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Senate Business & Commerce met to hear invited testimony only on proposed changes to the wholesale electric market design and the impact such changes will have on the reliability of the Texas electric grid. The Committee also discussed electricity outages resulting from recent weather events.

This report is intended to give you an overview and highlight 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 and the desire to get details out as quickly as possible with few errors or omissions.

 

Opening Comments

  • Rep. King reads the chair’s opening remarks:
    • Legislature took decisive action to reform the grid after Winter Storm Uri
    • PUC has made progress on several Phase I reforms such as new ancillary services and weatherization
    • When electricity is lost, the cause does not matter; citizens need reasonable comfort
    • Grid is vulnerable transmission congestion, needed new generation, renewable inconsistency, etc.
    • Need to determine how operational flexibility to balance variability and meet the need for more dispatchable generation capacity
    • Committee needs to determine if the PUC’s proposed plan, the PCM, is going to be worth it
    • Cost of the PCM is $5.7b per year and will take years to be fully implemented; does not guarantee new generation
    • Are possibly other options like firming requirements, state-owned backstop, low interest loans, or dispatchable ancillary services
  • Committee rules adopted; remove COVID-19 requirements and updated number to reflect quorum
  • Nichols – Overviews history of Texas energy market deregulation; renewables were a very small part of the market
  • Nichols – For Winter Storm 2011 market was free opportunity to bid, but one market was subsidized; was no call for a dependable market and no legislative movement
  • Nichols – Renewables have become a larger part of the market and dispatchable have continued to shut down
  • Nichols – E3 report says 38k MW coming on the grid that is heavy with solar; will have more wind and solar than dispatchable
  • Nichols – Same report says we will lose 11k MW of dispatchable; who would want to invest here
  • King – Most important thing during deregulation was certainty in the market; is no certainty in the market now
  • King – During deregulation the market model was put in place by the legislature and then directed PUC to make rules in response
  • King – Legislature has to put something in place that is steadfast enough for future investment
  • Nichols – Every decision needs to be considered from both sides; whatever you change on one side, changes the other side
  • MenĂ©ndez – Could build more peakers/storage where the demand is; why make a big change if a small change will get us closer to where we need to be
  • Kolkhorst – Market was skewed by all tax credits in 313s and federal incentives for renewables
  • Kolkhorst – After most recent winter storm renewables were not a significant part; 68% was coming from natural gas
  • Kolkhorst – Concerned about the capacity to store with rare earth materials; could mean something different for national security
  • Campbell – Need to ensure we are not building too much complexity and give time for the changes that have been made already to

 

Peter Lake, Chairman Public Utility Commission

Winter Storm

  • During the winter storm last week grid performed well
  • Highest demand last Tuesday evening 65k MW; lower than peak demand over the holidays
    • Had 10 MW in reserves during the peak
  • Wind performed just under 5k MW and solar gave none; natural gas performed well just under 8k MW in outages
  • Issue was largely icing on trees
  • Outages were the largest on Thursday with about 450k without power
  • King – What was the fuel mix among the thermals?
    • Over the week less than 10% power provided by renewables
    • 68% was gas, 25% coal, and the rest is nuclear/hydro/battery storage
  • Campbell – What about nuclear?
    • About 5k MW

 

