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Senate Business & Commerce met on May 2 to take up a number of bills. This report covers discussions on SB 2627 (Schwertner) and SJR 93 (Schwertner) concerning the creation of the Texas Energy Fund.

 

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.

 

Opening comments

  • Schwertner – Is continuing concern about what we are going to do about the electric grid

 

SB 2627 (Schwertner) Relating to funding mechanisms to support the construction, maintenance, and modernization of dispatchable electric generating facilities

SJR 93 (Schwertner) Proposing a constitutional amendment providing for the creation of the Texas energy fund and the authorization of other funding mechanisms to support the construction, maintenance, and modernization of electric generating facilities

  • Schwertner – Highest legislative priorities are operational flexibility and resource adequacy
  • Directs significant financial resources to the procurement of needed dispatchable generation
  • Bill directs a state backed 0% 20-year loan program for construction of new generation
  • Financial completion incentive/bonus when new MW connected by December 2026
  • State baked 0% interest free loan similar to SB 6 for existing generation
  • Campbell – Support this; need monitoring of the progression of construction? Or will be monitored by the PUC?
    • Application process to be devised by December 1, 2023 and the program would be through December 2026; with possibility of extension under certain circumstances
    • Have a legislative oversight committee and strict timelines in the bill
    • Has 5% escrow currently and is a discussion of lowering to 3%
    • Will change minimum generation to apply for the loan from 10 MW to 25 MW
    • Open to discussion/input/advise from members/stakeholders
  • Menéndez – $100m for small modular nuclear reactor on completion bonuses – is there a start time? All for new? Or retroactive? Can be open to other unique energy areas?
    • Is $10b in total
    • $100m is tied to a budget rider for SMRs facilities
    • For the loan program, is up to 75% for estimated cost
    • Loan program for maintenance and repair is $500m
    • $1.5b for completion bonus when they interconnect
  • Menéndez – Are creating a new lending mechanism; who manages this?
    • The Comptroller’s Office; a majority of this is a loan and are considering a Sunset date of 2028 for the completion bonus
  • Birdwell – Any generators who are considering shutting down?
    • $500m of $10b is a 0% 5-year loan for maintenance/upkeep if they promise to stay online for 5 years
  • Birdwell – Funds for converting coal to gas?
    • Does not speak to conversion; is about maintenance of the type of facility it currently is
  • Birdwell – How much high-level waste would these nuclear reactors create? Did a bill last session that prohibited high level waste disposal to four sites
    • Are many proponents of nuclear technology; is an area that needs to be explored
  • Zaffirini – Concerned that we are re-regulating in SB 6; how does this bill not do that?
    • SB 6 was not re-regulating; is an out-of-market action ensuring what happened in Uri does not happen again
    • This bill is in-market that supports the type of generation we need given the increase in renewables coming on to the grid
    • DRRS, PCM, firming
  • Zaffirini – Have to be criteria/strings attached
    • Is an escrow in the bill, if they do not meet timelines, do not get bonus
  • Zaffirini – Do not see that as re-regulation?
    • Do not see it that way
  • Zaffirini – Who qualifies for these loans?
    • Generation that has a track record in state/nationally; need 25 MW that has appropriate capital structure
  • Zaffirini – Why would anyone want to invest in the market if the state is giving money away?
    • Are market changes working with other pieces of legislation; is doing what we need to do in a specific amount of time
  • Zaffirini – In lieu of other legislation you have proposed before?
    • Is another option; are different ways to address dispatchable generation
    • Backup insurance network would get us the MW we need, but that proposal is different than this one as it is out-of-market
    • PCM is another option
  • Zaffirini – Was testimony on being technology neutral, how did we move so far away from that?
    • Need dispatchable generation that works at any time; other types of dispatchables like batteries have been addressed in DRRS and other ancillary services
    • Do not think we have targeted one over another
  • Zaffirini – Are batteries included in this legislation? Would you include them?
    • No; do not need to incent them with state funds; need resources that can balance the concerns of being able to operate in times of crisis
  • Johnson – Support the direct incentivization; what controls the proportion they add to the grid
    • When they interconnect; proportional to the amount of generation they add
    • Anticipate a certain amount of MW coming online
  • Johnson – Is that wording in the bill? Intention it would be based on 10 MW?
    • Proportional language is in there; may need a specific rider to tidy that up
    • Yes
  • Johnson – Not based on how much is borrowed, is how much is built?
    • Yes
  • Johnson – 75% for new construction; how compares to ROI in transmission and distribution?
    • Did not base it off anything the PUC did
  • Johnson – Want to know the effect this would have on the market
    • Like how some ancillary services are out of market
  • Johnson – Constriction would begin September 1, after discussion may be moved back to June 1
  • Johnson – Want to know what effects on the market this would have
  • Campbell – Batteries are more of a storage mechanism; this bill is about thermal generation?
    • Batteries are addressed in other areas; are important for certain types – are not the areas that is the most concerning which is dispatchable
  • Campbell – Do not see this as a subsidized bill, is an incentive loan that needs to be paid back
  • Campbell and Schwertner discuss the variability of renewables
    • Completion bonus is a direct subsidy; are willing to pay for that generation
  • Menéndez – $190k per MWh on the completion bonus; how would this impact those who are currently building?
    • Those generation companies already decided to enter into the market
    • Would not retroactively incentivize projects
  • Menéndez – $100m for nuclear reactors match the MWh requirements elsewhere in the bill?
    • Not advised

