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October 16, 2019

GCPA conference: Day 1 examines Texas restructuring and summer 2019

by Kelso King, Grid Monitor
Posted 10/15/2019

Lookback on Senate Bill 7

The opening panel at the Gulf Coast Power Association’s 2019 fall conference featured a look back at Texas’ restructuring bill Senate Bill 7. Panelists included former Sen. Troy Fraser and former Representative Steve Wolens, accompanied by John Fainter, former president of the Association of Electric Companies of Texas.

Representative Wolens noted that, at the time of SB7, Texas had the highest electric bills in the country although not the highest rates. However, there were concerns that competition could cause the reserve margin to drop from its 12% down to 8%. Blackouts were also occurring in the Northeast. An objective was to create an incentive to invest in Texas generation. A law was needed to replace the PUCT’s rate of return regulation and implement a competitive market. REP. Wolens suggested that most previous deregulations had been failures, including telephone, banking, air travel, etc. In order to avoid predatory pricing, SB7 implemented a Price to Beat, including a maximum 6% rate reduction for incumbent utilities.

Sen. Fraser noted that 1997/99 was an interesting time in business, with a desire for growth, adding that regulated markets guaranteed profits but also limited them.

Mr. Fainter noted that part of what made SB7 succeed was parties agreeing not to make amendments on the floor of the Texas House of Representatives. He suggested that SB7 was a good compromise, with electric cooperatives, municipalities, and non-ERCOT utilities not being required to compete. However, he suggested that it would have been helpful to have better customer education with more money and longer program.

Rep. Wolens noted that the legislature had “raided” the Sate’s customer education fund five years after it was created. He suggested that it would have also been helpful to have more restrictions on the PUCT’s Power to Choose website. Rep. Wolens noted that SB7 had “something for everyone,” something each party wanted … and feared, such as a stranded cost mechanism, clean energy, maintaining jobs, etc. When the bill was three votes short, a System Benefit Fund was added, which gained the necessary votes.

Sen. Fraser agreed that there was buy-in from everyone, including the environmental community, through a 1,000 MW renewable portfolio standard intended to recruit wind investment for Texas.

Rep. Wolens noted that, in order to gain passage, “a big bill was required” that everyone wanted a part of, adding that RPS, stranded cost, and other issues would not have passed on their own. He noted he had surprised stakeholders by asking each of them to sign a pledge they would not break the deal.

Sen. Fraser noted that the Price to Beat had been raised four times to encourage defection from incumbent utilities.

Rep. Wolens added that customers are “sticky,” that the incumbent is likely to retain them and they had to work hard to change the incumbent’s market share.

Is Restructuring Working in ERCOT?

Panelists representing Exelon, Vistra Energy, Brazos Electric Cooperative, CenterPoint Energy and BP Energy discussed the effectiveness of restructuring the ERCOT market

Scott Hudson, Vistra Energy, stated that electric products in Texas are more sophisticated and robust than other markets. He asserted that ERCOT is the best market in the world and recent volatility represents an opportunity.

Eric Schubert, BP Energy, noted that commercial and industrial customers were very active in summer 2019, adding that $9,000/MWh prices during summer 2019 highlighted the value proposition and demand response helped fit everything together.

Clifton Karnei, Brazos Electric Cooperative, believed that the long-term sustainability of ERCOT’s energy-only market is still a question. He likened it to a casino in that you only win occasionally. Mr. Karnei suggested that is tough to build a thermal generating plant in this market. He noted that the forward curves in 2022-2025 are “scary” and that Brazos has learned not to bet against the forward market. He predicted another round of thermal retirements in the near future.

Bill Berg, Exelon, asserted that ERCOT’s energy-only market provides benefits both now and in the future, believing that one of the successes is regulatory stability. Mr. Berg noted that the “extremely concentrated price signal” experienced in ERCOT during summer 2019 was impossible to ignore, adding that a multi-billion-dollar price signal occurring over a few hours in one week gets people thinking about opportunities.

