revision to the cost cap language to something that retains economic incentives for dispatchable generation, while balancing cost concerns
    • Removal of the sunset date, it adds uncertainty for investors investing on a 20-30 year market horizon
    • Removal of discriminatory language that single out generation and retail affiliates
  • Turner – Can you walk through the cap on cost?
    • What we are suggesting is a price cap not a cap on the total cost, would like to see a program that balances the energy and ancillary revenues that occur in the market and that’s netted against the cost of build capacity; think that a $500m cap in a state that is already growing is insufficient and likely would not incentivize new generation
  • Turner – So how do you address that language in the bill?
    • We would change the nature of the cap, purpose a two times net CONE (Cost of new entry) as a limit; that’s one way to do it but there are probably other ways to do it
  • Geren – You’re suggesting getting rid of the cap but what if we raised the cap, would there be a number that would be better?
    • I think it would be better if it would be better, we don’t see that as sufficient revenue to incentivize generation
  • Geren – What if we came up with a low interest fund, that the state was to subsidize the interest rates for you, would that be beneficial?
    • We think low interest loans will help incentivize new generation; the issue we want to address is when we only tackle the cost side of new build, we end up pushing out existing generation, we don’t want to build a new gas plant and have older gas plants immediately retire; a better cap is something that works dynamically as opposed to a fixed number
  • Geren – From your perspective a cap is not the best thing?
    • We do think a cap is a good thing, we think guard rails are a good thing, we just think the cap should be on the price of the PC as opposed to a total value of the credits on an aggregate basis

 

Rudy Garza, CPS Energy– On

  • Believe the PCM framework can work, the concepts laid out are in the right direction
  • Need to incentivize dispatchable generation the right way but that should not include any kind of technology choices that penalize renewables
  • Believe the cost allocation methodology needs a bit of work
  • Raymond – So you would be for a cap?
    • I would not include a cap, from our experience with winter storm Uri caps aren’t always a great thing; if you do include prescriptive langue in the bill it may need to move up or down depending on what kind of level of reliability you’re trying to solve for
  • Raymond – Would you put a sunset in the bill?
    • I don’t have an opinion on sunset

 

Tom Oney, Lower Colorado River Authority – for

  • Believe the PCM is a workable solution to both retain existing and incentivize new dispatchable generation
  • Concerned with two guard rails, cost cap and the sunset date
  • Raymond – What if we put a 30 year sunset on it?
    • think the PCM should be a dynamic program, any kind of sunset day presumes that it’s not a market
  • Raymond – If we did something else and still put a sunset on it, it would still be cloudy?
    • Believe so, companies come here to invest in this market and saying in 25 years we are going to stop it would be an odd way to approach a business to come invest in Texas
  • Anchía – What would be a good alternative to a sunset date?
    • I think setting up a statute requiring that they provide a report to you on the status of the PCM and maybe a hearing to follow that would provide accountability

 

Nathan Murphey, Valero Companies – For

  • Cost in ERCOT have been rising rapidly, remained very concerned about the outlook for reliability and price variability
  • Support meaningful design changes that will incentivize reliable dispatchable generation at least cost to the consumer
  • Consumers need this bill to past, need guardrails to protect against excessive cost increases, need assurance that new programs deliver the promise of reliability
  • Think the $500m cap is appropriate and will prevent the program from becoming a new mandate
  • Think market redesign programs aimed at variability and uncertainty should be paid for by the generation and load that cause the variability and uncertainty

 

