Regulators debate power grid overhaul

A much-anticipated report assessing proposals to boost the Texas power grid's dependability has recommended that the state move away from some elements of its nearly three-decade-old deregulation stance, by requiring electricity providers to procure a certain amount of advance "reliability credits" from generators.

But members of the Public Utility of Commission of Texas, who discussed the report during a meeting Thursday, aren't sold on the plan. Some said they favor an alternative they described as more market-driven, in which electricity providers would instead be required to buy performance-based credits from generators.

Performance-based credits would be earned after the fact based on a generator's availability to provide power during periods of high demand, rather than in advance.

Commissioner Will McAdams called the performance-based credit system a potential "Texas-based solution" to increase the reliability of the grid, saying it "fundamentally appears to create a unique solution for our needs."

Both ideas, as well as other proposals assessed by Colorado-based E3 Consulting in the report released Thursday, are intended to encourage building more power plants in the state.

The Public Utility Commission — which oversees the Electric Reliability Council of Texas, the manager of the state's power grid — has made no decisions on the proposals yet and intends to solicit public comment on the report over the next few weeks. The goal is to adopt a final redesign plan early next year but refrain from implementing it until after state lawmakers have a chance to weigh in when the legislative session begins in January.

The commission, at the direction of the Legislature, has been attempting to overhaul the Texas power market to prevent a repeat of the February 2021 grid disaster, when extensive blackouts during a severe winter freeze contributed to hundreds of deaths and billions of dollars in property damage around the state.

As part of the effort, E3 Consulting has been reviewing various redesign mechanisms since May under a contract with the commission.

Still, the consulting firm's key recommendation in its report released Thursday — the creation of a system based on reliability credits, called a forward reliability market — appeared to go too far for some commissioners.

Variations of such a system have been discussed numerous times over the past year by commissioners and assorted industry analysts, with some — including Peter Lake, the commission's chairperson — at times voicing support for the concepts. But a common criticism has been that implementation would constitute a big move away from free-market principles.

Currently, ERCOT operates a so-called "energy-only market," under which generators get paid only for power that's actually delivered. Price spikes during periods of high demand are expected to provide sufficient incentive for companies to build enough power plants to meet that demand.

Doug Lewin, president of Austin-based energy consulting company Stoic Energy, said the E3 Consulting recommendation, if enacted, would be a significant step toward creation of a "capacity" market, in which generators get paid in advance to ensure they're available during times of peak demand.

"This would move us much more toward what I would call an administered market, as opposed to a free, competitive energy-only market," Lewin said. "E3 went ahead and recommended a straight-up forward capacity market."

Lake said during Thursday's meeting that he considers a system that instead uses performance-based credits to be a better idea, partly because it wouldn't pay generators "just for owning something."

Under such a system — which is being called a performance credit mechanism — "if you want to get paid for being reliable, you've got to commit in advance and you've got to be there when you say you're going to be there," Lake said, "There is no notion of a capacity payment just for sitting on the sidelines."

According to the E3 Consulting report, such a market would have a "total system customer cost" of about $22.8 billion in 2026. That's about $460 million more than what the current energy-only system is expected to cost in that year, the analysis indicates.

"If implemented, the (performance credit mechanism) would deliver ERCOT a 10 times improvement in reliability for about 2 to 3% of an increase in cost, which is a tremendous deal," Lake said.

In its assessment of the potential performance credit mechanism, however, E3 Consulting noted that "it has not been implemented in any market in the world to date," meaning there could be challenges in getting such a system up and running.