This commentary originally appeared on EDF's Energy Exchange blog.
Over the past two years, Texas’s changing energy landscape has been a focus of EDF’s work. In our Texas’ Energy Crunch report from March 2013, we highlighted that Texas has a peak capacity constraint – meaning that the power grid becomes strained when, for example, everyone is using their air conditioning units on hot summer afternoons. This challenge, coupled with increased climate change and drought, signal the need to prepare by adopting a smarter grid and cleaner resources.
The Public Utilities Commission of Texas (PUCT) and the Electric Reliability Council of Texas (ERCOT) have been engaged in this conversation and various proposals have been laid on the table to determine what Texas’ energy future will look like. EDF maintains the position that, whatever reforms are made, customer-facing, demand-side resources – defined here as demand response (DR), renewable energy, energy efficiency and energy storage – must play a key role to ensuring reliability, affordability, customer choice and environmental improvements.
Energy-Only Status Quo or Capacity Market or…?
Texas’ current energy-only market structure pays power plants only for the energy they produce. This is beneficial in that generators are not overcompensated, but the downside is that energy companies aren’t incentivized to build in Texas and energy management providers (DR companies) are not viewed as equal players. Energy prices are low due to an upsurge in cheap, abundant natural gas and wind – and without a guarantee for a high return on investment, companies will not take the risk of constructing costly new power plants.
A capacity market, an option some for which some are pushing, would pay those providing capacity for their ability to be on stand-by, in addition to energy payments. Capacity is “the maximum electric output a generator can produce under specific conditions.” As the PUCT weighs all of these recommendations for a market structure change, including the Brattle report, the conversation seems to have become contentious with lines in the sand being drawn.
But the choice between an energy-only market or a capacity market is a bit of a false dichotomy. There are other concepts that we can look to provide a balance for our energy needs that many stakeholders can agree on. A ‘third way,’ like a capabilities market or changes to protocols (rules) in ancillary services (the extra market services often obtained as backup for grid reliability), could give us the resources “capable” of efficiently meeting the specific electricity needs Texans require.
Political Tea Leaves
To elevate this to the Legislature, the Texas Senate Natural Resources Committee held a hearing on Monday at the request of the Chair, Senator Troy Fraser (R- Horseshoe Bay). While this debate has been ongoing among legislators, it has not yet fully entered the public sphere. But with Sen. Fraser calling this hearing in response to PUCT Chairman Nelson and Commissioner Brandy Marty’s nonbinding vote to mandate a capacity reserve margin that may change. While the invitation-only testimony was necessary and informative, it was a bit theatrical and heavily one-sided by those opposed to a capacity market. We believe that Texans would have been better served if all stakeholders were given equal opportunity to weigh in.
After announcing her run for Lieutenant Governor last week, joining Wendy Davis on the Democratic ticket, Committee member Senator Leticia Van de Putte directed some important questions at the panelists. And, at one point, she even seemed shocked when implying that Texas was considering a “socialized” energy system.
Marty’s perspective and emphasis on reliability as her main concern as PUCT Commissioner is also duly-noted in light of her previous role as Governor Perry’s Chief of Staff. If the lights go out, his political future dims as well. However, Commissioner Marty showed her openness to new ideas and stated that Texas’ unique market didn’t “come off of a shelf,” but was built to become what it is today and will continue to evolve with any decision made. Ultimately, though, the Senate Natural Resources Committee does not have jurisdiction over this issue, as it lies with the Senate Business and Commerce Committee. So, while the show was good, highlighting the tension between Senate Chairman Fraser and PUCT Chairman Nelson, it was a bit ineffectual in the big scheme.
We need an honest conversation about what Texas requires to ensure reliability at a fair cost to customers and the environment, as well as a blueprint for how to get there. Senator Van de Putte made an important request of the Commission to, “be sure that the current market is not working before [they] make a change. And before [making] any changes, be sure everyone is involved.”
Demand Response: The Star of the Show
One bright note, however, was the consistent focus on customer-facing, demand-side resources, specifically demand response, which may be a turning point in this conversation. DR is an energy management solution that uses technology to either turn off energy-intensive devices during periods of peak demand, or shift their use to a different time of day.
While many different perspectives were heard, those that testified against a capacity market at the hearing seemed to agree that the beneficiaries of a capacity market – DR companies – were witnessing significant market growth. Dr. Robert Michaels of the Texas Public Policy Foundation discussed how the new paradigm of energy is less “iron clad” than in the past, stating that “capacity is becoming less important over time because of growth of demand response…”
According to Brattle, and as we have discussed previously in my 13:15 blog post, Texas could achieve 15% of our capacity reserve margin if demand response were deployed to its full potential across the state. Our capacity reserve margin today is 13.75%. DR alone could solve Texas’ capacity challenges.
Compared to natural gas power plants, demand response and energy efficiency can be built out cheaper and faster. Texas could achieve as much as 13,000 megawatts (MW) of DR by 2019, with the majority (7,661 MW) coming from residential customers, a group that accounts for “more than 70 percent of peak load.” That said, DR needs the ability to operate in the energy market without unnecessary obstacles posed by market protocols simply because this type of resource and approach is novel. DR representatives should have been invited to testify as well.
A ‘Third Way’
A third market option that encourages these type of customer-focused, demand-side resources may hold the key to quickly deploying additional capacity in the Texas energy market without sacrificing reliability, taxing industrial and residential customers or gulping down the state’s scarce water supply. A third way could put the right rules in place to enable the rapid deployment and fair compensation for innovative, clean energy technologies and bolster Texas’ economy through energy savings.
As part of a new blog series on this topic, I will dive deeper into the role Monday’s hearing played in the larger context of EDF’s work on energy markets, and discuss a notable omission from the discussion: climate change.