PCM

  • Overviews the process ERCOT/PUC in getting to the PCM
  • Are in Phase II determining the appropriate reliability service
  • True cost is a fraction of the $5.7b cited before; would be offset by the cost savings
  • Are technical answers that we cannot answer without input of market participants; will need that during implementation
  • King – What is the process moving forward to implement the PCM?
    • Are at a full stop; are completely deferring to the legislature
    • Would go to ERCOT and would go through the TAC process
  • King – How long would that take?
    • Could be done in 6-9 months
  • King – Opportunities for stakeholders to intervene in that? Reminded about Renewability Zones that were more expensive/longer to implement due to stakeholder intervention
  • King – Anticipate disagreements/lawsuits from stakeholders?
    • Would expect intensive stakeholder participation, but risk of stakeholder intervention/litigation is minimal
  • King – Any way to assure it would be up and running by a certain date?
    • Do not have the answer for that
  • MenĂ©ndez – PCM was created with E3? Is this their recommendation?
    • Has not been tried in other markets, but the components
    • No, is not their recommendation
  • MenĂ©ndez – Why did you not take their recommendation?
    • Their recommendation FRM was a new version of a reliability requirement
  • MenĂ©ndez – Consultant believes PCM will not attract new investment?
    • K
  • MenĂ©ndez – Concerned about short-term solutions while we wait for this new market to be put in place; would like to focus on demand response and energy efficiency
  • MenĂ©ndez – PCMs exclusive to dispatchable/thermal? Or allowable for renewables? Might incentivize storage
    • Have not spoken about qualification for the credit; anything with an on switch
  • MenĂ©ndez – Will a failure to perform lead to penalties?
    • Is a technical question we will answer during implementation; agree there should be a penalty
  • King – Concerned about you not being able to answer some of these questions; who formed the idea of the PCM?
    • The result of the analysis process we ran with E3
  • King – So E3, the IMM, or ERCOT did not come up with the PCM?
    • No
  • Campbell – Did E3 only have capacity models to analyze?
    • No also included an LSE obligation
  • Campbell – Seems like only capacity models were evaluated
  • Campbell – Are only hearing principles of the PCM; who is going to design it?
    • Lead would be ERCOT and market participants
  • Campbell – Speak to PMJs failure?
    • They had blackouts during winter weather due to weatherization
    • 50 MW of new generation since inception
  • Campbell – Gold standard capacity market model is PMJ that has failures; capacity by itself is not the answer
  • Campbell – How do we know we will get more reliability out of this new model?
    • Since announcement of the PCM has been a new market entrant, announced new dispatchable steel in the ground Calpine
  • Campbell – Reliability standard in the analysis
    • Are stable for now, but trouble in the horizon if there is no action
  • Campbell – Peaker net margin is $150k/MW hour; even without PCM, is an incentive for new thermal build?
    • Is a theoretical concept, does not account for total costs
  • Campbell – Shifting the curve has brought $1.7b or more into the market?
    • Do not have that in front of me
    • One of the drawbacks of the ORDC is that it does not distinguish between renewables/dispatchable
  • King – Put in statute all future generation 50% would be natural gas and put in an exception for renewables which we will need to discuss
  • King – If problem is renewables have been growing exponentially faster than thermal, what in PCM guarantees thermal will grow faster than that?
    • Is nothing we can do to stop federal credits for renewables
    • Reserves ERCOT revenue exclusively for dispatchable
  • King – Can guarantee that there will be more dispatchable; how enforce those commitments?
    • Yes; PCM requires the loads through the credit system to buy the equivalent amount of dispatchable
  • Campbell – Renewables will be able to get this performance credit?
    • According to SB 3 access would have to be through an associated battery/gas plant
  • Campbell – What is the maximum amount of renewables allowed on the grid?
    • Cannot prohibit any energy resource from connecting due to federal law
    • Is an upper limit on resources, but varies
  • Campbell – Wind and solar do not support the frequency necessary for the grid; would have to dedicate some amount of dispatchable thermal
    • Correct about voltage; voltage support part of our reforms being evaluated by ERCOT
