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The Senate Committee on Business & Commerce met on July 13 to hear from Public Utility Commissioners Peter Lake, Will McAdams, and Lori Cobos, and ERCOT CEO Brad Jones on implementation of 87th Session bills actions taken to support grid reliability.

This report is intended to give you an overview and highlight of the discussions on 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

  • Chair Schwertner – Winter storm prompted legislature to take steps to improve oversight and coordination of the electric grid, but reliability remains a serious long-term concern
  • Gov. Abbott set out 4 clear directives that PUC & ERCOT should do to secure the grid
  • Purpose is to hear from both PUC & ERCOT to hear about implementation of 87th Session bills

 

Invited Testimony

Peter Lake, Public Utility Commission of Texas

  • Highlights PUC implementation of 87th Session legislature
    • 2/3rds of the implementation action is for SB 3, implementing based on statutory deadlines and seasonal elements
    • HB 4492 is an important financial bill to protect consumers from price shock, first filing sent from ERCOT to PUC on Friday & will then move forward with nuts & bolts after that
    • Have started work sessions with stakeholders to provide forum for discussion related to bill implementation, held a market design session on July 1; had ERCOT IMM, generators, alternative tech & power, retail, river authorities & coops
  • Operational changes at ERCOT: Asked ERCOT to establish more substantial safety margin for the summer, to limit customer costs, and be more aggressive in establishing reserves and utilizing them sooner over the summer
  • Whitmire – If the goal was to improve reserves, why not before the June incident?
    • Schwertner – Next witness will be speaking on this

 

Will McAdams, Public Utility Commission of Texas

  • Ultimately Chair Lake has described June advisory as a confluence of 3 events
  • High demand starting June 13 due to low wind production and high outages among base load
  • Wind dropped to less than 200 megawatts from June 13 to June 18, ERCOT & PUC intended to bring more baseload units online, but saw mechanical failures among the units called on that led to forced outages
  • Larger picture was aging fleet had been stressed by the winter storm, PUC has taken action to ensure this does not occur in the future; ERCOT has RUC’d more units and PUC has ordered ERCOT to disclose units that go into forced outages within 3 business days
  • Reforms in SB 3 & Gov’s directive are tools we can use to make changes
  • Sec. 18 of SB 3 absolutely directs PUC to conduct a review of the minimum dispatchability reqs are to ensure reliability moving forward as a ratio to intermittent resources
  • Directed through this bill and Gov’s directives to create incentives to ensure this happens

 

Lori Cobos, Public Utility Commission of Texas

  • PUC has opened a rulemaking projects to implement HB 16 and portions of SB 3 prohibiting indexed products
  • Part of this is the default renewal product which customers are switched to after 3 nonrenewal notices
  • PUC has been working on rules requiring REPs to include disclosures and acknowledgments
  • PUC is reviewing implementing measures for index plans beyond wholesale
  • Staff has a variety of customer protections from SB 3 in review, is looking at critical load and shed provisions from SB 3 & has work session soon
  • Also looking at rules prohibiting disconnections during an emergency

 

Brad Jones, ERCOT

  • Released roadmap for improving grid reliability this morning, incl. 60 initiatives, of which 20 were completed
  • ERCOT has been meeting regularly with PUC, has been acting on Gov’s directives
  • ERCOT has been asking for more info from generators to learn more about outages experienced

 