 

Panel 1

Mark Bell, ACT – Neutral

  • Are concerned about government intervention in the loan program of the market; could crowd out private investment
  • Are potential benefits

 

Bill Barnes, NRG – Neutral

  • Prefer competitive solutions over government solutions, but prefer this option to SB 6
  • This needs strict conditions:
    • Not resource adequacy program and not a replacement of the PCM
    • Loan program needs a clear end date

 

Katie Coleman, Texas Association of Manufacturers – For

  • Is a tailored solution that supports new MWs
  • Unlike Production Tax Credit will make it easier for companies to invest without market distortions

 

Brett Kerr, Calpine – Neutral

  • This is a very complex situation; this loan program would only be able to incent new generation if it was coupled with a PCM

 

Sam Siegel, Vistra – Neutral

  • Believe the 75% loan percentage is not necessary
  • If bill goes through, should be paired with PCM; would only be supportive if this moved forward together

 

Q&A Panel 1

  • Zaffirini – How do you think this would impact market
    • Bell – Need to be cautious; will split the market into those who got loans and those who did not; those who are building now will likely stop; still need a PCM to ensure you do not lose what you have
  • Schwertner – Are doing a lot of things to help incent that support existing generation; PCM tied to cap is still an issue in that bill
    • Bell – PCM acts as a backstop
  • Schwertner – Is a subsidy
    • Bell – Disagree; is about meeting reliability standard
    • Coleman – Is currently not a level playing field in terms of access to financing to renewables/others; a lot has been done for existing MW, need to do more
  • Zaffirini – How would you improve this bill?
    • Coleman – Believe the concept is sound
    • Kerr – Have announced several projects that would not qualify; would struggle to expand existing brownfield site by 2026
    • Kerr – For large-scale projects, will struggle to make them by 2026
    • Kerr – Are questions about what happens if there is a default
    • Bell – May need to tighten definitions of modernization versus new build
    • Bell – Concerned about future EPA regulations that may cause retirements of coal plants
  • Menéndez – State could help keep existing plants in cleaning them up; is about net new
  • Zaffirini – Does this feel like re-regulation?
    • Coleman – Do not think it is; criticisms of SB 6 do not apply to this bill
    • Kerr – Re-regulation is on a sliding scale – this is not as much as SB 6
    • Barnes – SB 6 is much closer to re-regulation than this
    • Siegel – Is an improvement on out-of-market actions; this will incentivize new generation, but need PCM to incrementally add and match on the revenue side
  • Schwertner – Will add criteria to applicants on the floor and will add credit requirements
  • Johnson – Is a provision that the state will not own and they will go into receivership and will be sold back into the market
  • Creighton – In support, but have concerns about the collateral on value of these?
    • Coleman – Need to vet party lending to and ensure they are a good operator first
    • Coleman – Is a market for re-selling assets as long as they are good functioning
  • Schwertner – Are receivership provisions in the bills
  • Creighton – Yes, but concerned if they are sold back into the market for nickels and dimes
  • Creighton – Generation coming online versus retired? Price control issue – are we where we need to be without the PCM?