Mr. Schubert suggested that the ERCOT market has become more complicated and “net load” makes it less predictable. Mr. Schubert noted that demand response in various forms, including behind the meter generation, small-scale storage, etc. are resources but there is a difference between resources and reserves, like the oil and gas industry. Mr. Schubert noted that stakeholders are currently negotiating concerning the visibility of demand response (DR) programs in ERCOT.

Kenny Mercado, CenterPoint Energy, noted that there has been a rapid increase in industrial load in small pockets, such as thousands of megawatts of oil and gas load in the Permian Basin. This load cannot be served with distribution and planners must think about how to build transmission to accommodate it, as well as distributed generation, solar, etc. He noted that it is also important to ensure that these load pockets are getting high-quality power, including megavars.

Mr. Karnei asserted that the energy-only market has been good for Texas so far and electric co-ops have benefited from the bilateral market and the ERCOT ISO.

Panelists discussed what went right during summer 2019. Mr. Berg stated that ERCOT and local control operators performed well but will have to get even better and more creative in the future. He also believed ERCOT’s new credit policies worked well. He believed that price responsive demand was largely untapped and is an important future opportunity.

Mr. Karnei and Mr. Berg did not believe that mid-$20 prices in 2025 forwards accurately reflected the intermittency of renewables. Mr. Schubert suggested that this depends on liquidity at the time, adding that the challenge is ensuring small-scale resources have the right incentives.

When asked what will happen post-2025, Mr. Karnei replied that it will depend on the prices and how much wind and solar actually get built. Regarding whether demand response would exacerbate issues with price signals in ERCOT, Mr. Berg asserted that price response is nondestructive and the ERCOT market needs more elasticity in its demand curve.

Review of Summer 2019

Dan Woodfin, ERCOT’s director of system operations, began the discussion of summer 2019 by noting that ERCOT’s lowest Physical Responsive Capability occurred, not at the time of highest load on the system or minimum wind output, but rather at a time in between, when wind was declining and load was increasing. He noted that the first Energy Emergency Alert (EEA) had been triggered by lower wind output than on the previous day, which set a peak demand record. He noted that demand programs, notably ERCOT’s Emergency Response Service (ERS), had flattened load during the peak demand hours.

Clif Lange, South Texas Electric Cooperatives, noted that the high prices reflected real scarcity and believed recent Operating Reserve Demand Curve (ORDC) changes were “very effective” but what worked surprisingly well was the Reliability Deployment Price Adder. Mr. Lange observed that the impact of net load had been more obvious in 2019 than in the past. He asserted that demand response was huge and will be an even bigger player in the future.

Sandy Morris, Direct Energy, noted that Retail Electric Providers (REPs) do not usually reveal their hedging strategies. She noted that rain in West Texas can decrease solar output while not reducing load in other areas. She noted that the “very blocky” hedging products are hard to fit to a load shape, like fitting a box over a camel hump, leaving a lot of empty space within the box. Ms. Morris questioned whether the market is currently pricing risk to REPs correctly. She noted that more residential customers are moving to sophisticated or fixed products, adding that communication with customers needs to be fast. Ms. Morris noted that the $1.4 to $1.7 billion cost resulting from the recent ORDC changes was in line with expectations. She also noted that ancillary prices were very high during the summer, especially during scarcity, which she believed represented an opportunity.

Sam Harper, Gerdau Steel, noted that his company produces structural steel and is very energy intensive. He believed that, overall, summer 2019 was a resounding success. He cited excellent generation performance and the fact that DR prevented an EEA1 from becoming an EEA2, adding that no other market could have survived these conditions. He concluded by noting that at his home he had been excited on the first EEA day, turning off all the breakers in his house, but adding that by the third day he compromised with his wife an instead only increased the thermostat a few degrees.