Questions

  • Schwertner – Does the PUC lack any statutory authority to implement legislation or the Gov’s directives?
    • Lake, PUC – No, have the authority to implement the intent, provisions, and the Gov’s directives
    • McAdams and Cobos, PUC, agree
  • Whitmire – Would have been nice to have the ERCOT report yesterday
  • Whitmire – Shame that public doesn’t have a confidence in the system; why do you let everyone take maintenance shutdowns at the same time?
  • Whitmire – Wind getting all the blame, wind was low at the time, but also know that coal-fired plants and gas plants were shut down in record numbers, 1,200 unplanned outages; can you explain how this happens without someone saying maintenance shouldn’t be done at the same time?
    • Jones, ERCOT – Had 12k megawatts of outages, very few of these were planned; similar to a car driving with a flat tire that needs to stop and change the flat
  • Whitmire – Not sure this a great analogy, tire flat is not similar to scaring everyone in the state
    • Jones, ERCOT – Started reliability operations the day before the event, more ancillary services, more back up generation, but lost an additional 3.5k megawatts overnight
    • Because of the conservative operations, this additional loss did not hurt us; called for conservation as part of these operations & this saw 500 megawatts of reduced consumption
    • Outages have improved in time, not as much as hoped but continuing to trend downwards; trending towards expected number of outages for the summer peak
  • Whitmire – Seems like the need for maintenance caught you by surprise
    • Jones, ERCOT – Correct, maintenance due to parts breaking
  • Whitmire – How do we prevent this? Incentivize people to keep plants current?
    • Jones, ERCOT – Yes, exactly what we do, need to ensure they do planned maintenance when they have the opportunity and they have the revenues to perform maintenance
    • Lake, PUC – Need more reliable generation, at the same time we need to provide economic incentives to invest in existing generation and new generation
    • Incentives are preferable to requiring generators to turn on by force of law
    • Conservative measures are not the best, but it is a stopgap
  • Whitmire – AG said ERCOT is not subject to open records, this is concerning; would be useful to know for consumers and the legislature who was talking to who at the early hours of the freeze; would hope PUC and ERCOT strive for as much transparency as possible
  • Schwertner – Market redesign is what PUC is charged with according to the Gov’s directive and SB 3 to incentivize dispatchable generation
    • Lake, PUC – Yes
  • Schwertner – Also to research changing fleet; if we’re not acting we need to do something different, some sort of regulated system that ensures the lights stay on
  • Schwertner – Are we up to the task of market redesign that will ensure the electric grid is reliable?
    • Lake, PUC – Yes, we are up to the task and have those tools, we have levers to pull
  • Schwertner – What are those levers? ORDC changes?
    • Lake, PUC – Anything and everything, dual fuel ancillary services, extended ancillary services, extending the timeline, adjustments to ORDC
    • ORDC can be adjusted in a number of ways, e.g. changing how bonus looks as excess supply diminishes, can be designed for certain outcomes
    • Market design work groups are part of the effort of PUC to lay out pros and cons of each of these concepts
    • Key is market needs to move away from a crisis-based business model, only financial reward exists as you get closer to crisis
    • Need to have a market designed to give financial incentive for reliability
  • Schwertner – What is the optimal timeframe to see that the system is working between ERCOT and PUC? How should legislature determine if redesign is successful?
    • Lake, PUC – Redesign component is expected to be completed by the end of the year
    • Operational portion will come after and depend on what changes are, e.g. ORDC changes could be quick, new ancillary product would be a longer change
  • Schwertner – Could these include firming requirements?
    • Certainly could
  • Paxton – Counting on PUC to have the authority and do what we’re asking you to do
  • Paxton – Good to see legislative implementation, good to hear that 20 of the 60 ERCOT initiatives are implemented; important to re-establish confidence for consumers & drive industry and eco dev in Texas
  • Paxton – Regarding aging fleet, how big a problem is this when thinking about reliability?
    • Jones, ERCOT – Generators were impacted by the Winter Storm,
    • Maintenance windows have closed down significantly due to need to support wind power
    • Haven’t invested enough in part of our generation fleet, lack of investment is showing in perhaps lack of maintenance
    • Also could be a coincidence that outages occurred in June, have good expectations for were we’re headed later in the summer
  • Paxton – Asks McAdams to comment
    • McAdams, PUC – 60-70% of the gas fleet was installed between 1999-2007, significant portion is 20 years old; these facilities are depreciating out & requiring greater cost to keep them in performance condition
    • Market has been running lean for a long time, lowest wholesale prices for a long time
    • Also have a high systemwide offer cap even at $2k, other areas of the country still not this high
    • Laws from 87th and Gov’s directive provide us guidance to offer targeted incentives for reliability, need to also focus on maintenance
    • In law, there is a weatherization, inspection, and enforcement requirement; this all falls on the PUC to ensure reliability
  • Creighton – How much time do you anticipate needing to assess what needs to be done? You referenced the market is designed for crisis, but isn’t it more that market is designed to send signals to the market during demand peaks?
  • Creighton – Can you also speak to how this will affect current market participants who have invested into the current structure?
    • Lake, PUC – PUC is spending the next 60 days on work sessions and individually with stakeholders to gather info on market design
    • PUC will shift to decisions & design in the fall
