Don’t California my Texas (electricity market)

Texas Power Podcast host Doug Lewin is joined this week by Dr. Joshua Rhodes, who is a research scientist at the University of Texas at Austin, a non-resident fellow at Columbia University, and a founding partner and the CTO of IdeaSmiths LLC, to discuss the Texas electricity market redesign and the results of a highly-anticipated report on the cost and effectiveness of three proposals before regulators. Subscribe wherever you get your podcasts.

Public Utility Commission of Texas meetings are typically staid affairs. On December 2, 2021, the PUC of Texas held one that was anything but. The Commissioners came down from the dais and sat around a squared horseshoe of conference tables, next to or facing each other. 

It was an internal discussion for the world to see. 

And it was tense.

Nine months after the catastrophic grid failure that cost hundreds of lives and shut down the state for days, the commissioners met to talk about the future of the Texas electricity market. There were four commissioners at the time, and the proposal pushed by Chairman Peter Lake — known, suspiciously banal-sounding, as the Load Serving Entity Obligation, or LSEO (more on that later) — was clearly unpopular among the other three. 

Commissioner Jimmy Glotfelty said he was “wary” of the LSEO, saying it would likely force some retailers out of the market and undo the competitive system set up by the Legislature a generation ago

Commissioner Will McAdams said the LSEO would cost too much, pointing to the wealth of data showing that very effect in other markets. 

Commissioner Lori Cobos also started to voice “deep concerns” about the LSEO, at which point the Chairman cut her off and snapped: “You have concerns about everything” (45:55 here). 

Like I said, it was tense. 

Big price tag, small improvements

Texas Capitol on a snowy day in 2021 1
The Texas Capitol as seen in February 2021, when millions of Texans went without power due to the impact of Winter Storm Uri.

The one point of agreement: the LSEO needed a detailed analysis. Last week, it finally got one. 

It showed the three commissioners were right to be wary and concerned. Unfortunately, it took a third-party group to produce it.

The Texas Consumer Association report, authored by the firm ICF, modeled reliability and costs for each of the three proposals under consideration by the Commission as part of the next phase of Texas’ electricity market redesign. The LSEO is forecast to cost $8.5 billion in 2025 — a 35% increase in electricity costs in that one year alone — and $22.8b from 2025-2030. 

Costs are one problem; philosophy is another. The LSEO effectively abandons Texas’ energy-only market. Instead, it mimics s a capacity market much like California’s: a short-term forward market in which the state mandates purchases, and buyers can’t see what other buyers are paying (as they would with other commodities, and as they do in ERCOT’s energy market today). 

As one of the state’s top coal lobbyists put it: “nobody who likes the LSEO would like me saying this, but it is the way California does its market.” 

Worse, this model wouldn’t improve reliability all that much. According to the report, it would take ERCOT from an average of five large-scale outages in ten years (where it is now) to about four. 

For $22 billion. 

Where does that money go? Straight to the bottom line of existing generators, according to the study. Who thought that was a good idea? Well, existing generators — specifically NRG and Exelon, two of the largest generators in the state. 

The two corporations proposed an LSEO system in a report that was submitted to the state in October 2021. The report was written by a company called E3 Consulting. More on them in a bit. 

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NRG’s Limestone Power Plant and gas well near Jewett, Texas. (Courtesy: Roy Luck/Flickr)

The other options on the table

The Consumer Association report also analyzed two other market redesign proposals being considered by the PUC. (I discussed all of these proposals with Joshua Rhodes on the latest episode of the Texas Power Podcast.) Both would cost far less money, and each would deliver as good or better reliability. 

The first, known as the Backstop Reliability Service (BRS), was put forward by Commissioner Cobos a year ago. It’s basically a way to maintain old fossil-fuel plants as they retire and keep them operational. The Consumer Association study found BRS would result in less than two large outages every ten years at a cost of $2.6 billion over the next eight years. That’s twice the reliability that the LSEO would deliver for 90% less money.

The other redesign proposal is the Dispatchable Energy Credit (DEC) program. At that meeting in December 2021, Commissioner McAdams, who put forward the DEC proposal, begged Chair Lake to include DEC in the PUC’s market redesign plans (jump to the 40:30 mark here). It would give generators credits for high-efficiency, fast-acting gas plants and/or big two-hour batteries. It’s designed to get “new steel in the ground,” a result many legislators fervently want.

