July 16, 2022
By Matt Welch
With such pain at the pump right now and our struggling economy, it has been easy to miss what is happening with Texas electricity prices, which, unfortunately, is even worse. While gasoline prices are about 60% higher than a year ago, retail electricity rates are up even more, about 70% over this time last year. Electricity prices are higher, in part, due to higher natural gas and coal prices, which provided about 60% of electricity to Texas homes and businesses in 2021. The cost increases of these fuels, largely driven by Russia’s invasion of Ukraine and a consumer economy rapidly shaking off COVID-19-era declines in energy use, are mostly beyond our control. But another part of the reason that electricity prices are higher is largely policy driven.
Thankfully, the massive growth in renewable energy on the Texas grid is acting as a buffer and is keeping costs lower, to the tune of tens of millions of dollars per day, than they would otherwise have been because the price of sunlight and wind, the “free fuel” that powers renewable generation, isn’t tied to global markets or affected by war.
So, what is happening?
Like most competitive electricity markets, the Electric Reliability Council of Texas, or ERCOT, the grid that serves most of Texas, has an independent and nonpolitical Independent Market Monitor. The monitor’s job is to make sure that the market stays as reliable, low-cost, and competitive as possible by making recommendations for policy changes and investigating any instances of potential market manipulation. The IMM’s latest annual report paints a pretty bleak picture of how the market is functioning. According to the report, wholesale electricity prices were more than 500% higher in 2021 than the past five years’ average. The majority of those higher prices were due to the 2021 winter storm, but even taking that week out shows prices about 25% higher during the same time period.
The report also indicates that transmission congestion is becoming a very expensive problem for Texans. The monitor noted that transmission congestion in the real-time market was up 46% in 2021, costing ratepayers about $2.1 billion. However, the biggest red flag in the IMM’s Report is a critique of how the ERCOT market has changed its operations since last summer. At a high level, state leaders have directed ERCOT to procure much higher levels of electricity reserves than in the past and to overuse an obscure mechanism called the “reliability unit commitment,” or RUC, to do so.
Some levels of reserves are necessary in the event that demand is higher than projected or an operating power plant breaks down. And while it is bad to have too little reserves, you can also over-procure reserves, forcing consumers to pay for too much. The monitor notes that ERCOT is procuring too many reserves too often; that it has recognized little, if any, reliability benefit; and it is costing ratepayers a lot of money. The monitor estimates that these higher levels of reserves cost ratepayers up to $400 million for the second half of 2021.
To procure these excess reserves, ERCOT is also misusing the obscure reliability unit commitment tool that had previously been used sparingly to mostly help alleviate transmission congestion. While the commitment is sometimes necessary to ensure reliability, it is not designed to be used as frequently as it is currently being used, which is up 2,000% from 2020 to 2021, causing huge market distortions, muting price signals, and imposing unnecessary costs onto consumers without providing any notable reliability gains.
Using the reliability unit commitment in this way also has the impact of increasing wholesale market prices, sometimes far above what they normally would have been during the same grid conditions. Its use is essentially inducing scarcity pricing when there is no actual scarcity in the market. The independent monitor did not mince words in describing how it feels about these current out-of-market operations:
“While we continue to believe that an energy-only market can be successful and adapt to changing system needs, it is not compatible with ERCOT’s current conservative operational posture. The distortion in the market’s economic signals will diminish generators’ expected revenues, which ultimately will threaten ERCOT’s resource adequacy.”
Peter Lake, chairman of the Texas Public Utility Commission, the state body with oversight and regulatory authority over the electricity market in Texas, previously said that ERCOT would not become a capacity market. But the market is essentially operating with a pseudo capacity market via half measures and short-term-turned-long-term fixes that are making things worse and more expensive at a time when we should be doing everything we can to keep prices low.
The real issue is that we don’t know how much these actions are costing us. We have essentially handed over the credit card to someone else and are making minimum payments on an unknown balance. Just like with the fallout from the 2021 winter storm, it will catch up to us and we, consumers, will be the ones who pay in the end. An inefficient grid means Texas is at risk of losing its reputation as a low-cost energy state. That reputation has brought so many businesses and jobs our way, but if that stops, so will the jobs and economic development. We need clear and efficient markets, not manipulation and half measures masquerading as solutions.
Matt Welch is the state director of Conservative Texans for Energy Innovation, a statewide nonprofit advocacy organization. He wrote this for The Dallas Morning News.