Where will your power come from? Big decisions ahead for Texas
Something has got to give when it comes to how Texas generates, transmits and sells electricity.
In particular, Texas lawmakers need to reconsider how generators get paid for wholesale electricity by ERCOT, the semi-governmental agency that manages the grid in most of Texas. Prices have dropped so low that electric companies say they cannot afford to invest in the new power plants the state will eventually need to keep the lights on.
What these changes should look like, though, depends a lot on whether the company offering an opinion uses coal, natural gas or wind. It also depends on whether the company constructs transmission lines or sells retail electricity to customers.
That’s what makes NRG CEO Mauricio Gutierrez’s perspective more interesting than most. The $5.6 billion company is the largest electricity retailer in Texas, with 2 million customers. But NRG is also the second-largest electricity generator, with a mix within ERCOT that is 55 percent natural gas, 33 percent coal, 7 percent nuclear and 5 percent wind.
As an integrated energy company, NRG has several dogs in this fight.
“We are undergoing a profound change and transition in the electricity industry,” Gutierrez said in an interview. “When you combine very cheap natural gas prices, renewables that are becoming very cost-competitive even without subsidies and tax incentives, and then what I call the digitalization of demand – I mean, I can control my HVAC from my phone – you get a whole lot of disruption.”
None of these things were true in 1998, when lawmakers authorized the wholesale electricity market in Texas, which is managed by the grid operator. ERCOT predicts the amount of electricity needed a day in advance with a reserve margin and then takes bids from generators. ERCOT lines up commitments from the cheapest sources to the most expensive, and then pays generators only for the electricity that is consumed.
The generator’s bid often has nothing to do with the cost of production. NRG’s coal and nuclear plants can’t be easily stopped and restarted, so they run almost nonstop. The company will bid very low prices to make sure it sells all it produces, even if it sometimes loses money.
Wind turbines, meanwhile, spin fastest at night and can flood ERCOT with electricity that earns renewable energy tax credits. Rather than lose those valuable tax benefits, wind producers will often pay ERCOT to take the electricity, turning the wholesale price negative.
ERCOT has added so much wind power that the number of hours of negative pricing has tripled since 2014.
The wholesale market was also designed for electricity sources that have variable fuel costs, such as the price of natural gas. Wind and solar don’t have any fuel costs, which creates a very different cost curve and business plan.
Texas’ wholesale market has contributed to some of the lowest electricity bills in the world, but it is also killing electric company profits, offering no incentive to invest in new power plants, Gutierrez argued, especially generation that can switch power on or off quickly and predictably.
“When you need that dispatchable generation to make up for when the wind is not blowing, you need to compensate for that,” Gutierrez said.