  • Johnson – Voltage support is a separate part of the issue correct?
    • Correct
  • Johnson – Want to pull back on the discussion against renewables; does not matter at the end of the day how much renewables are on the grid just as long as there is enough natural gas?
    • Correct
  • Johnson – If I own a wind farm and bid into the PCM what happens? Would
    • Would fall under the penalty regime
  • Johnson – What does the reliability standard have to do what we are doing? Is just a goal
    • Defines how much backup we need and what that standard is
  • Johnson – PUC and ERCOT have shifted the ORDC, RUCed and purchased more ancillary in history; would successful PCM reduce the use of those?
    • Yes
  • Johnson – Demand curve was moved for what reason?
    • To bring more generators online sooner
  • Johnson – Think it would incentivize new construction?
    • Would have been a benefit, but did not happen
  • Johnson – What can we do in the short term to bridge before it is implemented?
    • Yes; ERCOT is in the process of examining bridge options
  • Johnson – Could we have new ancillary service product?
    • Ancillary are not designed for long-term reliability; do not see them as a generation tool
  • Johnson – Is the PCM a capacity market? Fully explain as people are going to talk about this
    • No; instead of paying advance to sit on the sidelines, only compensates generators who are online/available during hours where the grid is the tightest
    • Will answer at technical implementation; will not be annal could be monthly/quarterly
    • Stakeholders have said they want weekly or daily
  • Johnson – Will PCM destroy the energy market
    • No, is an add on; cost of consumers will drop
  • Johnson – PCM has been described as self-correcting, will go away if not needed anymore?
    • No, cost would dimmish as supply increases
  • Johnson – Dispatchable means natural gas, thermal?
    • Yes, but could include batteries, hydrogen
  • Kolkhorst – You noted the $5.7b would be offset
    • Would be about offsetting the emergency prices
  • Kolkhorst – Think PCM checks all boxes of SB 3?
    • Yes except the procurement part
  • Kolkhorst – Penalties?
    • Will have a penalty and generators must commit in advance of that day
  • Kolkhorst – Need to get into the details of the PCM; how ensure no market manipulation?
    • Credit transactions would have to go through a centrally cleared marketplace
  • Kolkhorst – Will this design incentivize new generation or just hold on to what we have?
    • Is designed to incentivize new and keep generation
  • Kolkhorst – Market will continue to skew with renewables, there is no guarantee this will prevent this
    • Requirement for the retailers to turn in their credits showing they purchased their power from dispatchable sources
  • Kolkhorst – Want to believe you, but it is the first of its kind
  • Birdwell – New to this committee; PCM would not bring new dispatchable for 6 years if at all?
    • Implementation timeline estimated 2-3 years
  • Birdwell – But then you need to account for timeline of construction of new facilites
  • Birdwell – How many more MW does the state need to bring on in the future to meet demand?
    • Will need 5.6k more dispatchable MW by 2026
  • Birdwell – Plants will arrive under the current structure, not the PCM?
    • The companies who have spoken include Calpine
  • Birdwell – Conservation can buy you time, not abundance; many are concerned about the PCM
  • Birdwell – Why are people who are concerned about this wrong and you are right?
    • Believe the entities who have concerns are not using good information
  • Birdwell – Can it deliver at the rate we are losing capacity? Concerned we disincentivized investment
    • By definition under the PCM will have to buy those dispatchable MW
  • Birdwell – That’s if the generator even builds in the first place; did not consult the generators?
    • Consulted during the public comment period, but worked with E3 during the analysis
  • Birdwell – Will not have a second change on this
  • Nichols – Have been people promising they are going to build, but there is no guarantee as this is not a regulated market
  • Nichols – How can manufacturers put their factory up and participate while Bitcoin miners have high reimbursement rates for shutting down?
    • Is load versus ancillary services; make capacity payments for ancillary services
    • Also pay for certain facilities to be willing to shut down
  • Nichols – What kind of pricing? Don’t know why our actual consumers are not getting paid
    • Depends on the contract; why we want a centrally cleared market for PCM
    • MenĂ©ndez – Want that kind of demand product for our consumers