    • Coleman – E3 envisioned a net cost of $500m at equilibrium; cap in SB 2012 $500m gross in the senate version and house is net is to keep revenue streams
  • Creighton – Could this flush out existing generation?
    • Coleman – Do not believe so; believe current market design incentivizes; we view the PCM as a step back to re-regulation
  • Menéndez – Have previously testified current market is sending enough signals to create enough generation?
    • Coleman – Yes, have already achieved the goal of divorcing pricing from crisis
    • Coleman – Do not think this essential, and if the state wants to do something to meet long term needs, this is the option we support
  • Menéndez – How much may come offline to EPA rules coming down the line
    • Kerr – Are natural gas; are not anticipating any compliance rules
  • Menéndez – How much have you announced? Will put things on hold because of this bill?
    • Kerr – 850 MW and have co-generation plans; since plans have been announced, will not be able to use these funds; have competition concerns
    • Barnes – Have the same concerns; reiterates PCM would need to work with this
  • Menéndez – How much would you have to retire if EPA rules come down?
    • Barnes – Worst-case impact would be closure of a lot of coal fleet
    • Siegel – Have two units at risk which would be several thousand MWs; people are not building because the market signals are not there
    • Siegel – Are more likely to retire units than to build them; reiterates support of PCM
  • Johnson – How reliable are these old coal plants compared to new gas generation plants?
    • Siegel – Put a lot of money into coal plants to enhance reliability
  • Johnson – Forced outage rates for thermal occur half as frequently as the non-deliverability of renewables; assume forced outages would be old coal plants
  • Johnson – If loan program is successful, PCM would go to $0?
    • Siegel – Yes would depend on how much new build versus retirements
  • Johnson – If we have an effective loan program, do not need PCM or vice versa?
    • Siegel – Need to address pressure on price that renewables are causing with a PCM; a loan program is nice to have, not need to have
    • Siegel – 25% is not a lot of equity to give up; would recommend 50/50 what normal lenders have
  • Kolkhorst – 86% of production in queue is in wind/solar?
    • Is what ERCOT interconnection queue shows
  • Kolkhorst – SB 2015 said 50% must be dispatchable and 50% renewable – is that an incentive?
    • Barnes – Could steer development
  • Kolkhorst – This bill is taking taxpayer dollars and lending it out while the PCM is solely on the backs of the ratepayers
  • Kolkhorst – The market is already distorted and it started with tax credits for wind/solar; effort is to strike a balance
    • Coleman – $10b allocated for this would be assets you are getting for 30 years and the PCM is billions annually for perpetuity
  • Kolkhorst – $500m gross versus net is a big delta; if is net, will cost ratepayers what?
    • Coleman – Dependent on what the PUC sets for reserve margin and curve
  • Johnson – Disagree with PCM being in perpetuity and getting us nothing; if PCM fails, we just do not do it anymore
    • Coleman – Could spend a lot under the PCM and not get new MWs
  • Campbell – Do not have level playing field between renewables/dispatchables; bill addresses this

 

Schwertner, in closing

  • Need to get this discussion moving on the floor; will be some floor amendments:
    • Changing from 10 MW to 25 MW
    • Escrow from 5% to 3%
    • Changing applicant eligibility and changes to completion bonus

 

SB 2627 and SJR 93 voted out to the Senate floor (7-3 PNV)