CEO Panel

A panel of utility CEOs unanimously agreed that the market worked well. Mauricio Gutierrez, CEO of NRG, noted that price formation in ERCOT is improving. He noted that NRG had brought approximately 400 MW of combined cycle generating units online due to the scarcity pricing and forward markets. Mr. Gutierrez believed ERCOT’s credit requirements have improved, now being based on the future than the past. He asserted that REPs need to understand that increased volatility is the “new normal,” adding that his company wants to retain customers and not have “bill shock,” which leads to customers looking for a different provider.

Thad Hill, CEO of Calpine, highlighted the increasing importance of Net Load, suggesting that the price during scarcity is ultimately largely determined by wind output. Mr. Hill noted that Calpine had spent “eight digit amounts” on repairs and preparation for summer 2019. He highlighted the impact of tremendous demand response. Mr. Hill noted that, in 2019, wholesale prices were high before summer, which helped REPs to be prepared. Mr. Hill suggested that higher collateral requirements for REPs is good because the cost of defaults is ultimately passed to customers.

Curt Morgan, CEO of Vistra Energy, predicted the addition of 45 GW of new generation, mostly renewables, with zero marginal cost, which strongly suggested the need for ancillary services for dispatchable resources. Mr. Morgan noted that his company has explored solar plus storage and learned a lot, including that solar is intermittent too. He noted that high heat rate units had been run as intermediate units in the summer when the market got tight and that Vistra has continued to invest in these previously marginal units. Mr. Morgan noted that, because of the relatively cool temperatures, REPs had made money in June and July but had to give much of it back in August.

The panel was asked whether retail innovations are causing problems for customers. Mr. Morgan suggested that retail electric provider Griddy is the “elephant in the room,” adding that customers need to be educated and his company does not want customers to “feel” the wholesale market.

Mr. Gutierrez noted that NRG had voluntarily sent conservation notices to help customers, agreeing that they did not want customers to be hit with extremely high bills.

Panelists discuss the trend of retail consolidation and how to protect customers. Mr. Gutierrez noted that there are 200 REPs in Texas and hundreds of offers, adding that eliminating weak companies helps consumers, concluding, therefore, “consolidation is good.”

Mr. Morgan agreed, adding that different offers reflect different services. He suggested that there seems to be robust competition in ERCOT and companies are spending money to improve. He believed business models are changing, with companies wanting to be more balanced between generation and retail in order to make things more predictable for customers.

Mr. Gutierrez stated that ERCOT is the best market in the world, with competition in everything, adding that consumers are engaging with electricity in unprecedented ways, including more concern about where their electricity comes from.

Mr. Hill agreed that “Texas is onto something” but was not sure customers care about the “flavor” of their electricity. He suggested that billions are being invested in wind and solar because people believe the market will be allowed to work in Texas. However, he believes the market is not perfect, that there is still too much “RUCing” (Reliability Unit Commitment) of units in the Houston area.

Mr. Morgan agreed that ERCOT is the best market in the U.S. because Texas believes in competition and market-based solutions. He acknowledged that there will be bumps in the road but has no doubt the Texas model is the right way to do it. He noted that in other areas lots of money is being spent on unused reliability, for example capacity markets.

Mr. Gutierrez also believes there is room for improvement, noting that transmission and distribution rates have doubled, or more, in the last 10 years. He suggested the need for market-based solutions for transmission questions, adding that 4CP transmission cost allocation distorts the market.

Mr. Hill believed that ERCOT has continued to make progress in addressing distortions in its market.

Mr. Morgan suggested the need for market-based competitive investments in batteries.

In discussing how to best address climate change, Mr. Morgan stated that getting rid of all subsidies and pricing carbon is the answer. He supported a national carbon fee with a dividend going back to citizens.

Mr. Hill agreed with the need to put a price on carbon, because it drives decisions concerning, transportation, heating and cooling, and other processes.

Mr. Gutierrez supported the need to internalize the cost of carbon, adding that NRG has increased its carbon reduction goals in order to meet the 1.5 degree limit on global warming.

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