With natural gas and wind now nearly two-thirds of the Texas energy mix, Texans are beginning to worry about whether the Electric Reliability Council of Texas (ERCOT) can keep the power flowing. And they are looking for someone to blame.
ERCOT, the state's grid operator, navigated last summer's record demand spikes with an 11% reserve generation margin, well below the Public Utility Commission of Texas (PUCT) 13.75% target. ERCOT expects this year's reserve margin to drop even further, to a historically low 7.4%, as existing fossil fuel generation that has traditionally served reliability is priced out of the market by low cost natural gas and renewables.
With the reserve margin falling, anxiety about meeting peak demand is rising for Texas policymakers who will hear from voters if the air conditioning goes off during this summer's demand surges. This reliability anxiety has sparked a debate about which of the state's various energy incentives are causing the grid's potential shortcomings.
When demand spikes, prices rise and reserves fall as more generation is brought online, threatening the reliable delivery of electricity. In response, ERCOT increases the market price to stimulate supply. To better understand the dynamics of these temporary market distortions, some lawmakers have introduced bills calling for a study of the impact of renewables incentives.
But renewable energy advocates say the more useful study would be of the impacts of all energy incentives because U.S. Department of Energy research has shown it is natural gas and not renewables that is causing the Texas reliability anxiety.
Volatility and distortion
The most highly debated bills, among a range of legislative efforts, are those calling for a study on the impacts of federal tax credits for wind and solar.
Wind on ERCOT's system "has become so significant" that it can determine when peak demand requires ERCOT to exercise market mechanisms to increase the power supply, Texas Association of Manufacturers (TAM) Attorney Katie Coleman told the state Senate Committee on Business and Commerce April 2.
TAM, which includes manufacturers who use natural gas, supports a study of how wind's rapid growth, driven by federal and state "subsidies," has led to "increased price volatility" and "market distortions."
Coleman appeared on behalf of Senate Bill (SB) 2232, which would order a study of "ongoing effects" from renewable energy subsidies, especially the $23/MWh federal production tax credit (PTC) for wind, on reliability. House Bill (HB) 2908 was amended April 4 to complement SB 2232.
These studies would likely lead to recommendations by the PUCT and ERCOT about changes to incentives or market rules to better address reliability.
"All energy incentives deserve study and a review of their impacts."
Jeffrey Clark
President, Advanced Power Alliance
Renewables advocates do not completely object to these bills, but say the proposed studies would not go far enough.
"All energy incentives deserve study and a review of their impacts," Advanced Power Alliance President Jeffrey Clark told the committee, adding that Texas has not studied the full spectrum of energy incentives since 2008, "when the state comptroller's study showed that 96% of the state and federal incentives went to fossil fuels."
ERCOT and the PUCT are already working on solutions to the state's supply challenges. The Operating Reserve Demand Curve (ORDC), ERCOT's mechanism to protect reliability, responds to falling reserves with an "adder" to the market price. With this year's summer reserves forecast at an all-time low, the commission ordered ERCOT to "adjust" the ORDC formula to boost short-term supply, PUCT External Affairs Director Andrew Barlow emailed Utility Dive.
Supporters of the renewables-only study bills say this only increases wholesale electricity prices and customer costs without addressing the market-distorting renewables incentives.
Why a study?
Some say the reliability issues are largely due to the growth of renewables on the ERCOT system that has been made possible by the PTC and solar's 30% federal investment tax credit (ITC).
"Renewable subsidies are much more impactful" than other energy subsidies and have caused "a lot of problems with reliability," Executive Director Michelle Gregg of power generator trade association Texas Competitive Power Advocates (TCPA) told the senate committee in support of SB 2232. Renewables have "crowded out" more reliable coal generation.
Wind and solar "get more total subsidies" than other energy resources, Texas Public Policy Foundation (TPPF) VP for Research Bill Peacock told the committee. The "biggest single subsidy in Texas" is the PTC. The resulting oversupply of variable generation causes ERCOT's reliability issues and forces it to increase the price of electricity.