Bill Barnes, NRG Energy – For

  • Support reasonable guardrails on the design of the PCM
  • Long term investments benefit from a stable market structure that the PCM provides; however, cost cap and sunset date undermine that uncertainty
  • Recommend a price cap for the PCM rather than a cost cap
  • Recommend a review process to make sure PCM is achieving its objective rather than a sunset date
  • New dispatchable resources have a 30 year time horizon
  • Raymond – So you like the cap but don’t like the sunset?
    • We support a price cap rather than a cost cap, if you put a $500m cost cap on the ancillary service market it would have stopped in august of 2022, price cap allows the market to continue to function while containing those costs
  • Raymond – and you would prefer not to have a sunset?
    • We would prefer to have a sunset review, I think having a date that signals the end of the program shows some lack of confidence for those that are looking to invest
  • Raymond – So you saying do a review (of the PCM program) and in doing a review it implies that it will keep going unless you take the proactive step of the legislature ending it?
    • That would be better approach
  • Turner – If we have a price cap will the PCM work in your view?
    • I think if you have a high enough cost cap it possibly could, don’t think $500m is not high enough; the value of the PCM is going to be dependent on the revenue in the energy and ancillary service market
  • Geren – What would your proposed cost cap equate to, in terms of a dollar cap in 2026?
    • We would recommend something similar to a net CONE, where the price of the PC is capped at a multiple of the value need to invest in a new dispatchable generation resource
  • Geren – What would that be in terms of total dollars?
    • It depends on the design of the net CONE concept
  • Raymond – For generators how much new generation is assured under the increase in the cap your purpose?
    • If the price cap is set per the design of the E3 report at a multiple of CONE you’re going to get the same amount of new build that was estimated in that report, believe it was 5000-6000MW in new gas generation

 

Edward Stones, Dow – for

  • Industry appointee by Gov Abbott to ERCOT committee
  • PCM is a capacity market in anything other than name
  • Opposed to the PCM believe guardrails are essential, including a cost cap and sunset provision
  • The cost in power and steam is a major factor in our decision in where to invest in new facilities
  • PCM muddles the water for investment decisions
  • Geren – Can you elaborate on why we should implement the guardrails on this bill
    • They are important in ensuring two things, one that there is an answer to the question on how much it cost, the other is that it’s a new concept
  • Turner – In your testimony you said you don’t support the PCM, but you do support the guardrails?
    • That’s correct
  • Turner – In your opinion if this version of guardrails is implemented, will there be a PCM?
    • There will be a PCM, we would prefer not to have guardrails and not to have a PCM, but if were going to have a PCM then we need to have guardrails
  • Raymond – If we didn’t do anything, and the governor told the PUC to stand down, what do you think would happen?
    • We do believe that more dispatchable power is required in ERCOT, and that there are better ways to make that happen than the PCM; we are supportive of ancillary market reform, what matters is dispatchable power and ancillary services are how you do that
  • Geren – How long will it take before the nuclear facility your planning on building take to generate electricity?
    • We anticipate startup by 2030
  • Metcalf – How much do you make on the ancillary service market?
    • I don’t think we make a lot of money on the market today, but I don’t know that fact; our source of revenue isn’t power generation, our source of revenue is products

 

Julia Harvey, Texas Electric Cooperatives – For

  • Believe these are reasonable guardrails to ensure that the PCM fulfills its stated objectives
  • Still skeptical of the PCM, not sure how it will work
  • Support revised IMM (Independent Market Monitor) and ERCOT evaluation of the cost and benefits
  • Regarding the cost cap, the PCM cost will be determined on the chosen reliability standard
  • The cost of the program is a function of the reliability standard
  • If cost cap is imposed with some form of a fixed number, the PUC would lose some ability to determine what might be the optimal reliability standard
  • The $500m is related to the $470m in the estimated cost study, that’s a long run estimated cost outcome according to one model
  • Anchía – What is your alternative?
    • You could cap the program around the cost associated with the optimal reliability standard that’s recommend to by the IMM to the PUC
  • Anchía – Ok would this be a rolling analysis, how often would they be making these recommendations to the PUC, and what might be the best practice there?
    • We do a similar study in ERCOT today but its biannually, you would want to update it as the cost environment changes
  • Dean – Do you have any opinion on what the $500m cap really is?
    • I think the $500m is not what we would recommend
  • Dean – What would y’all recommend?
    • Do not put a fixed number hinge it to the IMM evaluation and recommendation
  • Dean – We are trying to get some guidelines for this so in your opinion what would the price boundary be?
    • Its really hard to come up with a number
  • Dean – Would it surprise you if I heard today that it was $12b?
    • Depending on the design it could cost that much
  • Raymond – I understand you’re not giving us a number because it’s sort of a moving target, is that right?
    • Right because the cost would be an output of the reliability standard that’s the recommendation of the IMM

 

