During the 87th regular legislative session, the Texas Legislature passed several bills to address energy-related issues resulting from Winter Storm Uri. Together, the legislation required an overhaul of the ERCOT board of directors, expanded the Public Utility Commission of Texas (“PUCT”) from three to five members, imposed weatherization requirements on generation and transmission assets in ERCOT and on certain components of natural gas infrastructure, and directed a redesign of the ERCOT market to ensure grid reliability. As of September 1st , all of these laws were effective.

On September 27th, the Senate Business and Commerce Committee held a hearing to check-in on implementation of these energy-related initiatives. The following provides an overview of discussions with three panels of invited speakers from ERCOT, the PUCT, the Railroad Commission (“RRC”), and the stakeholders.

At the outset of the meeting, Senator Nichols indicated that the current market does not create incentives for new dispatchable generation; rather, ERCOT has been adding non-dispatchable generation for the last ten years. Conventional generation plants are now faced with deciding how long they can run before it is more economical to shut down. He classified this market construct as not being representative of a “free” market, but rather a “distorted” market.

Similarly, Senator Schwertner stated at the top of the meeting that Texas needs more energy, whether this comes through market structure changes, an energy reserve system, or other incentives (even if the government funds them) such as through loan programs. He indicated he would be willing to entertain any idea as to what the best path forward should be for Texas to meet its long-term reliability needs.

Panel 1: Chairman Peter Lake (PUCT) /Brad Jones (ERCOT) /Wei Wang (RRC)/Nim Kidd (TDEM)

Chairman Peter Lake of the PUCT provided an update on the various work sessions and rulemakings the Commission has undertaken over the past several weeks to address ERCOT market re-design, weatherization, and critical natural gas designation and mapping. He indicated the Commission will have a blueprint for ERCOT market design changes by the end of 2021. When asked by Senator Whitmire, he clarified that those changes will not include joining another adjacent grid because this would be beyond the direction of SB 3.

Interim President and CEO of ERCOT, Brad Jones, described ERCOT’s improved communications with the PUCT and others, as well as steps ERCOT has taken to operate the grid more conservatively and what he anticipates for the future of the ERCOT market. This will include integrating distributed generation resources into the market design by the end of this year. Senator Campbell asked Mr. Jones to indicate which resources are most dispatchable in the ERCOT market currently, to which Mr. Jones responded that batteries and load are tied in terms of which resources respond the quickest.

Executive Director Wei Wang provided an update on the RRC’s rulemaking to designate critical natural gas facilities. This rule is intended to ensure adequate gas supply to generation during an energy emergency. He also touched on weatherization issues. Mr. Wei received criticism from the Committee on the length of time it has taken to initiate the RRC’s required rulemakings on these issues, as well as on certain facets of the proposed rule. Since the hearing, the RRC has announced it is taking additional public comments on these rulemakings. Additionally, Senator Menendez inquired as to whether we should be looking into natural gas proceeds received from the winter storm to determine whether price gauging occurred. Mr. Wang indicated the RRC has not yet determined that market manipulation occurred from what his agency has reviewed.

Panel 2: Amanda Frazier (Vistra)/Randa Stephenson (LCRA)/Mike Alvarado (WattBridge)

Amanda Frazier, on behalf of Vistra, addressed ERCOT market redesign proposals. She expressed concern over any proposal that would include government subsidization of any generation type and advocated for market-based solutions to the reliability problem in ERCOT. She canvassed Vistra’s proposed changes which would include lowering and changing the slope of the operating reserve demand curve, as well as introducing a new dispatchable standby reserve product. Senator Schwertner expressed concern that Vistra’s proposal would not “guarantee” investment in new thermal generation in Texas. He acknowledged that demand response should be part of the solution to ERCOT’s reliability problems, but that it cannot be the only solution without additional “supply.” Senator Nichols suggested that dispatchable power is more valuable than non-dispatchable power, but that the current ERCOT market values those electrons as equally. He asked why we do not pay dispatchable resources more money. Ms. Frazier indicated that Vistra would rather see that sort of incentive implemented in ancillary service markets.

Randa Stephenson, on behalf of the Lower Colorado River Authority (“LCRA”), concurred with Vistra that new generation investment should be prompted by market-based systems. She also provided LCRA’s proposals for ERCOT re-design, which include introduction of two new ancillary service products: a dispatchable reliability service and firm fuel product. The first would reward generation resources that can respond within thirty minutes and provide uninterruptible power for 24 hours. The second would be a benefit to existing thermal generation as well as a potential investment incentive for new thermal generation.

Mike Alvarado, on behalf of WattBridge, provided an overview of WattBridge’s peaker facility construction in ERCOT. He indicated that WattBridge sees intermittency as the fundamental problem with the ERCOT grid.

Panel 3: Bill Barnes (NRG) and Bryan Sams (Calpine Corporation)

Bill Barnes, Senior Director of Regulatory Affairs for NRG Energy (“NRG”), indicated that NRG’s market redesign proposals include establishing a grid-wide reliability requirement in the ERCOT market and requiring all load serving entities (“LSEs”) to procure a share of electricity reserves (which would allow the ERCOT market to address the reliability goal without a central procurement of capacity). The proposal could include an enforcement mechanism wherein a penalty could be assessed both to LSEs and to dispatchable resources that failed to meet their requirement.

Bryan Sams, Director of Government and Regulatory Affairs for Calpine Corporation, expressed concern over market re-design proposals that would implement out-of-market solutions to the ERCOT reliability problem. Both Mr. Sams and Mr. Barnes indicated that their companies would be submitting market re-design comments to the PUCT later in the week.

Senator Schwertner expressed that it is the Legislature’s responsibility as policymakers to ensure that the state has energy, whether through in-market or out of market actions. Senator Menendez urged that the Committee consider the return on investments in the future because each megawatt of renewable energy is lower-cost than fuel-based resources – and fuel is a finite resource. Senator Kolkhorst commented that while Texas does not have the lowest cost energy in the nation, it does have much lower cost energy than California. She cautioned that if Texas adopted a model similar to the California policy of extending government contracts to incent investment, the cost of energy would increase for consumers.

The Committee indicated there will be another interim Senate Business and Commerce hearing on energy in the future. The Speaker of the Texas House of Representatives has indicated that the House Committee will also soon hold a hearing on energy.

Members of the public can follow the PUCT and RRC initiatives by staying abreast of the following agency dockets:

  • PUCT Rulemaking to Establish Electric Weatherization Standards: 51840
  • PUCT Review of Wholesale Electric Market Design: 52373
    • Stakeholders filed proposals on September 30th
    • The Commission is holding a Work Session on October 14th to discuss the components of a re-design
  • PUCT Review of 25.505 (related to re-designing the system-wide offer cap): 52631
  • PUCT Critical Natural Gas Facilities and Entities: 52345
  • RRC 16 TAC Sec. 3.65 and 3.107 (under Ch. 3 Oil and Gas)