State utility regulators Thursday approved a broad blueprint for a potential overhaul of the Texas electricity market that's aimed at incentivizing private investment in new power plants, despite criticism that the plan is untested and will add to costs for consumers without guaranteeing that outcome.
The measure approved 5-0 by the Public Utility Commission of Texas now will be considered by state lawmakers, who could endorse it, change it or scrap it altogether in favor of something else.
The utility commission will "tap the brakes (and) defer to the Legislature to consider their options throughout the legislative session" before going forward with implementation of the market redesign, said Peter Lake, the commission's chair.
Still, the plan — called the "performance credit mechanism," or PCM — already has the backing of Gov. Greg Abbott in addition to Thursday's unanimous vote by the utility commission.
Mark Jones, a political science professor at Rice University's Baker Institute, said that means the plan is in the "pole position" to win approval from lawmakers, who he said are under pressure during the just-started legislative session to take action to bolster the long-term dependability of the power grid.
"It's the default plan, unless (lawmakers) can come up with a credible alternative" before the session ends in May, Jones said. "It gets the ball rolling and sets the agenda. They will have to accept or modify it, or provide a viable alternative."
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Part of wider plan to shore up Texas power grid
The potential redesign of the state's power market, which is managed by the Electric Reliability Council of Texas, is part of a broad effort to make the power grid more reliable in the aftermath of its near collapse during severe winter weather in February 2021. Extensive blackouts during that disaster contributed to hundreds of deaths and billions of dollars in property damage statewide.
Boiled down, the performance credit mechanism would obligate electricity companies that provide power to homes and businesses to buy "performance credits" from generators that earn them by being available during times of greatest strain on the power grid. The credits would be awarded to generators after the close of compliance periods, based on evaluations of their availability.
The utility commission's vote culminates about 18 months of efforts to devise a plan aimed at making the Texas electricity grid more dependable long-term by encouraging more private investment in what's known as dispatchable power generation, meaning plants that can turn on and off quickly depending on need.
The measure approved Thursday is largely a blueprint, however, with many details and decisions — ranging from technical specifications to measures aimed at preventing market manipulation — remaining to be worked out. Officials have estimated that the performance credit mechanism could take two to four years to implement.
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Supporters say the plan will create the necessary financial incentives to spur construction of more dispatchable generators while preserving free-market principles and the core "energy-only" status of the state's grid, because the credits would only be awarded for performance. In energy-only markets, generators are paid solely for electricity that's actually delivered, unlike capacity markets, in which they're paid for their readiness to produce power if needed.
Dispatchable generation in Texas typically refers to plants fueled by natural gas or other fossil fuels, although wind farms and solar arrays could be considered dispatchable if paired with batteries for energy storage.
Performance credits would provide "no guarantee of revenue" for generators, Lake said. "The only guarantee is the opportunity to compete for a pool of revenue" based on actual performance during critical periods
He and some other commissioners pushed back on the notion — first raised in a consultant's report paid for by the commission and then repeated by skeptics — that the performance credit mechanism is untested because it hasn't been implemented anywhere else. Instead, they described the plan as a hybrid of well-established measures.
"All of these components are known," Lake said. "There is no grand mystery out there" as to how the components will work.
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Will plan result in new power plants?
But the plan also has been criticized because it will add to costs for consumers without obligating companies that earn the credits to build new power plants.
According to a report for the utility commission released in November, the performance credit mechanism would result in an extra $460 million in annual system expenses by 2026, an increase of about 2% over projected system costs if it isn't implemented. That's on top of billions of dollars in additional costs already being passed on to ratepayers in the wake of the 2021 grid disaster, both to pay huge expenses racked up by some electricity providers during the calamity and to operate the grid more conservatively in its aftermath.
Ratepayers "really can't shoulder much more," said Tim Morstad, associate state director for the consumer advocacy group AARP Texas. Electricity "is a must-have service, and every time something else gets pancaked on to electricity rates people get cut off" and lose power because they can't afford to pay their bills.
He also said he's not convinced performance credits will accomplish the goal of spurring construction of new generators deemed dispatchable.
Texas Competitive Power Advocates — a trade group for power plants in the ERCOT market — is backing the performance credit mechanism and has said its members are committed to building more than 4,500 megawatts of generating capacity, or enough to power 900,000 homes, if the plan is adopted "under the right framework."
Morstad said the pledge is far from a binding commitment.
"Color me suspect of power generators saying, 'Well, just give us this next thing, which will give us more money, and we promise to build power plants.' I have been looking at this too long to buy that hook, line and sinker."
Some members of the utility commission voiced similar concerns, saying they'd like to see measures put in place to determine if awards of performance credits correspond to construction of new power plants.
"We've got commitments for (generation) resources, but we don't have anyway to ensure that they are going to be here," Commissioner Jimmy Glotfelty said.