Those types of resources could help meet Texas’ summer peaks in power demand when heat waves cause air conditioner energy use to spike up for hours at a time in afternoons and early evenings, Milligan said. It would be less useful in the winter, when freezing temperatures can cause much longer-lasting spikes in demand both for electric heating and for gas used for heating and for fueling the power plants that provide the majority of the state’s electricity.
But the credits construct would also be much less costly than the LSEO plan. ICF’s analysis showed that it would increase wholesale electricity costs by a total of about $1.3 billion through 2025, but then lead to lower overall costs over time, largely because “we will have a more efficient market with greater reliability,” Silverstein said.
The second plan being considered, called “Backstop Reliability Service,” would in essence pay coal and gas generators that would otherwise be expected to cease operations because they can’t earn enough money in the Texas market to remain available for emergency operations. The ICF report forecasts that the Backstop Reliability Service plan would cost about $2.6 billion between 2025 and 2030, which is about 90 percent less than the costs it forecasts for the LSEO plan put forth by NRG and Exelon.
The Backstop Reliability Service plan could also be more valuable for providing extra power during the longer peaks in electricity demand that are common in winter, Silverstein noted. “[Dispatchable Energy Credits are] more of a summer solution; [Backstop Reliability Service] is more of a winter solution,” she said. “We expect that the PUC could probably implement both.”
The chart below shows ICF’s estimates of the cost differences between the three options, with the LSEO plan’s costs far higher than its competing alternatives.
Unclear operations, uncertain price impacts
Milligan highlighted another risk of the LSEO plan proposed by utilities: it could impose even more drastic costs on the utilities and retail electricity providers, depending on how they are required to secure reliability accreditation from the companies that own the power plants available during grid emergencies.
Critics of the LSEO model put forward by NRG and Exelon say they’re worried that the new structure could lack pricing transparency. “How credits are assigned can vary significantly,” Milligan said.
And because the PUCT and state grid operator ERCOT would be creating the program from scratch, the costs that might emerge are far less predictable than they are in other parts of the country where similar market constructs have been operating for decades.
In a worst-case scenario, utilities and retail electricity providers could find themselves unable to purchase the reliability credits they need at any price, which could expose them to penalties that could be quite high, Milligan said. If that happens, the costs of complying with the program could balloon to as high as $30 billion in its first full year of operation, as the chart below indicates.
The novel and uncertain structure of the market proposed in NRG and Exelon’s LSEO plan could also create a risk of market manipulation by gas-fired generators in Texas. Because these companies would be the most likely sources of reliability credits under the LSEO plan, they could “game the program in a way that could significantly increase costs,” Silverstein said.
That’s a potentially huge problem in the state, she said. NRG Energy is among a small number of companies known as “gentailers” in the ERCOT market, a portmanteau of “generators” and “retailers,” because they own a significant number of the power plants in Texas and are also major players in the retail electricity space.
Without adequate policing by ERCOT, those companies could offer their own retail electricity providers more favorable costs and terms for reliability credits from the power plants they own, and raise the price of or withhold reliability credits for retailers that compete with them, Silverstein said.
James McGinniss, CEO of energy retailer David Energy, echoed those concerns in a Friday interview. “You have NRG and the gentailers essentially saying, ‘We’re just going to build more gas and centrally plan this economy — and you’re going to have to pay us for it.’ And it’s going to crush competition and eliminate innovation.”
The LSEO plan’s structure also doesn’t have a clear lever to incentivize the building of new power plants or other resources available to help the Texas grid ride through peaks in demand, which is seen as a key way to improve grid reliability, he said. “It’s not an obligation to build; it’s an obligation to buy,” he said. “From who? From the big guys.”
Silverstein agreed that the LSEO plan, depending on how it’s structured, could allow gentailers such as NRG to use their market power to earn disproportionately high capacity revenue for the power plants they already have and not reinvest the profits in building new power plants.
The ICF report’s analysis forecasts that a relatively small amount of new generation would likely be built in response to the market signals proposed in the LSEO plan. But that new generation would be slightly less than the amount of new battery storage encouraged by the market structure proposed in the Dispatchable Energy Credits plan, and quite a bit less than the amount of generation that the Backstop Reliability Service structure would encourage to stay open rather than close down.
Using these projections, the ICF analysis forecasts that the LSEO plan would not yield better reliability improvements than the Dispatchable Energy Credits model. What’s more, it would yield significantly fewer reliability improvements than the Backstop Reliability Service plan, while increasing costs far more than either of those two options, as the chart below indicates.
An NRG Energy media relations spokesperson did not respond to multiple phone messages requesting comment on the ICF report and the critiques of the LSEO plan.
Looking beyond big power plants for better grid reliability
The truth of the matter is that none of these three interventions, either alone or in combination, will deliver the grid stability Texas needs, Silverstein emphasized. That’s a real problem, especially given that the Federal Energy Regulatory Commission recently determined that Texas has not yet taken sufficient action to reduce the risk of unusually cold weather causing the same kind of catastrophic grid problems that the state has in 2021.
Meanwhile, low-cost renewable energy is becoming increasingly important in keeping Texas power prices from escalating. Last week, consultancy IdeaSmiths released a study that found renewable energy has reduced electricity costs in Texas by roughly $27.8 billion since 2010, including $7.4 billion in savings in the first eight months of 2022 as wind and solar energy displaced power generated from increasingly expensive gas.
Texas Governor Greg Abbott, a Republican, has blamed renewable energy for the February 2021 grid emergency, citing the fact that some wind farms failed to operate during the sub-freezing weather. But the central cause of last winter’s problems was the failure of the state’s fossil gas infrastructure to operate in unusually cold weather and deliver the fuel needed by the generators that provide most of the state’s electricity.
The PUCT’s focus over the past year has been on market structures that could encourage more fossil-fired generation to be available for serving peak demand on the Texas grid. But a number of stakeholders have questioned this focus, noting that renewable energy is increasingly cheaper than fossil fuels for serving grid needs throughout most of the year.
At the same time, Texas also needs to encourage more investment in making its homes, businesses and industrial facilities more energy efficient and in managing their power use to better balance peaks and troughs in grid supply and demand, Silverstein said. What the state doesn’t need, she said, is a market change that “breaks our wallets before it can fix the grid.”