Overhaul plan for Texas grid a risky gamble
To hear Peter Lake tell it, figuring out how to keep Texas’ electric grid going during peak demand is akin to keeping a spare car in the driveway and knowing it will work when you need it.
The technical term for this is “dispatchable” energy, an electrical source such as natural gas that can be turned on or off quickly and is not weatherdependent like wind and solar. During Winter Storm Uri, natural gas facilities weren’t reliable enough and new weatherization requirements are meant to shore them up. Wind and solar energy, meanwhile, have grown rapidly in Texas, which presents a challenge. For roughly 30 hours per year, models suggest that the sun won’t be shining and winds will slow to a gentle breeze at times of peak demand.
Lake, who chairs the state’s Public Utility Commission, is trying to solve this problem with a calculated gamble to overhaul Texas’ electric grid with an untested, unproven, marketbased model. With thousands of people relocating to Texas every day, the state eventually will not have enough energy supply to meet their demand.
That’s where the car metaphor comes in. The sales pitch Lake delivered to the editorial board this week — and one he has been making to the state Legislature, which must approve the proposal — is called the Performance Credit Mechanism (PCM) model. The commission is proposing to pay generators of dispatchable energy in advance to have power available during peak demand hours, which he believes will lead to a more reliable grid at only a marginally higher cost. If the generators deliver during this period, electric retailers would be obligated to purchase a “performance credit” from them, giving generators an additional revenue source.
Consumers, according to Lake, wouldn’t be paying for the car in the driveway all the time. The ignition would be turned on, just not in gear.
“If ERCOT needs it to go into gear and start driving, it’s ready to go,” he said. And only when it’s driven would the consumer ultimately pay.
Ever since the commission, which regulates Texas’ grid, rolled out this proposal in November, this board, as well as many state lawmakers, have been mostly skeptical. We have questioned why the commission went against the recommendations of a consultant it paid to evaluate different electric market concepts in favor of a model that no other state in the nation uses. We wondered why it would entertain a proposal that even its biggest proponents acknowledge would increase our monthly electric bills, and how this new market design would respond to more frequent extreme weather. We challenged the commission to instead aggressively invest in energy efficiency measures that could free up enough energy to serve about 9 million Texas households.
In our meeting with Lake, he engaged with many of these questions in good faith, even if some of his answers left us wanting. It’s clear that Lake, who was appointed by Gov. Greg Abbott to lead the PUC in April 2021, is a smart leader making a genuine effort to find a solution. We respect his strong conviction that the PCM model can work within Texas’ independent electric grid, and his candid acknowledgement that overhauling the market will cost money — up to $460 million annually — a burden that will inevitably be paid by business owners and residents.
There are aspects of the Performance Credit Mechanism concept that we like, particularly that it is designed to adapt to an ever-shifting energy market as the nation transitions away from fossil fuels. PCM doesn’t pick winners and losers in the energy market. It simply designates a segment of market revenue for “anything with an on switch,” as Lake put it. The spare car in the driveway can run on natural gas, hydrogen, or nuclear, and perhaps even battery storage. If it all works as planned, having readily available dispatchable energy will eliminate the crisis days that push the grid to the brink.
Our concern, however is that in the short-term, dispatchable energy sources will look more like the old Pinto you have in your garage rather than a sleek, new BMW. After all, why would a company invest in building a new gas plant if the price of gas increases and battery storage technology proves to be cheaper? Lake acknowledged that “some old clunkers” will be staying online longer than their shelf life, but added that if their machinery is truly not reliable, under the PCM model, those generators wouldn’t get paid. Whether and how much they would be penalized, however, is not clear.
It’s critical that the commission come up with some sort of penalty for companies that don’t perform when they promise to, beyond simply losing the revenue from the performance credit.
Lake acknowledged that these are among the many technical questions about PCM that the commissioners don’t have answers to yet. They are listening to electric market participants, customer representatives, generators and cities to fill in some of the blanks on how the hours of need for dispatchable generation are going to be determined, how much exactly these generators will get paid, and which factors will dictate whether the electric grid is under stress.
At minimum, it is clear that PCM will require more study and hearings before the Legislature approves it. In the meantime, some interest groups are proposing a new model, called a Dispatchable Reliability Reserve Service (DRRS), similar to what ERCOT’s Independent Market Monitor has recommended. This market concept would direct ERCOT to provide annual revenue of approximately $1.7 billion directed toward dispatchable resources, but with a more defined time period for when they would be needed. It would rely on ERCOT’s forecasting models to calculate the power reserves the state needs, and allow generators to competitively bid to provide the cheapest and most reliable form of electricity.
Lawmakers should continue assessing alternatives and PCM, a proposal with both potential and risk. The state can’t afford to get it wrong.
Proposed market-based model, and alternatives, need further study.