ERCOT plans Texas market overhaul, but critics demand clarity

The performance credit mechanism, which could cost $5.7bn, is an attempt by the Texas Public Utilities Commission to address reliability issues after Storm Uri.

The electricity system operated by the Electric Reliability Council of Texas could be set for a significant overhaul after regulators approved the introduction of a performance credit mechanism, whereby power generators would be paid to be available to produce more energy during times of high power demand, low renewable output and loss of electricity production in general.

The PCM proposal was unanimously adopted by Texas’s Public Utilities Commission last week and has also been supported by state governor Greg Abbott, although still needs to pass through the state legislature.

It comes after the PUC was instructed to find ways to make the ERCOT grid, which sits separate to other electricity grids in the US, more reliable in the wake of Storm Uri in February 2021, where gas plants and wind farms were among those generators unable to respond to the power crisis. The PCM was proposed by consultancy group Energy and Environmental Economics, whose plan could result in a $5.7 billion cost to Texas consumers.

The proposal was accompanied by a resounding letter of approval from Abbott earlier this month, who also said a bridge solution should be implemented by the PUC to maintain enough power supply for Texas’ growing demand during the transition to the new framework. The PUC has directed ERCOT to design such a mechanism.

“After an extensive 18-month stakeholder engagement process and a review of the market designs analysed in the reliability study commissioned by the PUC last year, the Performance Credit Mechanism must be given strong consideration,” Abbott stated. “As the legislature has noted, a reliability standard must be the foundation of any reliability design. The PCM best meets this call because it is based on a reliability standard, incentivises new dispatchable generation, and maintains Texas’ energy-only market. The fact that generators have already publicly committed to build thousands of new megawatts of dispatchable generation resources if the PCM is adopted and implemented by the PUC further supports this point.”

‘Not a solution to any problem’

Despite Abbott’s claim of market approval, the Texas Oil and Gas Association said that “many questions still remain” and expressed doubt around the plan’s focus on availability rather than performance. The plan is “not sufficiently defined and has yet to be modeled to understand the full cost to consumers”, the group added.

“I represent a lot of developers, owners of IPPs and lenders and I don’t see this as a solution to any problem,” Kat Gamache, a Houston-based partner at law firm Norton Rose Fulbright, told Infrastructure Investor. “There are promises to bring on thousands of megawatts if this passes, but if you look at the interconnection queue, there are hundreds of thousands of MWs, so I don’t think that the retiring capacity of about 10GW [of coal by 2030] is the issue that we’re concerned about.

“What if you don’t perform? Is there going to be a penalty? What if it’s not your fault? What if it’s force majeure? What if the transmission is down? There’s way too many questions to think this will encourage new generation to be constructed based upon this.”

Gamache said the proposal would more likely benefit older, operating plants whose PPAs have expired within the last five to 10 years. She also criticised the proposal for lacking proposals to improve winterisation and weatherisation of the state’s gas supply and wind turbines, which were partially at fault for the lack of power in Storm Uri.

“What you want is stability and regulatory certainty and in ERCOT you just don’t have that right now,” she added. “Getting project finance for a merchant project is going to be an uphill battle. Is the PCM going to be a guaranteed revenue scheme so the project can pay its debt, or is this just an incentive to keep projects which are old from retiring? If its the latter, maybe they should say that. It shouldn’t be proposed as the solution at the loss of exploring other solutions.”

While the PCM is a response to Storm Uri, the urgency for a solution was emphasised last month when storms triggered power demand in the state to 73GW, a level not seen since the storms of February 2021.