Warren Lasher, Texas Oil and Gas Association – For

  • Support the CS because of the essential consumer protections it provides
  • TxOGA members to not support PCM
  • Details of the PCM have not been defined only have 12 general principals given by commission, no limits currently on what the program will cost
  • TxOGA supports the dispatchable reliability reserve service to fix what is needed in the current ERCOT market
  • Metcalf – why do you think $500M is the right number for the cost cap?
    • Believe it was developed from the E3 reported which said that the program would cost $500m
  • Metcalf – Do any of your members make revenue off the energy market today?
    • A limited number of members are able to participate in the market, very small subset
  • Metcalf – That may change if this bill passes?
    • Our business is the production of oil and gas
  • Turner – So TxOGA has always opposed PCM?
    • Yes
  • Turner – so do you think there will be a PCM if this bill is passed as is?
    • We would hold out hope that there would not be a PCM
  • Turner – do you think this bill would make it less likely that there would be a PCM?
    • I think this bill will ensure that consumers are protected in the event that a PCM is implemented
  • Turner – Let’s say there is no PCM, what is TxOGA suggestion to ensure we have reliability in our grid?
    • TxOGA has put forth a proposal combining the dispatchable reliability reserve service, which is a new ancillary service, which would provide direct funding for the types of generation we need currently in the market, in addition to a low interest loan program and tax credits for new dispatchable reliable generation
  • Turner – Do you think interest rates are the problem?
    • We think there is a reluctance of banks to finance
  • Dean – what’s your opinion on the 2x net CONE?
    • I think it’s a little bit high
  • Dean – So what is that number that you would say is too high?
    • If you are trying to fund 60,000MW @ $100k/MW, that works out to $12b
  • Dean – My information in discussion says that’s the minim, if were to look at this program for new bills it could be as high as $18b, what’s opinion on that?
    • I think you’re going to find it becomes difficult for consumers, whether there large or small to support that
    • Another issue with those numbers is, with the PCM you’re not giving that money to new generation you are giving it to old generation
    • We think a program that is specifically focused on new generation is more likely to result in what the market needs today at a more cost effective cost
  • Anchía – with the 3 things you purposed, have you projected how many MW that would incent to come online for 2026?
    • I don’t know that I’ve seen that number

 

Daniel Booth, TexGen Power – for

  • Firmly support PCM, and SB 2012 with corrects
  • Fair to say that those that support PCM with a $500m cap support PCM because they believe it will kill PCM
  • Paying for reliability is cheaper than not paying for it
  • Believe PCM can fix the market but capping it will make it ineffective

 

Michael Carter, Just Energy – For

  • Support the bill with the guardrails because there are not enough details in the PCM
  • Don’t think anyone will invest with a sunset portion attached to this bill
  • Anchía – If the guardrail bill did not pass would you be for PCM?
    • Not as currently drafted, don’t have enough information to know how its going to be implemented
  • Anchía – You said small consumers and residential consumers would pay more than the project $1/MWhr, what do you think that is?
    • I think its 5-10x
  • Anchía – Why would the PCM create a cost shift from big consumers to small residential consumers?
    • As drafted the peak load for a residential customer is very sensitive
  • Anchía – is it also the case that many of the large consumers can avoid cost?
    • I think some of them can, I don’t know how many that can
  • Anchía – so the cost would exponentially fall on residential and small consumers?
    • That’s correct

 

Michele Richmond, Texas competitive power advocate – for

  • Support the CS have some suggestions to make it better
  • Change the cost cap to a price cap
  • Removal of the sunset date, think independent review is appropriate
  • Anchía – you don’t like the $500m you prefer the 2x net CONE?
    • Yes
  • Anchía – what’s the difference between gross CONE vs net CONE?
    • you’re looking at the cost of new entry and what its going to take to get that online
  • Anchía – What are those assumptions currently?
    • Its usually based on a dispatchable combustion turbine gas plant, it is a dynamic amount
  • Anchía – where does the 2x come from?
    • There’s a trigger called LCAP, when you hit a certain amount which is 3x the CONE, it triggers the commission reducing that cost for entry
  • Anchía – The E3 report talks about a $5.3B offset, when does that happen?
    • I would expect that it would it happen gradually, allot of that is going to be set by the PUC and ERCOT
  • Anchía – do you dispute the estimates that are being discussed?
    • Today was the first time I heard that number
  • Anchía – does that sound high to you?
    • Yes, that assumes no reduction in ancillary services
  • Raymond – Do you think the IMM is a way to go?
    • Yes, I think you also need experts on reliability which the IMM is not an expert on
  • Dean – how do we determine the 2x net CONE, if we don’t know the reliability standards?
    • The best way to direct the PUC to establish one that is based on the review of the CONE and the reliability standard that’s set
  • Dean – so you saying that ERCOT should be defining that reliability standard?
    • ERCOT and the PUC are in charge of ensure we have a reliable gird, at the end of the day if you don’t know what you’re trying to achieve, that’s the problem
  • Dean – That’s the big problem, how do you set a cap if you don’t know what you are trying to get at the end of the day.
    • We agree, that’s why its difficult to put a hard number in statute becomes markets are flexible