 

  • Nichols – Know I am going to get some phone calls for people who are concerned about cutting into their revenue
    • Are here for the consumers
  • Zaffirini – Prepared for another extreme weather event?
    • Yes
  • Zaffirini – Why not add uncertainty ancillary product? Why not a better approach to retail consumption?
    • Have procured additional ancillary products, but need more for just dispatchable
  • Zaffirini – Asks about peaker plants
    • Are only in the most congested areas
    • The Calpine plant announced will start as a peaker but will convert to a base load natural cycle natural gas
  • Zaffirini – What can legislators do this session to improve the grid?
    • Completely defer to the legislature as the ultimate authority on that
    • Universal firming requirement and universal cost causation worthy of consideration
    • Did not contemplate these as we believe is outside the bounds of SB 3
  • Zaffirini – Commissioner Jackson’s request about a root cause analysis being done routinely?
    • Yes; has been elevated as a priority
  • Zaffirini – How seriously were public comments were considered in the final report?
    • Were exhaustively looked over
  • Zaffirini – Best practice for establishing an energy reliability standard?
    • Are in the process of this; determine which metrics are best for our market
  • Zaffirini – Has ERCOT/PUC improved their communications after the storm
    • Yes include improved reporting, communications, and establishment of TERC
  • Zaffirini – Grid no role in the outages during the Austin winter storm?
    • Correct
  • Zaffirini – How do we restore public trust?
    • Communication and performance
  • Zaffirini – What factors are cost of retaining existing resources versus incentivizing new ones/
    • Market dynamics; defer to consultant for more detailed answer
  • Zaffirini – Performance standards?
    • Performance during critical hours
  • Zaffirini – Example of clawbacks/penalties? Clawbacks equal to the money to be returned or additional payments?
    • Administrative penalty for non-performance dollar amount per MW not delivered
    • Generator side would be loss of revenue; already in current market
    • Want stakeholder and consumer feedback on the specifics
  • Middleton – Problem has been undoing 20 years of federal subsidies; want to be sure we do not create any more market distortion
  • Middleton – Timeline?
    • Two to three years for implementation at ERCOT; have heard construction would be at the same time ERCOT is going through reforms
  • Middleton – Is this addressing long term and short term?
    • Designed to be long term
  • Middleton – What we need is base load thermal generation?
    • Yes, need it all renewables, peakers, etc.
  • Middleton – $5.7b estimated cost offset by the decrease in spikes? If we are not careful we are incentivizing short term solutions that could lead to more price spikes
  • Middleton – Need to ensure we have more base load
  • Middleton – Renewables including battery are asynchronous; plan have any incentive to ensure we are incentivizing maintenance of grid frequency?
    • Is a separate voltage support product under development; separate from the PCM
    • ERCOT has the ability to curtail wind/solar to maintain frequency
  • Middleton – Could possibly have enough MW available, but not able to dispatch it?
    • Correct; are why we are focused on dispatchable
  • Middleton – Asks about how much has been promised to come on the grid?
    • Calpine and Solvent Energy batteries
  • Middleton – Would possibly just be building here anyway
  • Middleton – Synchronicity, the ancillary services, and the PCM all go together
  • King – Seems like this is still in the design phase and seems unlikely anyone will build thermal generation in this phase
  • King – Cannot fathom how this closes the imbalance between thermal and renewable

