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The Senate Business & Commerce Committee met on February 6, 2020 to discuss the Electric Reliability Council of Texas (ERCOT) and hear overviews and suggestions from agencies, participants, and stakeholders concerning continued market performance.

This report is intended to give you an overview and highlight of the discussions on the various topics the committee took up. It is not a verbatim transcript of the hearing, but is based upon what was audible or understandable to the observer and the desire to get details out as quickly as possible with few errors or omissions.

Opening Comments

  • Chair Kelly Hancock – Intent of the hearing is to get an overview and evaluate marketplace; one of the keys to success in Texas has been the electric marketplace

Panel 1 – PUC & ERCOT

DeAnn Walker, Public Utility Commission of Texas

  • Will be looking at what PUC has done to address reserve margin, other speakers will be addressing toughest week (August 13)
  • Most of the growth is in Permian Basin and Gulf Coast areas for industrial load, increase growth has led to increased demand for electricity that has affected reserve margins
  • Reserve margin for summer is 10.6%, up from 8.6% last Summer which is good, but still watchful; have complete confidence in ERCOT and team to get us through the Summer
  • Mainly have solar, wind, and some battery storage in queue for generation interconnection
  • Commission made some changes to Operating Reserve Demand Curve (ORDC) recently, went into effect in the Spring that impacted Summer Pricing; changes have helped send more accurate pricing info to generation and load sides
  • Seeing increases in renewables, fossil fuel generation that exists put more money in maintenance and upgrades which helped availability for this Summer
  • August 13 saw a lot of demand response because the pricing was there, will continue to see this moving forward
  • Has personally held meetings with all market participants, held one large