The DEC program would deliver reliability outcomes similar to the LSEO (four major outages every 10 years). But in contrast to the LSEO’s $22 billion price tag, the DEC program would cost just $1.3 billion cumulatively in the first several years, then would actually have negative costs $2 billion each year from 2027–2030. Yes, consumers would save money while matching the LSEO’s reliability benefit.

The report also analyzed the post-Uri changes that the PUC has made over the past 18 months. Those so-called Phase 1 changes have cost Texans well over $1 billion so far. For that, they’ve increased reliability only slightly. Two years ago, the state would have expected six outages every 10 years. Now, it’s five every 10 years.

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This is not the only study of the market redesign proposals. A few days after the election, the PUC likely will release a study that’s supposed to take an unbiased look at the LSEO and other alternatives. That study is being conducted by E3 Consulting — yes, the same firm that recommended the LSEO on behalf of NRG and Exelon last year. 

It’s a clear conflict of interest. Wonder what they’ll recommend…

Texas copying California? On purpose?

So what are the problems with the LSEO? Why is it such a bad idea? 

First, it doesn’t solve for February 2021. As the UT Energy Institute and NERC and FERC concluded in their post-mortem reports, the statewide blackouts were mainly triggered by a failure of gas supply and operational capacity. Gas supply, and gas and coal power plants, were not sufficiently regulated, operators failed to winterize them, and those resources froze, or simply shut down in advance of the storm.. We have enough gas and enough power plants, but they couldn’t deliver or operate because standards weren’t adopted or weren’t enforced.

Commissioner Glotfelty, appearing on the Energy Unplugged podcast last week, said: “There are challenges with LSEO in other markets like CAISO [California],… they still have resource adequacy problems. Question is, will LSEO solve the problems you’re trying to fix, or is it going to add a layer of bureaucracy that makes the market less efficient? How does the structure incent the resource you want?… It’s not easy, in my opinion, to say LSEO will fix the problems, because there are many that it won’t.”

That “layer of bureaucracy” he mentioned is a huge part of the LSEO’s added costs. Texas’ current market focuses on energy buyers and sellers; the LSEO shifts that focus to administrators and regulators, who functionally dictate which kinds of power have value and which don’t, and how much needs to be produced, sold, and bought. In other words, value in the LSEO model isn’t based on what someone will pay — it’s mostly based on what an administrator decides it’s worth. 

It’s a highly regulated, centrally planned market. Just like California’s. 

The LSEO also shifts industry incentives: from providing the best product at the lowest cost, to influencing bureaucrats. 

The competition becomes less about the players, and much more about the refs.

Some generators complain about “the missing money” from the market. The LSEO is intended to raise costs so it should be no surprise that the modeling done for the Texas Consumer Association showed $8.5 billion in added costs in 2025 alone, and possibly as high as $30 billion.

To adopt this market, Texas leaders would have to abandon a market that has delivered low prices for a quarter century, and without creating a much more reliable system. 

Watch your wallets, Texans

ERCOT Control Room4
ERCOT control room (Courtesy: ERCOT)

No matter what, modernizing and right-sizing Texas’ power grid represents a massive challenge for policymakers, regulators, stakeholders, and the general public — who, by the way, have yet to be invited a single town hall or meeting to weigh in on the future of Texas’ energy market. 

Every single Texan has a stake in ensuring reliability and affordability. These must be co-equal goals. You can’t choose one over the other. You can’t have reliability “at any cost” as Alison Silverstein told Canary Media

Happily, there are better ways to redesign Texas’ energy market; the TCA report illuminates some of them. Bymixing DEC and BRS programs, Texas would likely get down to about one major outage every decade, which is the industry’s typical standard.

And with a meaningful investment in energy efficiency and demand flexibility — including finding ways to help homeowners store and use power in EVs and wall-size batteries — and transmission, Texas’ system could become a benchmark for reliability. All at an affordable cost that won’t send families and businesses running to other states, looking for cheaper electricity.

Under this system, nearly everyone would win. The only ones who wouldn’t: big corporate generators, which wouldn’t reap the same customer-funded windfall as the LSEO would create. They think solving Texas’ power challenges requires Texans to pay them many billions more every year, and they got their own consultants inside the PUC to analyze the plan that they submitted in the first place.  

Texas consumers should watch their wallets.


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Author: Doug Lewin