Energy Prices and Adjustment Tools Debated in Interim Senate and Business Finance Hearing
Texas is an energy-only market — wherein energy producers are paid only after they provide power.
The state’s energy sector is operated by the Electric Reliability Council of Texas (ERCOT). Most of the rest of the country operates as capacity markets which is a sort of energy wholesale model wherein producers sign contracts for production over a given period and are paid upfront.
Only ERCOT and the Southwestern Power Pool (SPP) — which supplies power to Kansas; much of Oklahoma; parts of Arkansas, Louisiana, New Mexico, and Texas — are non-capacity markets.
ERCOT oversees most of Texas’ energy market and operates its grid. One function it has at its disposal is the Operating Reserve Demand Curve (ORDC).
Created in 2014, the ORDC is a price regulator meant to incorporate energy reserve levels into the market pricing. Meaning, it adjusts the price per unit of energy based upon how much the grid has in reserve. When reserves are low, prices will increase to compensate. At root, it is a signal to the rest of the market that reserves are running low.
ORDC’s purpose is to preserve a certain amount of energy in reserve in case of an emergency. But that energy, even when it’s not being used, still must be paid for.
Essentially, the ORDC distributes the cost-burden across all consumers, rather than focusing on what some say are the catalysts of reserve shortage and unreliability: renewable energy generators.
When reserves are trending low, price increases kick in so that less grid-electricity is bought until generation can be brought up to speed — not only to meet demand but to fill where the reserves have diminished.
The worry surrounding energy-only markets concerns possible instability surrounding demand uncertainty — essentially, that producers would be hesitant to build generation plants before the market to justify it is there. Energy-only supporters see the method as protecting competition rather than the individual suppliers — the latter of which a guaranteed contract certainly does.
On February 6, the Senate Business & Commerce Committee convened to discuss germane interim charges — specifically, “Assess the electricity market in Texas.”
Bill Peacock with the Texas Public Policy Foundation (TPPF) took issue at the hearing with the ORDC, arguing that increased intervention in the market has distorted prices and demand. According to Peacock, this is “forcing Texans to pay higher costs for a less reliable form of electricity.”
Pointing to renewable energy subsidies and the ORDC, Peacock views the former as being propped up by the government and the latter as hampering consumer access to cheap, reliable energy.
It is estimated, Peacock stated, that the ORDC added some $3.9 billion in electricity costs to ERCOT consumers in 2019. To address this, Peacock advocates for eliminating the ORDC and “instituting mechanisms that makes renewable energy providers pay for the cost they impose on the grid.”
The reason renewables “impose [costs] on the grid” is that wind and solar are not as reliable as other sources.
Put simply, their reliability hinges upon the wind blowing and the sun shining. Whereas, non-renewable sources are currently so plentiful in Texas that reliability is mostly a non-issue unless there is a power plant shortage or one breaks down like it did this past summer during the same time renewable energy generation lulled.
TPPF also wants to see chapters 312 and 313 — renewable energy property tax abatements — removed from code. They believe these subsidies unfairly prop up renewable energy suppliers at the expense of more traditional energy companies. Texas also has a Renewable Energy Portfolio Standard, which requires a certain portion of the energy grid be comprised of renewable-generated electricity.
Texas’ renewable energy sector has, however, outperformed that requirement by a substantial amount.