Legislature May Oblige with Measures on the Market’s Edge
As NRG Energy’s point person in the Texas capital, Bill Barnes knows his way around Austin. The company’s director of regulatory affairs, he is a prominent voice on ERCOT’s Technical Advisory Committee and can dig into the market and its complicated issues with the best of them.
But the best were not prepared for the sub-freezing temperatures that shut down more than 50 GW of ERCOT’s installed capacity in February, leading to dayslong controlled outages that have been attributed for at least 151 deaths, hundreds of billions of dollars in damages and financial ruin for many market participants.
“I did not have on my bingo card in January that I would be spending the spring at the Capitol,” Barnes said last week during the Gulf Coast Power Association’s Spring Conference.
Yet here he is, watching closely as legislation moves through the state legislature. He has been a frequent witness for the industry, testifying for or against various bills that could dramatically overhaul the ERCOT market and its governance. Penance, perhaps, after $9,000/MWh scarcity prices during the week of the storm resulted in more than $47 billion in market transactions and bankruptcies and lawsuits among and between its participants. (See Is the ERCOT ‘Casino’ Going Bust?)
“Who won? A massive transfer of wealth from one side of the market to the other did not happen here,” Barnes said. “This devastation has had severe financial consequences to every sector of our market.”
“We do a funny thing in ERCOT: We deliver reliability through efficient markets,” said MD Energy Consulting’s Mark Dreyfus, who was at the Public Utility Commission in the late 1990s when Texas created its energy-only market. “For a week in February, that wasn’t very funny at all.”
Under ERCOT’s market construct, generators are paid only when they provide energy to the market. The $9,000/MWh prices are designed to incent new generation in the state. However, wind farms and utility-scale solar account for most of the generation that has been added to the market in recent years, with more on the way.
Natural gas plants (51.7 GW of installed capacity) still provide most of the energy for the market’s 26 million customers, but wind (31.4 GW) is second with 28.8%. Solar (6.2 GW) accounts for only 5.7% of ERCOT’s capacity, but along with wind, it is responsible for the bulk of the interconnection queue’s projects.
“It was a market failure, but it was not a fault of our market design,” said attorney Katie Coleman, who represents industrial consumers. “We have a fantastic market that has served Texans well over two decades. It’s lean and sometimes mean, but it incentivizes top performance for customers at sometimes a low cost.
“The answer is not to completely redesign the market from scratch. I hope people can remember there has been a lot of work, a lot of thought, in creating the market we have today,” she said.
Coleman was part of a GCPA panel of “industry rock stars,” as described by moderator Pat Wood, former chair of both FERC and the PUC. She was joined by ERCOT Independent Market Monitor Carrie Bivens; Pedernales Electric Cooperative’s Julie Parsley, also a former PUC commissioner; consultant and ex-Wood aide Alison Silverstein; and Amanda Frazier, Vistra’s senior vice president of regulatory policy.
They were nearly unanimous in their belief that Texas lawmakers should take a scalpel to the market, not an ax.
The winter storm “uncovered a number of flaws in our market design … but our competitive markets have delivered an enormous amount of value to Texas consumer over last 20 years,” Frazier said. “We should do some market design fixes, but we should not throw out the baby with the metaphorical bath water.”
The most likely measures to pass the legislature are some form of weatherization mandate (though its funding is unclear), a requirement that ERCOT’s board members be Texans, increased governance responsibility for the PUC, a ban on wholesale price-indexed plans, and better coordination and communications between the electric and gas industries — both of which have pointed the finger at the other over who was responsible for the lack of fuel supplies during the storm.
“That has created a conversation about a lack of integrity in our fuel supply, which we have not seen in previous events,” Frazier said. “To me, that is absolutely the worst issue we saw in February and the one that deserves the most attention.”
“We need to be very careful in the way we require companies to spend money in ways that load will have to start paying,” Parsley said. “There’ve been complaints about [the lack of] weatherization. One thing that really should be looked at is weatherization of the natural gas system. I don’t know what that would cost or what it would require, but it’s a conversation worth having.”
What you won’t see coming out of the legislature is a capacity market or moves to link ERCOT with the Eastern or Western interconnections. Standby generation would likely have had the same problems that knocked off half of ERCOT’s capacity during the storm, while the neighboring RTOs were also struggling to meet demand.
“Are they going to reregulate? They’re not,” Priority Power Management CEO and keynote speaker Brandon Schwertner said. “Are they going to start a capacity market? They’re not. We’ll fix the market another way.”
That hasn’t stopped Starwood Energy Group Global from proposing to build and own 11 GW of new ERCOT-dispatchable gas plants, similar to a previous proposal by Warren Buffett’s Berkshire Hathaway Energy. (See Berkshire Hathaway Offers Texas Emergency Power Supply.)
In a letter to the PUC and ERCOT, Starwood CEO Himanshu Saxena offered to invest $8 billion to develop and build the “state-of-the-art” plants. In return, the investment firm would create a regulated company that would hold the assets and recover a PUC-approved regulated rate of return, not to exceed 9%.
“I’m watching two outside investors falling over themselves to spend billions in Texas,” Wood said. “Why would anyone put one more kilowatt of gas-fired power on the grid?”
“I’m not sure the answer we need is a bunch of new gas,” Bivens said. “What we’ve seen over the past few years is certain incentives lead to certain outcomes. We have seen high prices in August; we have seen price spikes when there’s not enough rampable generation on the system. Storage has the potential to upend a lot of the conventional thinking we have, but I don’t necessarily think the answer to the event is a lot of natural gas.”
“This is a very complicated market, and it’s a complicated grid. There’s a lot of change that’s needed,” Frazier said. “I’m hopeful that with whatever comes out of the legislative process, we end with a workable system where we can get dedicated folks, whether they’re Texans or not, who are willing to dig in, consider the issues, learn on the job and fix the things we uncovered in the storm.”
Legislators and market participants seem to be coalescing around securitization products, which would take the nine-figure bills some utilities are faced with and spread them out over 20 or 30 years. Customers would get a monthly charge on their bills, but the cooperatives and other buyers in the market would have the debt taken off their books. (See Securitization Offers Texas a Way Forward.)
The two largest short pays to the market are held by cooperatives Brazos Electric Power, which has declared bankruptcy, and Rayburn Country Electric. Brazos owes 62.8% of ERCOT’s short pay (nearly $1.88 billion of $2.99 billion, as of April 23) and Rayburn owes $641 million.
“There’s some light at the end of the tunnel there. Our legislative members have been very accommodating in terms of thinking of solutions to help this financial distress we’re seeing in the market,” NRG’s Barnes said. “The No. 1 priority is the cooperatives’ securitization. That would allow Brazos and Rayburn to get access to low-interest funds, and that’s what we all want … that Brazos and Rayburn pay their bills.
“This is all intended to help provide liquidity and financing to plug this massive hole and get it behind us,” Barnes said. “Then we can update our rules so we make sure we don’t ever live through this again.”