Bill Magness, Electric Reliability Council of Texas

  • Speaking on last Summer demand and projections for the future
  • Last Summer, went in with a reserve margin that is as low as we’ve ever seen, went in with 8.6% last Summer and have 10.6% this Summer
  • Set new record on demand side last Summer, saw very good generation performance, all of the incentives in the market are aligned for when power needed most
  • Pricing changes were implemented in time and performed as expected
  • Tightest conditions on the system were not always when demand was highest, had two Energy Emergency Alerts (EEA) due to low reserves and lack of generation from wind power during week off August 13, caused pressure early in the afternoon which stayed high
  • Describes EEAs, three levels with increasing measures taken
  • Strong wind resources in West Texas and on the coast that are active at different times, causes trough effect that hits in the afternoon and can cause issues earlier in the day until the resources pick up
  • Natural gas is still predominant source of power at 47%, coal at 20%, wind is currently lumped in with remainder, but will likely become its own category soon
  • 10.6% is the reserve margin for this Summer, ERCOT is expecting new records set on load side
  • Texas is one of the only regions in the US that is experiencing increased demand, some of this driven by growth
  • Chair Hancock – On planned development, typically what do you see planned that comes to fruition, what percentage of the plan is finished?
    • Need to have a signed interconnection agreement to connect to system, water & air permits need to be in place, etc.; at this level of commitment follow-through is pretty good, but is driven by investment decisions
  • Highlights generation queue of providers wanting to generate on ERCOT, for 2020-2023 seeing a lot of solar and wind, but not so much gas and others
  • When looking at large interest in areas of solar, ERCOT tries to estimate what will happen, 64,000 megawatts of planned solar, but only 9,400 megawatts has signed agreement, with 75% chance that generation will come online with signed interconnection agreement; much less, but still would be a tremendous addition of generation
  • Commission has directed new efficiency measures be built into the market & implementation expected to be done in 2024
  • Starting to see increased demand all over the state, not just Basin and Coast
  • Need to get systems set up for storage and distribution generation resources; working with distribution and generation to interact with resources not on the traditional ERCOT-managed transmission system
  • Chair Hancock – Why is distribution so different from generation or retail?
    • Distribution system lies between substation and transmission, more local
    • ERCOT system operators dispatch power from the transmission system, ERCOT doesn’t have visibility into the distribution system, but we need to enough about what is there to anticipate changes
  • Sen. Zaffirini – Regarding ESR and DGR, what timeline are we looking and what will be the impact on the consumer?
    • Working diligently to get market/admin rules developed this year, also in the process of upgrading Energy Management System by 2024; will be doing IT work to get these features into the system between now and 2024
    • Have provided opportunities for participants to get started and put a pseudo-hiatus on other entrants
  • Sen. Zaffirini – And the impact on consumers?
    • Storage potentially changes the game for grid operators, allows quick response
  • Sen. Zaffirini – Asks how projection would change
    • If we see solar developers come with projects planned, solar will become its own category of generation
    • Continue to see people interested in wind, coal has diminished
  • Sen. Zaffirini – What about nuclear?
    • Nuclear plants have been steady so far, current plants are running well, but no new ones on the horizon
  • Sen. Campbell – We have a higher reserve margin due to changes in computation and new tech?
    • We were given higher numbers by generation when we asked, they have brought additional resources online
  • Sen. Menendez – Points to times during August when wind appears to have exceeded demand
    • I don’t know that we had generation exceeding demand during these times
  • Sen. Menendez – If wind output exceeds demand during the night, how much of this could be put onto battery storage that could be used to smooth out peaks
    • One of the most promising things in the ERCOT market is that large-scale storage could be leveraged, though no large-scale storage exists currently
    • Could take excess power when prices are low and save for when prices are higher, owner can make decisions to meet the market
  • Sen. Menendez – Peak forecast is based on historical use and growth of the state?
    • Yes, fairly complicated formula
  • Sen. Menendez – This is a figure that is pretty confident, if plans do not come online, where does that reserve margin go? Very interested to see ERCOT and the state help more solar projects, etc. be online
    • Largely a policy issue, development so far is due to the market & seeing tremendous interest from the solar developers ; should ask witnesses from solar industry to see what they need
  • Sen. Menendez – Goal is to get outages for peak demand days down as low as possible, references data
    • Data is based on generation, outages in generation largely due to maintenance
  • Chair Hancock – Before last session the PUC requested guidance on batteries, Senate passed bill that didn’t make it all the way through
  • Chair Hancock – There are times when wind produces so much wind the industry will pay you to take it, would be better to use batteries for this excess generation
  • Sen. Paxton – Could you give us a big picture on the technology of battery storage
  • Chair Hancock – Have experts coming later that can talk about this
  • Chair Hancock – Commends ERCOT & PUC for communicating with legislature, ERCOT has an app that tracks supply & demand
    • Notes the app is free
  • Sen. Nichols – Asks after incentives to those voluntarily shutting down during peak demand
    • Saw roughly between 1,000-2,500 megawatts coming off the system during peaks, 4 Coincident Peak (4CP) allows transmission connected customers can affect rates in the future if they voluntarily go offline
    • There are also customers that respond to the price and take demand offline if prices increase high enough
  • Chair Hancock – These price changes incentivize business to take voluntary actions without us needing to pay them essentially to not work
  • Sen. Menendez – Could also incentivize residential customers to buy into solar generation, could use schools, etc.
  • Chair Hancock – I think we see the projections of what is going to come online and means the market is working & solar is already expected to grow without and legislation
    • Correct

Arthur D’Andrea, Public Utility Commission

  • Speaking on PUC’s implementation of cybersecurity bills from last session
  • Bills created cybersecurity council between Gov’s Office, PUC, and ERCOT to research best practices and consider possible changes to emergency plan
  • Also created cybersecurity monitor for the grid, PUC and ERCOT contracts with entity to monitor and meet with participants, look for vulnerabilities, alert participants, etc.
  • PUC published rules in December to get council going and it has met twice; have recently signed a contract with Securitas for cyber monitoring services
  • Chair Hancock – There was a point in time that only one person had clearance to have deep discussions, will have more now; discusses DeAnn Walker’s process in getting that clearance

Steve Reedy, Potomac Economics

  • ERCOT Market Monitor
  • Did not see significant shortage prices in Summer 2018, shortage prices drive investment
  • There were significant shortage prices in 2019
  • In most years price of electricity generally tracks cost of natural gas, however in 2011 and 2019 there was divergence
  • ORDC was changed in 2019 that led to generally higher shortage pricing
  • Market can respond in many ways to shortage prices, e.g. new generation, increased maintenance, load system and procedures to enable nonconsumption, etc.
  • Sen. Whitmire – Asks PUC Walker, Has the PUC discussed access for electric vehicles, does the PUC see this as its responsibility?
    • Walker, PUC – Absolutely, will likely need some changes to statute to address some EV questions, working with TCEQ, TxDOT, etc.
  • Sen. Menendez – Also would be good to see a way to get hydrogen-fueled vehicles as well
  • Chair Hancock – Would likely be an issue for a  different agency
  • Sen. Zaffirini – Asks for specific recommendations for legislative changes
    • Walker, PUC – PUC considers these issues yearly in its report, not ready yet, but will have report in October or November