 

Zach Ming, Energy and Environmental Economics

  • E3 is the technical economic consultant contracted by the PUC to evaluate six reforms for market reliability
  • King – Which reform options did you analyze?
    • Ming – Energy only market, load serving entity reliability obligation, forward reliability market, performance credit market, backstop reliability service, and dispatchable energy credit
  • PCM establishes a reliability standard consistent with SB 3 requirements; would need to be decided upon
  • MenĂ©ndez – Have best practices on a reliability standard?
    • Common industry standard is 1/10 year; is the assumption used in our analysis
    • Does not bind the commission to that being the standard they use
  • System is performance credits during hours of most need; creates strong signal for energy efficiency and demand response
  • Price of PCs would be determined by a demand curve set by ERCOT under PUC supervision; are self-correcting
    • Generators have to bid into the market into advance
  • Used ERCOT projections and extreme weather to analyze these markets
  • By 2026 Texas will see an additional 5GW wind, 27 GW solar, 5 GW battery storage
    • When they come on to the system, thermal and dispatchable get off the system
  • Would cause exit of 11 GW of dispatchable generation
  • Would calculate at least one reliability event per year
  • If implemented PCM, would bring more dispatchable resources; 5.6 GW of new natural gas generation
  • King – How much renewables during that time?
    • The same amount
  • Kolkhorst – Feel good about that number?
    • Yes, but understand there is variability
  • Kolkhorst and P. King – Would still have lost dispatchable even if we gain
    • Correct; would be 5.6 GW incremental
  • Johnson – That is why we are setting a reliability standard; it is not the ratio of what is out there, it is what we are purchasing to meet grid needs
    • PCM is about purchasing enough dispatchable during highest reliability risk
  • Johnson – Have heard the timeline is overstated; have you reconsidered those numbers?
    • Is appropriate framework as we expect resources need to earn enough money to cover their costs
  • That 5.6 GW and impact on reliability is a tenfold improvement in reliability
    • Reduces the costs of energy
  • 2% increase for consumers; $460m is the cost of the performance mechanism, not $5.7b
    • Reduces the costs of energy
    • Only would affect a certain amount – some do not purchase PCs at all
  • PCM would keep prices stable
  • Campbell – How do you know that 11 GW will come offline?
    • Generators are not just looking at profits this year, but are looking ahead; are seeing the 37 GW of renewables are coming onto the market
  • Campbell – Seems like removal of the 11 GW creates artificial scarcity; reliability standard without doing anything would be 0.03
  • Campbell – Real time co-optimization is not occurring, why was this used in the report?
    • Real time co-optimization will be a feature of ERCOT in the coming years, wanted to be sure it would reflect how ERCOT was going to operate
    • Would not have material difference in the report
  • Campbell – Asks about the implementation of real-time co-optimization and PCM
    • Lake – Are moving forward with real time co-optimization
  • Campbell – New investment?
    • PCM will drive new generation; would prevent some from retiring yes, but aims to incentivize new generation
  • MenĂ©ndez – Firm recommended the FRM; potential flaws for the PCM?
    • Some challenges associated with it being a unique design; all elements ERCOT and other markets are familiar with, is just the combination is unique
  • MenĂ©ndez – Cost is $460m? Who would have access for these funds?
    • Yes; any generator available when the hours are tightest
  • MenĂ©ndez – ERCOT is currently at 0.03 reliability?
    • If current market as it is today would never change would see that reliability
  • MenĂ©ndez – Feel PCM would guarantee new investment?
    • Believe it would incent new investment; competitive electricity market would assume market participants would respond to price signals
  • MenĂ©ndez – Are other mechanisms for the state to lower its demand in a lower time line? Like demand response only being used for industrial?
    • Was a recurring theme in public comments that what we need is X resource; question is how do we get those resources on the system
  • MenĂ©ndez – Why did you not recommend the PCM?
    • Were many good options
  • King – All other ISOs and RTOs have three sources of revenue; Texas only has energy and ancillary
  • King – No other entity has anything like PCM?
    • Correct
  • Johnson – Have heard concern from retail electric providers and municipally owned utilities; can you talk about that?
    • Have heard concerns/support from them; think it is consistent with a vibrant retail electricity market as there is no collateral, takes customer migration into account
  • Johnson – Would put burden on smaller providers?
    • Do not see it any more burdensome that what already exists
  • Johnson – Should we be looking at a reliability standard with energy efficiency?
    • Flexible on how much dispatchable we need to meet that reliability standard
  • Kolkhorst – 2026 projections all get us to the same place; implementation timeline will be long according to your report
  • Kolkhorst – Like the Backstop Reliability Service for its short implementation timeline, low complexity, but has less stable costs
  • Kolkhorst – Why PCM over BRS?
    • It has to do with what Texas wants – regulation or competitive electricity market
    • Backstop is a regulated product; would expect to see volatile scarcity pricing
  • Kolkhorst – PCM would be complex to implement?
    • Are a number of parameters to consider before implementing
  • Kolkhorst – Shifted from ORDC to the PCM? How much new money to incentivize generators?
    • Will be enough money for cost of new entry
  • Kolkhorst – Free market in this industry dissipated years ago due to renewable federal subsidies
  • Kolkhorst – Think some of the other options analyzed by E3 should be looked at
  • Kolkhorst – Lt. Governor and many of us believe some of the costs should have been borne out of state revenues
    • PCM levels the playing field as those receiving those PC revenues are the dispatchables
  • King – Added in transmission costs?
    • Do not include transmission/distribution costs as we think they would cost the same
  • King – That is inaccurate; costs more to build transmission in West Texas than elsewhere
    • Lake – Is equally important, but is a parallel issue; we will build the transmission we need one way or another
    • Cost will be there regardless
  • Birdwell – Have heard nothing under PCM that says more thermal generation will be built
    • Level PCM is set at is a stable way to provide a rate of return to investors
  • Birdwell – Cost of construction has to be put in the rate stream; am skeptical
    • Is factored in
  • Birdwell – Trying to solve a problem; may not have the luxury of time
  • Birdwell – Terrible precedent for the state to own power generation, but may be a desperate time; could put a Sunset on that ownership
    • Are already generators that have recognized the forthcoming PCM and have started that process already
    • No reason to assume the state can build a power plant faster than private
    • State coming online could have the same effect
  • Birdwell – What if the state had an RFP with those companies to build? How can companies say they are coming here due to PCM if it has not been implemented?
    • Lake – Cannot give insight into those companies; sure this committee would like to hear from those companies
  • Birdwell – How much land will solar take up with this 27 GW coming on?
    • Acre per GW so about 30k acres
  • Birdwell – Where is that 30k acres coming from? Concerns from my district their land will be turned into solar farms