    • Working on distinction between high demand and crisis
    • Also asking what would cause new generation to be built, only hearing interest in building peaking units that operate on the edge
    • Right now ORDC bonus doesn’t activate until we get to the edge; investors are saying they can’t make money unless there is a crisis
    • Winter storm was clear indicator grid needs to be more reliable, most private investment is waiting to see what that will look like
  • Creighton – Timeline?
    • Lake, PUC – End of year for internal view of market redesign
    • Various SB 3 elements will be done in parallel like weatherization, supply chain mapping, critical load management
  • Creighton – Are you looking back at former market constructs and why we made changes?
    • Lake, PUC – Have looked at this, Comm. McAdams may have more context
    • Cobos, PUC – Previously stepped up increase in price caps to enhance price incentives and drive more investment in generation
    • PUC took those actions at the time via rulemaking with input from stakeholders, operating reserve demand curve was brought to PUC by a stakeholder as a white paper
  • Creighton – Haven’t met a market participant that said caps need to be at $9k
  • Creighton – Interesting that we had the ability to have a tiered structure based on number of hours of crisis experienced; is there anything in place in rule were this decision could’ve been made?
    • Jones, ERCOT – No tiered structure to my knowledge, there is a structure where if $9k was maintained for a certain time then it would drop to $2k
    • $9k can also be 50 times the fuel index price, which would have been much higher
  • Creighton – Fine line between forced generation and keeping investment secure
    • Lake, PUC – Generators do not like being forced to generate when it is uneconomic, but must have a margin of safety and act with caution while redesigning
    • In early stages of redesign, but need to work to secure investment dollars in the future
  • Campbell – Where do revenues come from to support maintenance?
    • Lake, PUC – Revenues need to come from ERCOT marketplace and these don’t materialize until conditions get tight
    • Cobos, PUC – Other lever we have is incentivizing investment into ancillary services
  • Campbell – What does the timeline look like on improvements? Still have summer heat
    • Cobos, PUC – Soon, need to gather info on market redesign changes and act
    • McAdams, PUC – Scarcity pricing is scheduled to be reopened as part of SB 3 and this drives the whole thing, incl. ORDC
    • Scarcity price is forecasted and maintenance windows have shortened because everyone is so lean
  • Campbell – And you had the authority to do everything the Gov said before the letter came through
  • Campbell – Regarding RUCs, do you ask them to come on and provide the incentive?
    • Jones, ERCOT – We look at how much generation is committed the day before, have the option to force generators to commit through RUC and will pay them at essentially their cost
  • Kolkhorst – We lost 3.5k megawatts on Monday morning in that week in June; it would appear to the general public that there could be incentives to manipulate the market to drive crises
  • Kolkhorst – Have you looked at if we had unscheduled leaking pipes and when can we expect data?
    • Lake, PUC – Directed ERCOT to release this info within 3 days, in process of seeing who was out, when, and why
    • IMM also keeps an eye on misaligned incentives and bad actor behavior
  • Kolkhorst – On misaligned market incentives, the more we keep it at the edge, the more money is made; so with redesign we’re looking at paying more for reliability?
    • Lake, PUC – Correct
  • Kolkhorst – So no one is wanting to build new generation, maybe ancillary services? When you look at the redesign, has there been too much incentive on renewables?
    • Lake, PUC – Renewables and pricing mechanisms were not a factor when the original market was designed
    • Cobos, PUC – There was legislation passed that created CREZ that brought on a lot of wind
  • Kolkhorst – Who paid for CREZ?
    • Cobos, PUC – Consumers
  • Kolkhorst – Exactly, so they paid for something that isn’t reliable
    • Cobos, PUC – We have a significant amount of wind and solar on our system, issue is how to deal with this when baseload dispatchable is set
    • Hearing that we need to drive investment on baseload dispatchable and peakers
    • McAdams, PUC – Capabilities of batteries is also increasing every day, should consider policy with an eye to these new techs
  • Kolkhorst – So goal is intermittent renewables with reliables?
    • Lake, PUC – Yes, market was originally designed with the idea that gas was the highest fuel cost, federal incentives allowing negative pricing was something never contemplated at the outset
    • Uniform pricing mechanism means everyone gets the same price at the same time
  • Nichols – Pricing more reliable hydro, nuclear, gas, etc. the same as less reliable wind and solar at the same level; incentivizing less reliable generation; need to create incentives for a more reliable system
  • Nichols – Are the incentives you intend to use going to get us more investment and more reliable generation?
  • Schwertner – Good comment, Gov’s letter directs PUC to use incentives to drive investment for reliable, dispatchable power
    • Lake, PUC – Not making marginal changes, looking at the entire market to make changes that drive reliability
    • Have clear legislative intent, clear guidance from the Gov, all pieces are in place to ensure reliability
  • Schwertner – Legislature has a keen interest in this issue, giving clear legislative backing to the Gov’s letter
  • Hall – Concerned how we’re going to get to a reliable system, need to look at threats natural and man-made that could disrupt operations
    • Lake, PUC – Important point, thinking about it from an incentives perspective, but with an eye for accountability; defining outcomes we want
    • McAdams, PUC – Need to pay for performance
  • Schwertner – Reliability is an issue that needs to be addressed
  • Kolkhorst – Didn’t finish agenda, won’t be coming back today?
    • Schwertner – Correct, might have something later this summer or interim