Panel 2 – ERCOT Participants

Julia Rathgeber, Association of Electric Companies of Texas

  • Discusses situation last year that led to good outcomes in 2019, but concerns remain about reserve margins in the future
  • Thermal generation is lagging, prices are not yet favorable enough to drive significant investment
  • New techs like distributed generation being explored, storage pairs well with wind and solar, demand response allows for load adjustment during high demand, etc.

Julia Harvey, Texas Electric Cooperatives

  • Speaking on rural electric cooperatives
  • Provides overview of electric coops, designed to provide stability for members & supports resource adequacy; designed to have members shoulder the cost and then have percentages paid back on performance
  • ERCOT energy market necessarily deals with volatility and complicates investment for coops who look to more consistency in generation over time
  • In 2019, coop generation performed very well & have made targeted investments to ensure peak availability

Michele Richmond, Texas Competitive Power Advocates

  • Provides overview of member investment
  • Member investments are primarily in thermal generation, generators make money only when selected & must cover fixed and variable costs through this market
  • Expecting Summer 2020 to be similar to 2019, Congress extended wind credit so will likely see more of this
  • Member companies have about 600 megawatts in interconnection queue coming online in next 2-3 year
  • ERCOT is one of the most successful markets in the world and should stick to market principles

Russ Keene, Texas Public Power Association

  • Provides overview of Texas Public Power Association, vertically-integrated entities that consume about 15% of generation and provide about 14% of the generation
  • TPPA works to provide stability for the Texas electric market; provides a large portion of generation and TPPA has 60 signed power purchase agreements that will total 5,900 megawatts
  • MOU generation and transmission activities are fully regulated by PUC, very active in ERCOT board and stakeholder activities
  • Sen. Zaffirini – Regarding demand response programs, can you talk about your more successful efforts?
    • A number of cities have implemented demand response by working with large customers that would be willing to have interruptible contracts, also due to good communication and awareness of EEA coming up
  • Sen. Zaffirini – Do you have any recommendations to present to the committee?
    • Rathgeber – Working on recommendations and will be speaking with legislators later in the year
    • Richmond – Also working on recommendations with similar timeline
  • Sen. Schwertner – Have constituents served by MOUs and coops that are concerned by pricing, have asked me why Texas has not opened all areas to competitive markets
    • Keene, TPPA – Cities have been involved in electric generation for a long time and perform safely, efficiently; fluctuations exist, but members strive to keep things low
    • Georgetown has brought on new staff and made improvements
  • Sen. Schwertner – Georgetown entered into wind energy contracts and then the price cratered, rates and reserve requirements of the Georgetown utility have increased dramatically and this seems to be a continuing problem
    • Georgetown no longer has the goal of being 100% renewable, trying to work out long term contracts and Shell is coming on as new energy manager
    • Georgetown citizens are going to be paying about $13/month/meter, but this is not forever and Georgetown is making good progress
  • Sen. Schwertner – Looking forward, interested in getting competitive markets for everyone
  • Sen. Menendez – Would be good to have historic rates from MOUs and IOUs, have had good experiences with city utilities

Panel 3 – Stakeholders

Katie Coleman, Texas Association of Manufacturers

  • Members are the largest electricity consumers in the state, electricity costs are often in the top 3 costs for members; definitely something members look at in investing
  • Should be proud of market that Texas has built, only market that allows demand and supply to balance each other; most other RTOs require 15% reserve margins whereas Texas got by with 8.6% with very little reliability issues
  • Key to success is concentrating performance incentives across peak demand periods, also demand response
  • Chair Hancock – Tweaks were made to our system after a Summer where we saw prices not change as expected due to supply and demand
  • Chair Hancock – One of the things we’ve heard from everyone is better communication, way to move forward and continue tweaking things favorably is good communication; appreciates work of stakeholders and participants
    • We had some concerns about the ORDC shifts that we made vocal to everyone, was focused on peak demand periods