 

Melissa Trevino, Occidental – for

  • Against the PCM
  • If PCM were implemented strong guardrails are needed

 

Michael Jewel, Enel North America – For

  • Opposed to the PCM
  • Support $500m cap, consistent with net number that E3 said would be added to the market overall
  • Support implementation of real time co-optimization
  • Support a more technologically neutral approach
  • Anchía – Can you speak more on the technology neutral approach?
    • Having the most resources able to participate will be the largest benefit to customers
  • Anchía – so if there is a problem if you participating everybody should be treated equally?
    • Yes, because everybody is helping to solve the problem

 

Bryan Sams, Calpine Corporation – For

  • Support the PCM
  • Support appropriate guardrails, support price cap

 

Joe Roth, Olin Corporation – For

  • Supports dispatchable reliability reserve service
  • Oppose PCM

 

Cyrus Reed, Sierra Club – For

  • Opposed to the PCM at PUC meetings
  • Believe PCM can work with guardrails, like an upfront study
  • 2x net CONE cost is a very high number
  • Would like folks to earn PCM that have controllable load, if you can meet the performance standards

 

Scott Harland, Rockland Capital – For

  • for the PCM
  • prepared to proceed with new projects if the PCM were to pass
  • Believe PCM should have guardrails with some caveats:
    • No sunset
    • Opposed to a fixed cost cap, more of a price based cost cap
    • CONE is the cost of build a new reference power plant, gross CONE is the total capital cost, Net CONE is the cost less what the expected revenue and ancillary services are going to be
    • If it’s capped at 2x CONE that sends a strong signal to build something, that’s why you don’t want to have a hard cap, if you have a price based cap that’s sensitive to how your doing relative to this reliability standard its flexible and it send the right signals at the right time
  • Anchía – So it sounds like you’re not advocating for 2x net CONE but rather a dynamic model that goes between 1-2x net CONE?
    • For the most part, I think the cap should be tied to some multiple of CONE, but it wouldn’t be something that the PUC dictates, it should be price signaled
  • Anchía – I have heard people testify that they hit CONE 3 out of the last 4 years, how would you respond to that?
    • the problem with the system right now is that it’s so volatile, we were able to build when the price was at CONE for less than CONE, but you can’t do that forever
  • Anchía – Why shouldn’t the cap be 1.5?
    • It could be 1.5, it wouldn’t send as strong a signal, however, think it’s good for the PUC and ERCOT to discuss that
  • Raymond – If we had not had winter storm Uri, in your opinion do you think we would be here talking about this?
    • Probably not, but at some point, we would have
  • Raymond – What if we passed legislation and funded the state building some gas plants?
    • We wouldn’t build anymore with our private capital, don’t want to be in a situation in competing with subsidized generation
  • Raymond – There’s no scenario where you invasion that would work?
    • If you look at California, that’s exactly what they did when they had their energy crisis
  • Raymond – Do you know how many plants will go offline over the next 5-7 years?
    • I don’t have the numbers, most of the older gas and oil plants and coal plants, over the next decade would almost certainly go away
  • Dean – What is the cost cap tied to 2x CONE?
    • I don’t know what the answer is, I think $12b is not the right number though
  • Dean – You said you wouldn’t build any new plants if there was subsidized generation, correct?
    • That’s right
  • Dean – But we already have some of that going on, with our renewables
    • Yes but at least the state isn’t subsidizing it
  • Dean – Do you think moving to 2x CONE would help us in replacing the older generation with new metal that we need, would that incentivize it?
    • I think it would if structured properly, in theory if we structure the PC in the right way older plants won’t get the benefit that the new plants get

 

Sean McLaughlin, Texas Instruments – for

  • Concerned about the PUC, needs strong guardrails

 