TPPF's role is this debate is controversial. As a 501(c)(3) foundation, it does not disclose its donors, but it gets funding from the fossil fuel industries, according to reporting by the Texas Observer. The "effort at the Capitol" to bring focus on renewables subsidies is being funded by "oil and gas, and other fossil fuel, interests" and the target is "renewable energy subsidies," according to the Austin American-Statesman.
Clark told Utility Dive he had done extensive work in PUCT archives to confirm the two newspapers' findings.
"Inefficient, older power resources are retiring, but few firm resources are being built to replace them."
Robert J. Michaels
Professor of Economics, California State University, Fullerton
The bills represent TPPF's most direct attack on renewables. To make the case, TPPF commissioned a study by California State University, Fullerton, Professor of Economics Robert J. Michaels.
Wind has grown to a size "that would not have been possible prior to the introduction of subsidies" and other market interventions, Michaels' April study reported.
Wind's PTC, solar's ITC and other incentives have driven the growth of variable generation and limited growth of "dispatchable generation needed to maintain reliability," Michaels' study affirmed. Using market pricing to manage reliability instead of limiting renewables growth imposes "costs for Texas consumers that could grow to $2.5 billion by 2020," he found.
It would be more "efficient and economical" for the PUCT to eliminate renewables subsidies, the study said. If that is "politically impossible," the PUCT should reduce the ORDC by requiring "that wind and solar operators rather than consumers bear the costs." This would disadvantage renewables and allow higher-priced fossil fuel resources to compete.
"Inefficient, older power resources are retiring, but few firm resources are being built to replace them," Michaels told Utility Dive. "That is because low cost renewables make ERCOT's energy prices, which would normally be high enough to support investment, too low to make new firm power profitable." More renewables, supported by the PTC, the ITC, and other market interventions "will perpetuate this pattern."
But research from Lawrence Berkeley National Laboratory (LBNL) and the University of Texas refutes Michaels' conclusions, bolstering renewable energy advocates' argument that all energy incentives should be included in any study.
Renewables by the numbers
Current penetrations of variable renewables have led to minimal reliability issues in Texas, LBNL Research Scientist Ryan Wiser told Utility Dive last year. His detailed ten-year studies of the ERCOT market found "no observable widespread impact of variable renewables on thermal plant retirements."
Other LBNL work showed 90-95% of explanatory factors for wholesale price decline from 2008 to 2016 were driven by declining natural gas prices, he said. No more than 5-10% of the factors causing the low prices Michaels identified were from tax-credit financed renewables.
"I cannot say whether the LBNL study is right or wrong," said Michaels.
"Unbiased studies are helpful in making policy."
Joshua D. Rhodes
Energy Institute Research Associate, University of Texas at Austin
Neither Michaels nor Wiser address in depth the potential impacts the falling cost of battery storage could have on reliability. The state's immediate challenge is navigating demand peaks in the next two to five years, when battery storage will not achieve significant market penetrations, according to analysts.
"Unbiased studies are helpful in making policy," University of Texas at Austin Energy Institute Research Associate Joshua D. Rhodes told Utility Dive. But SB 2232 "presumes a conclusion" and his research of Texas subsidies "comes to a different conclusion."
From 2010 to 2019, "Texas electricity generation support is $0.5–$0.6 billion annually" for renewables, Rhodes' study found. That does not include the cost of the new transmission built by the state in that period, which was driven by West Texas wind growth but now serves all generators and has become vital to powering West Texas oil and gas productionin the last two years.
Wind and solar receive "significantly" more direct support than Texas' conventional electricity generation, Rhodes acknowledged. But coal and natural gas get indirect support from the state's "mixture of direct expenditures, mandates, and tax expenditures," the study found.
About $1.5 billion per year, 63% of Texas' broader energy subsidies, goes to severance tax relief for the state's oil and gas industry, Rhodes said in an April opinion piece. If environmental externalities were included, Texas' history of "subsidies for fossil fuels likely would climb into the many trillions of dollars."
"There has not been enough money in the market to maintain reliability because prices were so low for natural gas and there was excess capacity."
