In efforts to prevent a repeat of the February disaster that left millions without electricity, Texas policymakers continue to disagree over the cause and appropriate mitigation efforts. The blackouts from the storm led to spikes in power prices and the deaths of at least 151 people.
Republican leadership was quick to criticize renewables for the role they played in the blackouts, with Gov. Greg Abbott, R, claiming on national television that renewables caused the outages. They “cannot be dispatched” by the Electric Reliability Council of Texas (ERCOT) and therefore “cannot be relied upon,” said state Sen. Kelly Hancock, R, who chairs the Senate Business and Commerce committee. Hancock sponsored Senate Bill (SB) 1278, which would impose reliability costs on “intermittent generation.”
But the grid operator’s post-event data showed Texas renewables over-performed winter forecasts by 6.34 GW while natural gas underperformed by 15.8 GW, according to an assessment of ERCOT data by economics professor Peter Cramton, who resigned from his position as independent director of ERCOT’s board after the grid failure.
“There is no reason to attack renewables with costs for reliability that subsidize fossil fuels,” Cramton said. “But we cannot accept this critical infrastructure failure. Regulators must reform the natural gas system and design reliability into the transitioning Texas electricity market.”
The many bills addressing power system weatherization and ERCOT’s revenue shortfall divide Texas energy analysts and policymakers like Cramton and Sen. Hancock. There is little disagreement, however, over skepticism of the $8.3 billion proposal by Warren Buffett’s Berkshire Hathaway Energy (BHE) to operate emergency natural gas generation outside Texas’s deregulated power market rules.
But beyond punishing specific resources and undoing deregulation, there are available and affordable solutions for reliable electricity service, many in the debate said. For example, a flurry of legislation in the state legislative session ending May 31 proposed solutions that would better weatherize the power grid, improve reliability requirements and resolve power providers’ $2.9 billion debt to ERCOT.
A proposal to shift costs to renewables
Hancock’s controversial SB 1278, passed by the Senate on April 14, would alter the way reserve generation called “ancillary services” are procured by ERCOT to protect reliability.
Many say SB 1278 is not the solution.
It “is a terrible idea because renewables did not cause the outage, and imposing costs on them will not make thermal generators available when we need them,” said Texas energy consultant Alison Silverstein, a former adviser to Federal Energy Regulatory Commission Chair Pat Wood III, who also previously worked at the Public Utilities Commission of Texas (PUCT).
ERCOT’s April 27 analysis found at least 20% of the outages were due to natural gas supply shortages, according to Cramton.
“The Texas legislature tends to focus on easy superficial solutions,” Silverstein added. “SB 1278 is the natural gas industry trying to avoid blame.”
“Texas needs technology-neutral performance-oriented reliability rules with penalties for failing to deliver,” she said. “The goal is a high quality market product that offers an incentive for fuel availability under particularly challenging weather conditions.”
The Hancock bill “has nothing to do with the February event,” agreed Michael Jewell, a member of the Conservative Texans for Energy Innovation board and managing partner of energy and infrastructure policy consultant group Jewell & Associates. “It is just punitive to renewables.”
Utilities, including the CEOs of Duke Energy, NextEra Energy and Southern Company also protested the bill in an April 14 letter to lawmakers, saying the legislation would “unjustifiably” shift “onerous new cost burdens” to renewables. The February outages were “primarily due to insufficient thermal power generation,” Duke Energy Renewables Managing Director for Business Development Spencer Hanes added to Utility Dive.
To ease the impact of Hancock’s proposal, Sen. Nathan Johnson, D, added an amendment with two critical stipulations. One would require costs imposed by SB 1278 to be “consistent with cost-causation principles,” meaning generators would only be required to pay for reliability issues that PUCT rules determine they caused. The other stipulation would only impose costs on new ERCOT generation.
“The amendment shifts final cost decisions to regulators,” Johnson said. “The charges on intermittent generators in proportion to cost causation could be zero, because all ancillary services needs are not attributable to them.”
Stakeholders dubious of the value of SB 1278 in solving system reliability issues said the amendment may not necessarily improve the bill.
The Johnson amendment “absolutely was intended to help, but cost causation here is unclear because reliability needs vary with customer demand and, like wind and solar, traditional generators can go offline,” Jewell said.
The Hancock proposal is “vague,” and it “could take months or more at the PUCT to determine the appropriate cost-causation principles and the proper charges and remedies,” added Vice President of AB Power Advisors Caitlin Smith.
PUCT and ERCOT proceedings on how to implement the bill “were going to happen anyway,” said Hancock.
Meanwhile, a broader legislative push may bring essential changes to how the region weatherizes its power infrastructure.
Weatherization and how to pay for it
Analysts say determining how to implement and pay for stronger weatherization protocols may be more important than any reliability metric lawmakers might come up with.
“There is probably not a capacity market or planning reserves scenario that could meet February’s nearly 50% system outages,” AB Power Advisors’ Smith said. But “operational issues could be addressed with weatherization or with better coordination of the natural gas supply.”
Omnibus bill, SB 3, which passed the state Senate including SB 1278, also addresses other critical weatherization questions, though debate over whether to use securitization or some other tool to pay for grid-hardening remains.
