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Proposed power market overhauls could cost $460M more a year

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After almost a year of analysis, three plans to overhaul Texas’s wholesale power market have been pushed aside in favor of two new proposals — each of which could cost power consumers an estimated $460 million more per year.

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The new plans, one from E3, the San Francisco-based energy analysis firm hired by the Public Utility Commission to review the previous proposals, and another by the PUC itself, come more than a year after the state launched an effort to revamp the power market in the wake of the catastrophic February 2021 winter storm. The deep freeze caused blackouts across the state — some lasting for days — that were blamed in the deaths of at least 200 people and cost billions of dollars in damage.

PUC staff said their recommended model was developed in the process of the recently completed review. PUC Chairman Peter Lake said it took elements of the other market redesign proposals to create something that addresses Texas’ unique needs. Texas’s power grid, managed by the Electric Reliability Council of Texas, is mostly independent of the nation’s other power grids. 

“That was the plan from the beginning. The blueprint we adopted last December specifically articulated the possibility and intent to identify a hybrid solution to capture the best features of these proposals and discarding the flaws to develop a hybrid product that harnesses the best of each,” he said.

The plan recommended by E3 would, essentially, create what’s known as a capacity market, with ERCOT acting as a clearing house for power created by generators that stay online during peak periods. 

At least one independent analyst says the two new proposals reflect a flawed review process that failed to identify the problem. Doug Lewin, president of the Stoic Energy consulting firm, said the study also skipped the potential effects of extreme weather — such as the 2021 winter storm — on the proposed market redesigns.

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“Twenty-one months after the storm, they have not stopped to clearly define what the problem is, and without that problem statement, you have a lot of analysts, stakeholders and consumers who are not even talking about the same thing. Why else would you be grasping for new solutions this late in the game?” he said. “That’s why I think we’re in this place where it doesn’t seem like we’re all that close to anything that would make a meaningful difference.”

The study’s authors from E3 said their review fails to consider the effects of another deep freeze on peak winter demand, adding that “such analysis is beyond the scope of this study.”

Lake said the study’s authors didn’t consider the storm’s effects because they recognized that actions already taken by the PUC to prevent another freeze would drastically reduce the chances of similar blackouts happening again. And he painted a different picture of the process to get to this point, driven by hours of research and meetings.

“We went through rigorous process last summer and fall with dozens of hours of public workshops, thousands of pages of public comment through the summer and fall of 2021 and many hours of deliberation with this commission resulting in the blueprint adopted unanimously last December, launched the process as described with this consultant, which has been rigorous and resulted in a well executed analysis,” he said.

Both the recommended plans are essentially capacity markets, said Ed Hirs, energy fellow with the University of Houston. Those types of market designs pay generators to be available to meet peak electricity demand.

That’s a departure from the current system, which depends on rapidly rising wholesales prices when power supplies are tight to encourage generators to come online. Lake has previously called such a system a “crisis model” that the state and power market needed to move away from.

Lake, however, insisted that the PUC’s recommended design would have generators commit to being available in advance.

“There is no notion of a capacity payment for sitting on the sidelines,” he said. “We would only pay for what we really need when we really need it.” 

The two recommendations could meet stiff resistance in the 2023 Legislative session and from Gov. Greg Abbott, who appointed the PUC commissioners, Hirs said. Abbott and the Legislature have rejected other plans similar to capacity markets, arguing they add costs. 

The public can offer written comments on the study and the proposals until mid-December, when the PUC is expected to vote on the final recommendation. The Legislature is expected to weigh in before anything is enacted.

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