Cyrus Reed, Sierra Club

  • Market is working and is favoring new, cleaner technology such as renewables, older thermal like coal is coming offline
  • Supportive of battery storage, co-optimization
  • There is a need for more transparency and reporting, should know more about demand response and DG
  • Commented on PUC rules for smart meter rollout, did not go far enough to give consumers access and promote more demand response
  • Texas has done a good job on energy efficiency, buildings outside cities are not necessarily meeting codes and legislature could help with that
  • Provides 12 recommendations in writing to the committee

Bill Peacock, Texas Public Policy Foundation

  • Interference in the market via renewable energy subsidies and ORDC are distorting the ERCOT market
  • Renewable energy subsidies could be changed, could remove Chapter 312 and 313 for wind and solar
  • Can affect federal subsidies via removing the ORDC and making renewable energy generators pay for effect on the market

Suzanne Bertin, Texas Advanced Energy Business Alliance

  • Alliance is focused on innovative technology like demand response, EVs, etc.
  • Access to cleaner technologies as exists in Texas makes state attractive to many companies pledging to use more renewables
  • Integrating Distributed Energy Resources (DER) can lead to savings, should be addressed more broadly, should also look into non-wire solutions
  • Sen. Menendez – Regarding investment in written material, further expanding DER use can possibly return $5.4 billion in savings via infrastructure, lower costs, etc.?
    • Yes, numbers are conservative
  • Chair Hancock – Seeing significant growth in these areas under current situation
  • Chair Hancock – Asks Peacock, TPPF, you are trying to point out that our unique market can be negatively impacted by the subsidies
    • Peacock, TPPF – Because we have a competitive & favorable market, wind and solar can come in with subsidies and set whatever prices they want and push others out; traditionally this would be predatory pricing in other markets and is leading to thermal producers not being as successful
    • ORDC was one method to address that, but not very efficient; making renewables pay for cost of subsidies on the market would help, renewables do not participate in the market in the same way
  • Chair Hancock – Asks Coleman for her opinion on government controlling pricing
    • Coleman, TAM – Agree with principles, not necessarily solutions; TAM has looked at whether ERCOT should have reliability services to smooth the peak and should encourage renewables to work on reliability
  • Chair Hancock – Not easy to operate when federal government interferes in a free market
  • Sen. Menendez – Is there anything that keeps traditional generators from going into renewables?
    • Peacock, TPPF – Many do
  • Chair Hancock – Problem is capacity
  • Sen. Menendez – Cheapest power generation
    • Reed, Sierra Club – Federal subsidies play a role, but it is very cheap to produce renewable energy with no marginal cost
  • Chair Hancock – And the subsidies are staying the same
    • Reed, Sierra Club – And we could impose the healthcare costs on coal, etc.
  • Chair Hancock – Let’s not go there

Panel 4

Charlie Hemmeline, Texas Solar Power Association

  • Solar power is making an impact in Texas, cost has fallen over 90% over last decade making it a good option for customers; large corporations are also participating more and more
  • Some companies are investing directly into solar generation
  • Solar capacity is expanding rapidly and will grow ERCOT peak generation; expected to add >7,000 megawatts by 2022
  • New solar will boost reserve margin well above targets, solar growth is distributed around the state & local utilities are expecting capacity to come online, solar is scalable to demand
  • Sen. Menendez – Has solar system on his house that has been very helpful during Summer months; Texans are paying for utility bills in public schools, solar could be useful in reducing variable costs, could help add more power to the grid during months schools are inactive

Tom Rose, New Electric Technologies Policy Group

  • Speaking on electric vehicles, electric vehicles sales have increased, but difficult to forecast
  • Regarding grid impact, level 1,2, and 3 chargers exist currently, larger ones would be needed if fleet vehicles are used; could be 1,000s of megawatts added to grid due to vehicle use
  • Impact will be largely on distribution, need to look at various factors like regulations, incentives
  • Sen. Zaffirini – How would I plan a trip from Laredo to Austin?
    • You would access the app provided by the manufacturer and map out stops based on capacity of your vehicle
  • Sen. Zaffirini – How does the time involved in charging factor in?
    • Level 3 chargers can take 30 minutes, is a troublesome prospect until we can get
  • Chair Hancock – But the faster the charge, the more demand on the system
    • Correct, will need larger chargers to charge fleet vehicles as well
  • Chair Hancock – And weight factors into charge?
    • Sure, first fleet vehicles will be port to port, but tech is there for heavy weight