Casey Kelly, Constellation Energy Generation – for

  • Have same concerns on cost cap and sunset date
  • Believe guardrail bill is appropriate, should not be barriers in getting to the reliability standards that this state needs

 

Mike Nasi, South Texas Electric Cooperative – For

  • Did not support the PCM at PUC because there were no guardrails
  • Cost cap is bad and is related to the cap doesn’t account for inflation, or volatile gas prices

 

Eric Shubert, Lionel Bussell – For

  • Concerned that electricity cost will increase considerably if the PCM is implemented
  • Oppose PCM plan
  • Support DRRS

 

Catherine Web King, Team Texas energy Association for marketers – for

  • Whichever reliability mechanism are implemented they need to match the retail electric market
  • Support the guardrails that are in the CS
  • There is not an immediate offset of any projected energy price offset, offset would be in real time energy not the hedge

 

Jason Ryan, CenterPoint energy – for

  • Believe framework of the bill is salvageable
  • Think expiration date in the CS works counter to the cost of the mechanism, recommend removing the expiration date
  • Believe having the PUC coming up with a cap and coming back next session to decide it

 

Mark Bell, Association of Electric Companies of Texas – for

  • Concerned with cost cap and sunset date
  • Support keeping the bill technology neutral

 

Christopher Dorow, BASF corporation – for

  • PCM mechanism will cause contract uncertainty and changes of law clauses with existing renewable energy agreements
  • Depending on how the PCM is implemented could cost BASF $17-25m annually
  • Support 500m cost cap

 

Katie Coleman, Texas Association of Manufacturers – for

  • Don’t know what we are buying with this construct
  • Recommend establishing a standing committee, and that committee would have to vote to allow the PUC to go forwarded with the design

 

Caitlin Smith, Jupiter power – for 

  • Batteries are dispatchable, concerned about attributes language in the PCM
  • Believe language should reflect that participation is based on performance
  • Anchía – So what you’re saying is we should tighten up the language, so that we can’t set these specific attributes in an arbitrary way, let’s have them be correlated to the needs of the market?
    • Yes

 

Mike Alvarado, WattBridge – for

  • In the past 36 months invested $2B in new technology that the market needs
  • Support price cap, not cost cap
  • Think sunset would discourage investment

 

Jeff Smith, Samsung Austin Semiconductor – for

  • Opposed to PCM
  • Support CS
  • Under the current constructs that are being talked about cannot recommend building in Texas
  • PCM has put so many question marks in the market we are not able to buy power

 

Shannon McGriff, TEPA – on

  • There is not single solution that will address the issues with the Texas grid
  • Believe Texas consumers will benefit to a more conservative approach to incentives new generation, one that does not shift the risk of investment to consumers

 

Anne Rappold, Freeport LNG – for

  • Estimate their cost if the PCM is implemented will go up 24%
  • Support DRRS, tax incentives, cost cap, sunset, and low interest loans

 

David Roylance, Prison energy solution – for

  • Against PCM, for the alternative
  • A MW saved is the same as a MW generated

 

John Pitts, Texas Energy Buyers Alliance – For

  • Apricate the CS
  • Support cost cap and sunset date
  • Would ask the bill stay technology neutral

 

Thomas Brocato, TCAP – for

  • Believe the CS strike the right balance
  • Against PCM
  • Support cost cap, price cap can become very expensive very quickly
  • Suggest a way for generators to be held accountable, support the adoption of penalty provision

 

Brent Bennett, Texas Public Policy Foundation – on

  • Concerned that this bill would create confusions as to which programs the PUC is adopting
  • Cost allocation language in SB 7 does not create a firming incentive on its own
  • Cost cap should be more flexible applied over a period of 5 years

 

Jean Ryall, Advance Power Alliance – For

  • In favor of PCM guardrails
  • Believe CS could be improved by allowing all resources to participate

 

Michael Jewell, Octopus energy – for

  • Support the allocation the cost prospectively rather than retrospectively
  • Support sunset, entire code is subject to sunset and the market still works

 

John Gordon, Self – opposed

  • Will take $1b a year for the next 20 years
  • Facing the problem, you have the need for dispatchable capacity

 

Rep. Hunter closes

  • Seems like we have a good framework, need to look at the sunset, need to look at the cap, like the commentary on batteries

 

CS withdrawn, SB 2012 left pending