Texas Debates Tilt Toward Gas-Fired Power Plants
Texas legislators are pushing seven bills aimed at bolstering traditional dispatchable power in a bid to fix a reliability problem with the Texas power grid.
Each of the bills has more ground to cover before becoming law. Senate Bills 2012 and 7 are farther along in the process and more likely to become law.
House and Senate members are negotiating to bring their respective priority bills out of committee and to the chamber floors. The legislative session ends on May 29.
The Public Utility Commission would establish a new incentive-based program to encourage construction of new dispatchable power plants and impose guardrails for a yet-to-be-implemented "performance credit mechanism" under Senate Bill 2012, a bill favored by Governor Greg Abbott. The performance credit mechanism would allow dispatchable generators who provide power during periods of peak demand to earn performance credits and then sell the credits to other generators. Dispatchable generation is gas-fired "peaker" power plants that are expected to run only when there is high demand for electricity on the grid.
ERCOT would have to require reliability assessments of utilities and allow generators to earn revenue by offering ancillary "dispatchable reliability reserve service" to improve grid reliability under Senate Bill 7.
Independent generators may bear more costs when building new assets, according to a formula to be established by the Public Utility Commission under Senate Bill 1287.
The existing renewable energy credit program would become purely voluntary and probably result in reduced demand for renewable energy credits under Senate Bill 2014.
Senate Bill 6 -- the product of lobbying efforts by Berkshire Hathaway and the Lower Colorado River Authority -- would establish 10,000 megawatts of state-sponsored back-up dispatchable power plants to be brought online during potential load-shedding events.
Senate Bill 2015 would require 50% of the new generating capacity installed in ERCOT be sourced from dispatchable power.
Senate Bill 2627 would allow companies to receive a monetary bonus upon completion of a new dispatchable power plant. Both new and existing dispatchable generators would have access to no-interest loans from the state.
These bills would tilt the scale on new development toward gas-fired power plants and away from wind, solar and battery projects.
Senate Bill 2012
The incentive program under Senate Bill 2012 would provide up to $500 million annually in capacity credits for producers who build back-up megawatts of dispatchable power.
Capacity credits would only be available to producers of dispatchable generation: load resources and electric energy storage are explicitly excluded. ERCOT CEO Pablo Vegas testified in a Senate committee hearing that passage of Senate Bill 2012 would require utilities either to buy capacity credits or build new power plants to meet the energy needs of their customers -- a critical change to the current ERCOT market structure and design.
The bill also imposes guardrails on the "performance credit mechanism," an incentive created by the state legislature in 2021 that establishes grid reliability standards to ensure on-demand generation will be available during times of low non-dispatchable power production.
Attendant cost obligations imposed by the new programs would be shared by independent generators and utilities using a cost allocation formula. Both renewable and dispatchable generators have expressed concern about the cost allocation formula, which is punitive towards renewable resources and would drive older dispatchable generation from the market.
Senate Bill 2012 passed the Senate and has cleared the House State Affairs Committee. The House version would delay implementation until an assessment is made of how the new capacity credits would affect the ERCOT market and an independent organization certified by ERCOT begins real time co-optimization of energy and ancillary services in the ERCOT wholesale market.
Most importantly, the House version would also prohibit the Public Utility Commission from implementing the new program until it fleshes in the essential features of the program to ensure that it meets the reliability needs of the ERCOT region.
The House bill would also cap the net costs of the capacity credits at $500 million a year.
The House is under significant pressure from the governor to pass the bill.
Senate Bill 7
Senate Bill 7 proposes two tools to improve grid reliability -- a firming reliability requirement and an ancillary "dispatchable reliability reserve service."
During testimony before the House State Affairs Committee, Carrie Bivens, vice president of Potomac Economics, the independent market monitor for ERCOT, Paul Vegas, CEO of ERCOT, and Thomas Gleeson, executive director of the Public Utility Commission, said that Senate Bill 7 is not necessary since ERCOT is already in the process of implementing a "contingency reserve service."
The firming requirement creates a capacity market in ERCOT, effectively taxing operators that lack certain reserves. The cost of providing ancillary and reliability services during extreme weather conditions would be proportional to the generator’s unreliability. Generators who are considered more unreliable would bear a greater share of the costs. A separate calculation for utilities would assign costs based on volatility at peak hours. Like Senate Bill 2012, the least reliable generators would purchase credits earned by dispatchable generators to ensure support during peak times. Senate Bill 2012 would not affect behind-the-meter systems.
Aging power plants considered unreliable under the formula could be rendered economically infeasible as a result of bearing additional costs. In the short term, the total amount of megawatts available in the ERCOT market would be reduced until new power plants are brought online.
Senate Bill 7 requires the Public Utility Commission to implement an ancillary services program requiring retail electricity providers to buy dispatchable reliability reserve services on a day-ahead and real-time basis to account for market uncertainty. Generators participating in the program would be evaluated for their ability to turn on within two hours, stay on for at least four hours during a period of peak grid demand and have the dispatchable flexibility to address inter-hour operational challenges. Critics argued that a 10-hour requirement in the previously circulated version of the bill was too long and unnecessarily precluded battery storage from participating in the program.
The bill sponsors hope, by incentivizing dispatchable generation, to counter the impact of the Inflation Reduction Act that they claim unfairly benefits renewable energy development, glossing over various provisions of the federal tax code that solely benefit oil and gas development.
Senate Bill 7 grants the Public Utility Commission broad authority to develop new programs to strengthen grid reliability. Its annual reports must include an update on system costs of dispatchable and non-dispatchable generators, status of the new programs, recommendations for additional actions and the advisability of continuing the reliability program.
Any new programs would not start before 2026.
Senate Bill 6
Senate Bill 6 would set up a "Texas energy insurance program" as a funding mechanism for construction of 10,000 megawatts of dispatchable power plants to be used during peak load periods.
The program would be run by an independent organization. The goal is to function as a backup insurance policy where power from the new gas peakers would only be dispatched during specified or threatened load-shed events and during limited yearly testing.
To participate in the program, generators would respond to request for proposals to provide an amount of generating capacity for specific regions. Winners will be selected if they can demonstrate financial stability, experience and industry expertise.
If there are not enough state funds to fund the program fully, then winning applicants would be authorized to charge a supplemental rate to their customers or bill the customers' retail electricity providers. The expected cost to build 10,000 megawatts of gas peakers ranges from $10.8 to $18 billion.
There would also be a state-backed zero-interest loan program. Loans would be used to cover the costs to maintain and build the gas peakers. There is no corresponding incentive for renewable generation.
Senate Bill 2015 further incentivizes participation in the insurance and loan programs by requiring half of new generating capacity installed in ERCOT to be dispatchable power plants starting in 2024.
The Senate bills have to clear the House committee by May 20 to be enacted before the end of the legislative session.
The House will then have to vote. If the House makes changes, that will complicate enactment because the differences would have to be reconciled with the Senate or the Senate would have to re-pass the House bill.
The collective impact of the bills would be to increase electricity prices for Texans.
If none of the bills becomes law at the end of the regular legislative session, the governor can call a special session, which is expected this year given the lack of progress on the governor’s favored bills. During any special session, the legislature would only be able to address matters within the specific purpose of the special session, as decided by the governor.