Josh Preuher, Broad Reach Power

  • Provides an overview of Broad Reach, energy storage provider in Houston focused on merchant services rather than contracted jobs; investing heavily in energy storage projects across Texas
  • Difference for storage came in 2016 when Lithium Ion batteries costs fell in step with increased global production

Pat Wood, Wood3 Resources

  • Provides a history of energy markets in the US with focus on ERCOT, realized large savings through getting power plants into an efficient marketplace, tight margins in a competitive market, and having excess cost of capacity borne by the market
  • Old nuclear technology is out of price, but modular technology is coming online and will likely be big part of the market in the future, the other new techs like renewables, EVs, etc. are here
  • Coops and municipal utilities were carved out for political reasons; way to keep investment are to remind people customers are paramount, not just those in ERCOT IOUs, but others as well
  • Texas’ energy market has been a goldmine for the state, investors know projects will not be disrupted by things present in other states
  • Sen. Schwertner – Agrees regarding coops and utilities, these entities have a monopoly on their areas; is the way to keep Texas competitive to introduce some form of competition
    • It was politically correct to carve out these entities, allowed issues to be figured out early on; now we’ve had 20 years to figure these issues out & should do the things that help out customers
    • To be fair, rates that cover infrastructure for power delivery will likely be higher compared to rural areas, so municipals are a little different than coops
  • Sen. Paxton – Asks after new technologies like app control of A/C, techs that allow self-regulation, etc., are coming in 5 years?
    • Yes, new systems that customers can install in their homes for storage or generation, etc., allows for demand response
  • Sen. Nichols – People in rural areas would likely not have electricity if not for coops, coops are very sensitive to moods of customers; had we left this to the free market system we would not have electricity for these customers, cell and broadband was left to the free market entirely and still large areas without; free market is not always the solution
  • Sen. Nichols – However, in some of the municipals, really bad contracting decisions are made, especially with respect to renewables
  • Sen. Schwertner – Many of my areas are served by coops as well, some municipal utilities have made bad decisions
  • Chair Hancock – Can you speak to the battery legislation last session?
    • Important to focus legislation on things that the market cannot do
  • Chair Hancock – Which was the idea, e.g. to keep this new tech out of the fully regulated market and let it develop naturally
    • If it is cheaper to do storage than it is do build a transmission line, on pure economics we should not be “allergic” to that, but we need to be careful
    • Should always err on the side of the market to be the first answer, but should be pragmatic enough to admit when the market is failing as with rural broadband
    • The bill seemed to invite the approach
  • Chair Hancock – You mentioned new nuclear technologies/mini nuke; there has been a lot of discussion federally, but not much at the state level, would like you to speak more to this; would like to have something in statute before it is developed
    • It is far out enough that I have not thought much about it, still in the development phase
    • Renewable subsidies were helpful to jumpstart, but have outgrown usefulness, would like Texas to stay away from subsidies on nuclear technology/mini nuke
  • Chair Hancock – Do you see any incentive we can provide on base capacity, any suggestions on incentivizing infrastructure retrofits
    • Retrofits I have seen are converting coal plants to gas plants
    • Because of low cost, the future is renewables and they will build where the resource is
    • These resources don’t rust and fall apart, owners will do something with the property
  • Chair Hancock – Just curious, infrastructure is there and we aren’t using it
  • Sen. Schwertner – EV charging stations tend to be on gov property or private industry, who should regulate these? Should we incentivize growth?
    • Rose, NETPG – May need to do regulation of the metering to ensure customers are being charged appropriately, but wouldn’t do more than this
    • Cost of installing charging stations is not cheap
  • Sen. Schwertner – Should we regulate like retail?
    • Rose, NETPG – No, mostly just changing pipes for wires
  • Sen. Schwertner – They can build capacity overnight?
    • Rose, NETPG – If they have storage, but most don’t; will always be more expensive to charge away from home
    • Wood – Always want to charge overnight, but need to prepare as EVs are growing in popularity
  • Sen. Schwertner – Is there any regulation at all?
    • Wood – Not currently
    • Rose, NETPG – Some EV manufacturers
  • Sen. Schwertner – Neither of you think that Texas should put EV chargers on highways
    • Wood – For your fleet or state vehicles, sure, but should not subsidize an already attractive price

Closing Comments

  • Chair Hancock – Trying to be flexible around other committees for future meetings