Some of the legislature’s weatherization proposals include mandating some of the 2011 recommendations laid out in a joint report by FERC and North American Electric Reliability Corporation staff, following a a similar, but less severe, 2011 winter storm. The report recommended, among other things, that generators and suppliers plan and prepare for more severe weather and expand and assure the readiness of reserves.
Some of its recommendations were followed to some extent following the 2011 storms, said Beth Garza, energy and environmental policy senior advisor for consultant R Street and former Director of ERCOT’s Independent Market Monitor. “But the current weatherization proposals must include sufficient standards for what Texas just saw.”
Several legislative proposals require regular reporting and emergency planning by Texas electricity and natural gas regulators, or new multi-agency coordinating entities. Others define weather indicators, such as temperature, that should trigger accelerated preparations and responses.
Another bill introduced by Hancock, SB 1749, proposes coordination between electricity and natural gas suppliers to prevent critical loads from being shed during emergencies.
Addressing weatherization will likely happen this session, according to Johnson. But it “will require political will and either private or public capital, because it has to be paid for.”
Many Texas lawmakers are talking about addressing the costs of weatherization, power system reliability needs and the $2.9 billion ERCOT revenue shortfall from unpaid bills following February price spikes through securitization, AB Power Advisors’ Smith said.
But securitization faces obstacles in Texas.
Hancock’s securitization-enabling SB 1580 was passed by the Senate and accepted by co-ops that incurred “the vast majority of the shortfall,” Hancock said. And “securitization is available in the market for others,” he added.
“It is not surprising Texas wants to tap the financial markets, but securitization is normally used in a regulated environment,” said Harriet Moyer Aptekar, a national securitization consultant at Crest Policy Consulting.
There are specific criteria Wall Street rating agencies require to determine whether securitized bonds are stockholder investments that qualify for AAA ratings and low interest rates, Moyer Aptekar said. “Electric co-ops and deregulated electric utilities in Texas don’t have the regulated oversight to assure the necessary irrevocable, non-bypassable charge on ratepayer bills,” she said.
To enable securitization, other states have passed legislation that meets rating agency criteria. At least eight versions of securitization-enabling legislation for Texas utilities and electric cooperatives are in the current legislative process. There are also at least four versions for financing weatherization.
But “securitization is not magic,” said Mayer Brown Attorney and securitization analyst J. Paul Forrester. In legally-structured pools of electric co-ops, other electric utilities and natural gas suppliers, the bond credit rating is set by “the least creditworthy obligated entity.” That would mean the bonds would likely have higher interest rates that might not significantly reduce the costs for the revenue shortfall, weatherizing and enhancing reliability.
Enabling securitization could allow regulated utilities and gas suppliers to obtain low interest bonds to use the tool for weatherization or meeting certain ERCOT reliability requirements, he added.
But it is unlikely to resolve obligations to ERCOT, Forrester and Garza agreed. It “is not exactly an easy payment plan” and could add large monthly costs on customer bills, Garza said.
Uncertainty on these issues gave Warren Buffet’s Berkshire Hathaway Energy an opening to propose its own solution.
Emergency supply or market solutions?
BHE’s proposed $8.3 billion Texas Emergency Power Reserve (TEPR) would consist of ten 1 GW natural gas plants and onsite stored liquid natural gas supply and recieve a 9.3% guaranteed rate of return, BHE Infrastructure Group President and CEO Chris Brown told the April 20 House State Affairs Committee session.
The cost for the average Texas residential customer “would be around $3 per month” over the 40-year life of the project, with rates varying by customer class, Brown told Utility Dive. But it would return $1 billion per peak season for failing to deliver during emergencies, and would rebate profits earned during operation to customers.
TEPR would have returned $9.4 billion to customers in February, “more than offsetting the $8.3 billion cost,” Brown added. And the units would be designed to burn 100% hydrogen to avoid becoming stranded assets if Texas moves away from natural gas.
Power plant developer Starwood Energy made a similar proposal in an April 23 letter to ERCOT. It would build an $8 billion, 11 GW project, without stored LNG, for a guaranteed return “not to exceed 9%,” Starwood CEO Himanshu Saxena wrote.
Most market participants oppose using a guaranteed return to address reliability, AB Power Advisors’ Smith said. “I have not heard a lot of receptivity,” Hancock told the Wall Street Journal. A guaranteed rate of return “would be a gigantic change to the way we provide energy,” Johnson agreed.
Market solutions would include ancillary services or reliability market products that ERCOT defines and procures on a competitive basis, Cramton, Garza and Silverstein agreed.
Capacity markets and resource adequacy requirements have had reliability failures during recent polar vortexes and heat waves, Garza added. Now, ERCOT’s energy-only approach has been challenged. “They started out as two extremes of market design,” she said. But “this may be finding a common approach in the middle.”
The February event was “a wake-up call,” former ERCOT board member Cramton wrote in his independent analysis on the crisis. “Rapid innovation in how electricity is produced and consumed creates challenges and opportunities” and “market designers need to find effective ways of inducing public and business behavior to improve reliability” because the crisis made it clear “markets need to work better.”