 

Carrie Bivens, IMM Potomac Economics

  • In our opinion operating reserve demand curve changes offer more than sufficient price signals
  • $460m seems to be the low end for the cost of PCM
  • Do not support the implementation of the PCM; believe performance credits will clear at zero
  • Middleton – Have a free market now?
    • Ming – The electricity market has always been highly regulated and administrated
    • As much of you can have a free market, Texas has it; PCM does not change this
  • Middleton – Has E3 ever recommended 100% solar for any state?
    • Ming – Do not make recommendations; do analysis of cost impacts of different paths
  • Middleton – Asks about work done with the state of Hawaii
    • Ming – The legislature of Hawaii passed a law that requires all utilities to be renewable by 2045
    • Were contracted to do analysis based on this
  • Middleton – Typical for E3 to be given the result
    • Ming – Are analysis the economics and costs of certain objectives
  • Middleton – E3 is a subsidiary of Willdan group that has supported the renewables that have skewed the market in the first place
    • Ming – E3 is an independent subsidiary of Willdan and perform objective economic analysis
    • Even a 100% renewable system requires dispatchability
  • MenĂ©ndez – Access fuel for thermal resources was not considered in this analysis?
    • Ming – Do capture higher failure rates and the primary contributor is the availability of fuel
    • Do not have a standalone factor that said there was a certain amount of fuel
  • MenĂ©ndez – Heard concern about lack of gas generation – is not true nothing has been built?
    • Correct
  • MenĂ©ndez – Who would most benefit from the implementation of PCM?
    • Generators
  • MenĂ©ndez – Price manipulation is a concern?
    • It is in every market like this where there is a concentration of supply
  • Campbell – Analyze PCM as a monthly service?
    • Ming – Assumed annual basis, but could be flexible on what that would actually be
  • Campbell – Thought given to new builds may not be the cost of new entry value?
    • Ming – Cost of new entry is calculated as what is the cheapest resource that could come online
  • Campbell – Do not think they would come on cheaper?
    • Ming – Would be losing money if they did
  • Campbell – With 37 GW coming on, an amount that would be too much for the market?
    • Ming – Yes
  • Campbell – Asks about other concerns you have
    • Have issues with the estimate of 11 GW coming offline, believe it is overstated
    • Issues with their analysis: assume static operating demand curve, assume retirements if don’t meet the cost of new entry
  • Campbell – What do you think of the PCM?
    • Is a novel concept and a different way to introduce a capacity product
    • If it is designed right, will clear at zero most years
    • If there are design issues, these credits could have no material benefit
  • Campbell – Have confidence on the companies who are coming here because of the PCM?
    • Lake – Yes
  • Campbell – What authority did SB 3 give you?
    • Lake – Directed to establish requirements to meet reliability needs of the market
    • Lake – Had 8 incidents where we could have had issues, but changes that have been made have prevented that
    • Lake – Even though we have added ancillary services and RUCed, need more
  • Campbell – Thoughts on these incidents?
    • Have had tight days, cannot parse out what why there were near misses
  • Campbell – If we do not endorse this concept would you move forward on this? Feel you have the authority to move forward?
    • Lake – Plan is to implement whatever the legislature wants to do
  • Nichols – Not concerned about power plants closing down?
    • Have not had any retirements in 2022; is no world where you would retire unless you are facing extraordinary capital costs
  • Nichols – Spent a lot of money on high pricing and we want to get away from that
  • Nichols – End of 87th session we were convinced we needed more dispatchable power; concerned about the age of these plants especially those RUCing
  • Nichols – Did not get closings in 2022 because some of the actions the legislature took
  • Nichols – We want to have backup in case things go wrong; worried about units being there when we need them
  • Nichols – If you have a solar or wind plant out in rural areas, we have to run transmission lines; had a bill last session that would have them pay some costs if they were in rural areas, Senate passed it and the House did not send it back; seemed reasonable to me
  • Nichols – If we’re trying to incentivize dispatchable power, investments will happen at the cheapest locations with infrastructure in place already
    • Ming – Shift across the nation is towards thinking about resiliency, resource adequacy is just a small portion of this
    • More important aspect is the weatherization, supply chain stability, etc., instead of the narrow piece of how many gas units have been built
  • Nichols – Haven’t heard many good things from the capacity markets; with the PCM, if you only pay if you perform, generators will get rid of old equipment and invest in things that may ramp up quick
  • Zaffirini – How do you reconcile your findings with IMM’s finding that the report had major
    • Ming – One issue IMM had was E3 report not reflecting ORDC, but found that taking this into account changed results very little
    • Other issue was E3 report assumption that generator needed to earn equal to total cost, IMM assumed generators only needed to earn for go-forward costs; E3 report does have this in the report, but Texas needs new resources and prudent to take capital costs, etc. into account
  • Zaffirini – Do you plan to rerun any calculations?
    • Ming – No, have run calculations to address the second concern
  • Zaffirini – Does dispatchable energy include batteries for solar and wind
    • Ming – Definition for dispatchable is any resource that is available when conditions are tightest; any resource that can generate during those tight hours
  • Zaffirini – So yes?
    • Ming – Yes
  • Zaffirini – How does this affect renewables?
    • Ming – PCM shouldn’t have any effect on renewables, renewables don’t earn PCs, hours in which renewables are generating are not hours of scarcity; revenues should be unaffected
