Proposed energy market reforms could cost $460 million more per year

After nearly a year of analysis, three plans to overhaul Texas’ wholesale energy market have been shelved in favor of two new proposals — each of which could cost energy consumers an estimated $460 million more annually.

The new plans, one from E3, the San Francisco-based energy analysis firm hired by the Public Utilities Commission to review previous proposals, and the other by PUC itself, come more than a year after the state launched an effort to revamp the power market in the wake of a disastrous winter storm in February 2021. Deep freezes in power outages across the state – some lasting for days – have been blamed for at least 200 deaths and billions of dollars in damage.

PUC staff said the recommended model was developed in the recently completed review process. PUC Chairman Peter Lake said it took elements of other market redesign proposals to create something that meets the unique needs of Texas. The Texas power grid, operated by the Texas Electrical Reliability Council, is mostly independent of the country’s other power grids.

“This has been the plan from the start. The blueprint we adopted last December specifically clarified the potential and intent of defining a hybrid solution to capture the best features of these proposals and ignore the flaws to develop a hybrid product that uses the best of each,” he said.

The plan recommended by E3 would create, essentially, what’s known as a capacity market, with ERCOT acting as a clearinghouse for power generated by generators that stay online during peak periods.

At least one independent analyst says the two new proposals reflect a flawed review process that failed to identify the problem. Doug Lewin, president of consultancy Stoic Energy, said the study also went over the potential effects of severe weather — such as a winter storm in 2021 — on the proposed market redesign.

Related: New ERCOT CEO defends efforts to boost power grid amid cost controversy

“Twenty-one months into the storm, they haven’t stopped to clearly define what the problem is, and without that problem statement, you have a lot of analysts, stakeholders, and consumers not even talking about the same thing. Are you absorbing new solutions late in the game?” he said. “That’s why I think we’re in this place where we don’t seem to be very close to anything that would make a meaningful difference.”

The study authors from E3 said their review failed to consider the effects of another deep freeze on peak winter demand, adding that “such an analysis is beyond the scope of this study.”

Lake said the study authors did not take into account the effects of the storm because they realized that measures already taken by the PUC to prevent another freeze would significantly reduce the chances of a blackout happening again. And paint a different picture of the process to get to this point, spurred on by hours of research and meetings.

“We went through a rigorous process last summer and fall with dozens of hours of public workshops, thousands of pages of public comment during the summer and fall of 2021 and many hours of deliberation with this committee leading to the scheme that was unanimously adopted last December, and we launched the process as it was He described it with this advisor, which was rigorous and resulted in a well-executed analysis.”

Ed Herz, an energy fellow at the University of Houston, said that both recommended plans are primarily capacity markets. These types of market designs drive generators to be available to meet peak electricity demand.

This is a departure from the current system, which relies on wholesale prices rising rapidly when power supplies are tight to encourage generators to go online. Lake previously called such a system the “crisis model” that the country and the energy market need to move away from.

However, Lake insisted that the recommended design of the PUC would make generators an obligation to provide it in advance.

“There is no idea how much they can pay to sit on the sidelines,” he said. “We will only pay for what we really need only when we really need it.”

Herz said the two recommendations could meet stiff resistance in the 2023 legislative session and from Governor Greg Abbott, who appointed PUC commissioners. Abbott and the legislature rejected other similar plans for capacity markets, arguing that they add costs.

The public can provide written comments on the study and proposals until mid-December, when the PUC is expected to vote on the final recommendation. The legislature is expected to study before enacting anything.

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