Texas wind and solar projects risk new costs

Texas wind and solar projects risk new costs

April 12, 2021 | By Keith Martin in Washington, DC

Texas is considering imposing additional costs on wind and solar projects that are already in operation as well as such projects that are built in the future.

At least four proposals are under consideration in the state legislature. The current legislative session runs through May 31, but the governor can call the legislature back into a special session if needed.

The renewable energy trade associations have sounded alarms about one of the proposals. It would require wind and solar projects to reimburse ERCOT for the cost of ancillary services that ERCOT buys to deal with the intermittent nature of such projects. Details would be left to the Public Utility Commission to work out.

ERCOT spends about $380 million a year to buy ancillary services from power plant owners whose projects are connected to the grid, but only about $50 million of that total, relating to regulation service, is triggered by performance of renewable generators.

Ancillary services include such things as back-up power, voltage support and frequency regulation services. The grid tries to maintain the frequency at which electricity oscillates at 60 Hz. As more air conditioners, televisions and lights are turned on, the grid frequency goes down unless the electricity supply increases to match demand. As equipment is turned off, the opposite happens. Maintaining a stable grid frequency is a constant effort.

Grid operators compensate power plant owners for standing by to help, for example, by supplying additional power or voltage support within one to several minutes after being asked.

It is not clear how much of ERCOT’s annual bill for ancillary services would be attributed to addressing intermittency from wind and solar projects or how the additional cost would be allocated among such projects.

A version of the proposal that passed the Senate on March 29 would require intermittent generators to “purchase ancillary services and replacement power sufficient to manage net load variability.”

The uncertain additional costs would complicate financings and erode the economics of existing projects.

Becky Diffen, a Norton Rose Fulbright partner in Austin, said the proposals are too new to be playing a role yet in any pending financings.

The legislature is also considering requiring all power plant owners to weatherize their projects so that the projects can operate at temperatures below freezing.

It is also considering requiring independent generators who connect to the ERCOT grid in the future to pay the costs of direct interconnection, substation improvements and other “network upgrades” to the grid to accommodate the additional electricity to the extent these costs exceed an allowance that would be set by the Public Utility Commission.

Independent generators in ERCOT, unlike in the rest of the country, do not have to reimburse the grid for the costs to interconnect. They have to post security for the costs, but the security is released once the project is completed. The security is to protect ERCOT from having to spend money on improvements for a project that is not built.

Many power projects in Texas sell into ERCOT at the spot market price for electricity and then enter into a hedge to put a floor under the electricity price so that the project can be financed. Texas limits the maximum spot price. It was $9,000 a MWh, but has now been reduced to $2,000, pending further revision.

The last of the four proposals would require generators selling into the spot market to be paid only their costs to generate the electricity, rather than a full market price, during any emergency when spot prices have hit the cap and remained there for at least 12 hours during a 24-hour period.

Christy Rivera with Norton Rose Fulbright in New York, who handles hedging arrangements, said paying generators only their actual cost would leave them short of the market price they are required to pay hedge counterparties under existing hedges.