Zoe Parker is a graduate student in public affairs at the University of Texas at Austin, Lyndon B. Johnson School of Public Affairs.
It's been two years since the Texas Legislature and Governor Greg Abbott, R, directed the Public Utility Commission of Texas, the state's electricity regulator, to revamp Texas’ wholesale electricity market and fix the state’s grid reliability problem. The directive came in response to Winter Storm Uri, an unprecedented cold weather event that brought the state's electric grid to the brink of catastrophic failure. Now, the PUCT has proposed an expensive, never-before-seen market design that might increase grid reliability in exchange for statewide bill increases — at the expense of Texas’ most vulnerable energy customers.
In the aftermath of Uri, state lawmakers enacted a set of bills to bolster reliability and get electric utilities’ finances back on track. House Bill 4492 and Senate Bill 1580 delivered the most drastic relief; the pair of bills permitted electric providers to securitize charges and issue ratepayer-backed bonds to recoup their excessive expenses from the storm.
The state’s mechanism to help utilities avoid crushing debt ironically prolongs the shadow of Uri: utilities forced to buy high-priced electricity during the storm will pass securitization charges down to their customers over the next 30 years.
Now in the 88th Legislative Session, grid reliability is again at the forefront as legislators attempt to strike a delicate balance between consumer demands for low costs and high reliability. There are multiple bills under consideration. The Texas Senate recently approved a proposal to construct 10,000 MW of backup power and another to incentivize electric providers to construct dispatchable generation closer to their customer bases.
But it’s the PUCT's proposal that's attracted the most attention — and controversy.
After considering and eliminating a host of market redesign options, in January the PUCT unanimously approved a plan for a performance credit mechanism. The PCM is a novel concept aimed at encouraging power providers to construct — or to not decommission — so-called “dispatchable generation” facilities. Unlike renewable sources that depend on solar and wind conditions to provide power, dispatchable power facilities typically run on nuclear, natural gas, or coal resources that can turn on anytime and ramp up quickly. Under the proposed market design, generators that guarantee they’ll be available during high-demand events can sell performance credits. On the other end, municipal utilities, rural cooperatives, and other electricity retailers purchase performance credits to ensure they’ll have capacity when it’s needed most.
The credits offer generators a financial impetus to invest in new power plants and, theoretically, help retailers and consumers avoid price spikes when demand for electricity is high. Still, the promise of financial certainty comes at a cost: by the PUCT’s own estimation, at least $460 million in new system expenses will inevitably be passed down to Texans’ electric bills.
The PCM has garnered early support from Gov. Abbott, and, predictably, from natural gas producers who are typically edged out by cheap wind and solar in the Texas market.
Standing in opposition are market monitors, environmental and consumer advocates, and high-usage industrial customers. Critics claim that the PCM is at best, unnecessary, and at worst, will be ineffective at meaningfully increasing grid reliability. The most cogent argument against the redesign points out that the PCM would not guarantee the development of any new generation capacity but would impose guaranteed new costs on Texas consumers.
And while some consumers may be content to trade an increase in their monthly bill to keep the lights on during a winter storm or a heat wave, a significant segment of Texas’ population simply can’t afford to be a pawn in the PUCT’s experimental market design.
Electricity price increases would impact nearly all consumers, but would especially burden the nearly one-third of Texas households that struggle to afford their energy bill. This hardship, termed “energy insecurity,” disproportionately affects the 3.5 million Texans living below the poverty line. For low-income households, even a minor increase in monthly expenses can mean going without essentials like food or medicine in order to pay the energy bill — if they can pay the bill at all.
Nonetheless, the brunt of an unreliable electric grid would, too, fall most heavily on low-income households. Uri’s multi-day power outages left many low-income Texans with not only steep electric bills, but the unanticipated costs of medical emergencies, property damage and spoiled food. A late amendment to House Bill 4492 — the bill that lets utilities recoup their stranded costs through securitization and draws down $800 million from the rainy day fund to pay debts to ERCOT — would have funded one-time $350 assistance payments for residential customers. The proposal never made it out of the Texas House.
Although the PUCT has put all its weight behind the PCM design, the Texas Legislature should give serious consideration to more financially prudent alternatives. Interest groups and energy market experts have put forth two promising models: a Dispatchable Reliability Reserve Service and a Direct Procurement mechanism. The first option directs revenue toward dispatchable generation specifically at the times that demand forecasts indicate that reserves will be needed. This targeted approach trims annual costs down to $1.7 billion, compared to the PCM’s whopping $5.7 billion of additive market costs. The second option, direct procurement, is a backstop plan to secure capacity from newly-built, dispatchable resources on a one-time basis. In combination, both options would dramatically cut down the cost of shoring up Texas’ grid and still deliver meaningful improvements in reliability.
For now, the fate of the PCM or any other reliability proposal lies with the Texas Legislature. If approved, grid relief would not be immediate or even quick. Estimates for implementation range from 18 months to four years. In the interim, it is crucial that lawmakers iron out the details to keep consumer costs minimal and deliver on reliability. To start, the PUCT must establish a penalty for companies that do not fulfill their performance obligations, above and beyond the loss of potential revenue from the performance credit. Instead of anticipating the organic addition of new generation, it should be mandated that a portion of performance credit revenue be allocated to new capacity development. Lastly, electric utilities should cap the proportion of PCM costs that can be passed to low-income ratepayers, and utilities’ PCM transactions should be independently scrutinized to ensure that any costs passed down are necessary and prudent.
The PCM is a gamble that may work, but it will come at a cost. The Texas Legislature should consider other — and better — options for Texans.