  • Zaffirini – Asks the IMM the same question
    • Bivens – Can’t respond
  • Zaffirini – Additions to costs since the beginning of conservative operations
    • Bivens – $800m to $1b from July 30 2021 to August 1 2022
    • RUC costs are more difficult to pin down, overall should be smaller
    • RUC concern is the impact to the market and others generating
  • Zaffirini – Do you esxpect retail rates to increase under PCM?
    • Bivens – Not a retail expert
  • Zaffirini – Your preferred fixes to the market?
    • Bivens – Recommended a new ancillary service
    • ERCOT will face a flexibility issue, not a resource adequacy issue; revamping ancillary services will be the best solution
  • Zaffirini – How confident are you that with that change energy-only could delivery reliability?
    • Bivens – Very confident, 9 out of 10
  • Zaffirini – Already answered who will benefit most from PCM?
    • Bivens – Yes
  • King – What would new ancillary service look like?
    • Bivens – Would be an alternative to RUCs; would take into account things like low solar and if you know about it ahead of time
    • Would include things like inaccurate forecasts of renewables, outages, etc.; if the uncertainties go up, could deploy product to make up difference
  • Johnson – Nichols asked if the parent company of E3 has pressured you to drop objectivity and colored your response with ESG goals?
    • Ming – Absolutely not
  • Johnson – 37 gigawatts of renewables coming on in a coming time period, inclusive of batteries?
    • Ming – Yes
  • Johnson – Why? I don’t think of new batteries in the same way as wind and solar
    • Ming – Big growth techs are wind, solar, and batteries; any resource coming online reduces profits from existing generators
    • Even bringing new dispatchable lowers profits of existing generators, which is way new dispatchable isn’t a reliability solution
  • Johnson – Do we have an issue with resource adequacy in Texas? Don’t need to build anything?
    • Bivens – Market is providing the signals to facilitate entry and exit
  • Johnson – Signal are appropriate because there is a lot of money in the market?
    • Bivens – One example, ORDC has been changed 3 times; have generated enough revenue to beat cost of entry
  • Johnson – If we pulled ORDC back, could it pay for ancillary service product or PCM?
    • Bivens – Would not recommend getting rid of ORDC
  • Johnson – Not getting rid of it, have needed an artificial mechanism to stabilize the market
    • Bivens – Wouldn’t call it artificial, have to draw a demand curve to tell you the value of megawatts to consumers
  • Johnson – You said if this thing is properly constructed, it will clear at zero; so it is useless?
    • Bivens – If we’re meeting 1-in-10 standard, then PCs should clear zero; should have no value if you’re meeting reliability standard
  • Johnson – If price goes to zero how much would it cost the state? Need to pump money in to make it work
    • Bivens – Upfront costs of implementing market are one thing
    • Even if profits clear zero, if you want to hedge there will be a risk premium; you’ll still need to buy ahead of time
  • Johnson – So there are little costs; but there is $200b worth of damages because market failed last time, have seen problems because we valued profits over reliability
  • Johnson – Efficiency and reliability are separate, aren’t they?
    • Bivens – No, job isn’t to find cheapest solution, job is to ensure market outcomes support reliable grid
  • Johnson – ORDC will give money to whoever is there at the time, not very precise; if the goal is to incentivize new gas-fired generation, isn’t ORDC clumsy?
    • Bivens – ORDC is a tool of price formation and accurate real-time prices; ORDC revenue predominantly goes to thermal, much more than they are generating
    • ORDC typically goes high when there is low renewable output
    • But if you subsidize production at all, it has negative consequence of kicking out other units
    • If there is a desire to subsidize, better to subsidize capital costs
  • Johnson – What are we talking about?
    • Bivens – Trying to draw a distinction between subsidizing production and capital costs
  • Johnson – Are ancillary services subsidizing production?
    • Bivens – It is an insurance product that the market needs
    • Difference in energy and capacity, ancillary services are a capacity product, subsidizing energy products is damaging
  • Johnson – If we do the ancillary service product, this would be another capacity payment of some sort that will subsidize specific generation available at a specific time
    • Bivens – Being paid to be available and wait for ERCOT to call
  • Johnson – Will it incentivize new generation?
    • Bivens – Reliability tool, wouldn’t say it’s a generation product
  • Johnson – Asks Chair Lake and Ming, if PCM is structured properly it will clear at zero?
    • Lake – If we have more supply than demand, then yes, it will have been designed correctly
  • Johnson – Will it have done anything before hand? If it clears at zero it doesn’t seem like it does anything
    • Lake – Have heard from people that the market will sort it out, but market didn’t figure out large outages
  • Johnson – So if they are right, it will clear at zero?
    • Lake – It will cost nothing if market does so
    • If we get enough new dispatchable power to cover demand, by design PCM will cost nothing
    • But if market can’t solve this, PCM is designed to increase in value
  • Johnson – Is the uncertainty ancillary service inconsistent, can they both be deployed?
    • Lake – Yes, already deploy an uncertainty ancillary product; ERCOT is authorized to procure an additional 1.5k megawatts
  • Johnson – So proposal is redundant?
    • Lake – Similar to what we’re already doing
    • Bivens – Would characterize it as a different product
    • More revenue you have in capacity service, cheaper the ancillary service costs
  • Johnson – IMM participated in design of PCM?
    • Bivens – Provided feedback but never supported the product itself
  • Johnson – Did you not support it?
    • Bivens – IF PUC will move forward with PCM, will try to make it as efficient as possible
  • Johnson – Didn’t voice doubt until now?