Joshua D. Rhodes
Energy Institute Research Associate, University of Texas at Austin
Wind's PTC has been "a net benefit for Texas," he added, reducing wholesale market costs about $1 billion per year.
The PTC and other renewables incentives are driving savings to consumers, Environment Texas Executive Director Luke Metzger agreed. "Let the market work."
The $2.5 billion that TPPF's Michaels foresees imposed on Texas ratepayers in 2020 by the ORDC to maintain reliability will likely add about $0.0069/kW, and "have hardly any impact on customers' bills," Rhodes said.
"There has not been enough money in the market to maintain reliability because prices were so low for natural gas and there was excess capacity," Rhodes said. Any strategy to bring today's 7.4% reserve margin up to the targeted 10.7% for 2020 and 12.2% in 2021 will have costs, he added.
These numbers explain ERCOT's near-term strategy, which is focused on market mechanisms to boost reliability. The grid operator is also readying a long-term strategy.
ERCOT's solutions
The PUCT put the ORDC to use in 2014 to stabilize reserves. By 2017, rapidly falling natural gas and wind prices revealed the mechanism's shortcomings and the PUCT and ERCOT initiated studies for near- and long-term solutions.
"Scarcity price formation is being adversely influenced by factors not contemplated by the ORDC," a May 2017 report to ERCOT found. And "other aspects of the ERCOT market design must be improved" to guide "resource investment, maintenance expenditure and retirement decisions."
In January, the commission directed ERCOT to make adjustments in the ORDC formula, simplifying price calculation and increasing prices in response to peak demand events, PUCT's Barlow emailed.
Under Real-Time Co-optimization (RTC), generation to meet system needs will be selected "several times every hour during real-time operations," Barlow said. That "will optimize both the technical and economic dispatch of available resources, resulting in more efficient real-time operation."
"Solar provided less than 1% of ERCOT electricity in 2018, but it will add about 3,000 MW of on-peak power over the next three years."
Charlie Hemmeline
Executive Director, Texas Solar Power Association
Simulations of the Texas market by Potomac Economics, ERCOT's Independent Market Monitor, found RTC would have reduced 2017 load costs by $11.6 million, reliability costs by $4.3 million, system congestion costs by $257 million, ancillary services costs by $155 million and energy costs by $1.6 billion, or about $4/MWh.
Obtaining these "substantial benefits" will cost $40 million and take four to five years to implement, Potomac found. By allowing existing market mechanisms to work, policies and the prices they form would continue to guide ERCOT and allow for the continued growth of natural gas, wind and solar in Texas.
It would also allow Texas solar to have a powerful impact on system reliability, according to Texas Solar Power Association Executive Director Charlie Hemmeline.
"Solar provided less than 1% of ERCOT electricity in 2018, but it will add about 3,000 MW of on-peak power over the next three years," Hemmeline told the senate committee. Under current market rules, ERCOT projects solar "will be the biggest contributor to raising the grid's reserve margin to 11.6% by 2021, significantly reducing the likelihood of shortages."
These numbers raise the question of why some in Texas see a need for more studies.
A punitive solution?
TAM supports the studies and finding ways to protect reliability, but not through "a price adjustment that would hit customers," Coleman told the senate committee. Echoing the Michaels paper, TAM wants to "go to the source of the problem by better assigning reliability costs or other types of costs to these types of intermittent generation."
"[I]f we are going to study the impact of subsidies, we should study them all — renewables and fossil fuels."
Joshua D. Rhodes
Energy Institute Research Associate, University of Texas at Austin
Wind's PTC will have "continued effects for the next decade," TCPA's Gregg warned. "This bill's study is a good first step" to "having some educated solutions."
The bills "appear to be a cynical attempt to single out clean energy," Environment Texas' Metzger said. And "it is easy to imagine renewables opponents deciding the legislature should impose charges that neutralize the tax credits, which would be punitive."
Bill sponsors did not respond to repeated phone and email requests to explain why renewables are being singled out.
"Studies are fine because having all the right information is the best way to make good policy," Rhodes said. "But if we are going to study the impact of subsidies, we should study them all — renewables and fossil fuels."