    • Bivens – Until comment period was open
  • Johnson – Why’d you wait?
    • Bivens – Weren’t asked
  • Johnson – Ming wanted to weigh in
    • Ming – PCs clearing zero is an incorrect assumption, if system is at reliability we would expect positive price for PCs
    • System that is reliable doesn’t have scarcity pricing and resources aren’t earning to cover full costs; PC price would fill gap
    • In the long run we would expect a positive price for PCs; would only clear zero if you have a lot more resources
  • King – IMM was not an original part of SB 7, why’d legislature create the IMM? What was the mission
    • Bivens – All grid operators have market monitors
    • In markets with concentrated supply, there is a concern about market power; role is to guard against that and provide an independent voice
  • King – As the IMM, you don’t recommend PCM?
    • Bivens – Correct
  • King – E3 didn’t recommend PCM from the 6 options?
    • Ming – That wasn’t the option we chose, but if the question is PCM versus status quo, we recommend PCM
  • King – But if there are other options?
    • Ming – Not the top choice
  • Middleton – Intermittency penalties, you think there is some ability to do that; do you think SB 3 grants PUC that authority or does the legislature need to weigh in?
    • Lake – For cost causation, SB 3 gives authority to apply this to ancillary services
    • Something to consider as we move forward with ECRS
    • Broader or universal we read as beyond scope of SB 3 and PUC authority
  • Middleton – What is IMM’s position on intermittency penalties?
    • Bivens – Doesn’t sound like something we would support
  • Middleton – What if there are additional federal market distortions, how do we deal with that?
    • Bivens – If legislature wants to subsidize dispatchable generators, better to do this on the capital costs as it doesn’t distort the market; subsidizing production can inhibit price formation
    • Penalties do as well, not the way to address this
  • Middleton – How do we fix that?
    • Bivens – Market has cleared at cost of entry for gas turbine plant for past 3 years; hard for me to imagine that market is not sending the right price signals
  • Middleton – $40b in renewable subsidies is not a meaningful distortion?
    • Bivens – In overnight hours it can erode revenues coal plants receive, but doesn’t mean they aren’t receiving sufficient revenues to cover going forward costs
  • Middleton – A lot of aspects are layered on top, market distortions multiply; how do we fix that?
    • Bivens – Spend time looking at price signals, have an annual report; price signals are sufficient to meet reliability standard of ERCOT
    • Not centrally planned, role of market is to send the right price signals for orderly entry and exit
  • Middleton – You supported lowering cap from $9 k to $5k?
    • Bivens – No, think it should be raised
    • Can’t say to consumers that value of lost load is lower; value of lost load is higher now than it used to be; studies say as much as $20k
    • If market is going to reflect the value accurately, it would raise value of lost load
  • Middletown – What is the value of $20k to the consumer?
    • Bivens – Provides signal in real-time to incentivize people to perform, incentivizes demand response
    • High prices when grid is tight is the right signal
  • Kolkhorst – On comment that incentives are better on capital costs; had hearings on ESG in State Affairs, coal plant in Marshall scheduled to be closed based on movement like ESG
  • Kolkhorst – What is effect if there is a clamp down on how companies are rated, if borrowing restrictions
    • Bivens – Haven’t modeled, but aware that there are externalities & markets across the country are dealing with that same issue
    • Externalities are not necessarily priced in as they as not necessarily economic factors
    • Lake – Forced closure due to certain regulations are a concern, but looking at 10k megawatts in retirements of coal if current EPA rule moves
    • We need to have dispatchable generation and need a structure that will incentivize this without requiring market to go to the brink to $20k
    • Job is to keep the lights on; if worst case scenario is PCM is $0 because of abundance of dispatchable generation, that is good
  • Kolkhorst – Asks Ming, what impact does ESG have on this?
    • Ming – PCM is designed to adjust to whatever the externalities are, designed to allow dispatchable resources to recover costs, interest included
    • If ESG increases costs, would be reflected in higher PC prices
  • Kolkhorst – And this is then passed onto the consumer, Uri costs will be borne by consumers for a long time
  • Kolkhorst – Learned today that there is some combination we can do; heard at the State Affairs hearing in Marshall that one person couldn’t get a loan to drill; ESG can become very expensive
  • Kolkhorst – Have entered the market with SWIFT and other funds where capital has been inexpensive to borrow, should be on the table
  • Kolkhorst – HB 2133 was passed in 2011, allowed generators to enter into VMPs, should these agreements be cancelled or redrafted in light of market changes & conservative operations?
    • Bivens – With RTC, VMPs will likely need to be renegotiated because they don’t address this; same will be true of PCM as well
    • Lake – Agree, conservative operations are a short-term patch to keep lights on now; hope is that through PCM or other mechanism a long-term reliable grid will mean we don’t need conservative operations
  • Kolkhorst – Want to commend on goal of keeping lights on and industry going
  • Kolkhorst – Did we pay E3 to come here today?
    • Ming – Staff manages contract, this is part of E3’s standard contract
  • Kolkhorst – Hope estimate of $100k is wrong, and you can refute that; if we have questions and contact E3 to answer questions, we get charged?
    • Lake – Correct
  • Kolkhorst – How long is the contract?
    • Lake – Can get this information to you
  • Campbell – Asks Bivens, RTC will be instituted? You do find the need for that?
    • Bivens – Yes, quicker the better, great product that increases reliability

 

Closing Comments

  • King – Will continue to revisit issues as we proceed through the session