In February 2021, Winter Storm Uri hit Texas, causing over five million people to lose electricity and 11 million experiencing an outage at some point for several days.
Industry leaders weigh in on Texas electricity market reform
David Black, CEO, Shell Energy Solutions. Photo courtesy CERAWeek by S&P Global
The ice and snow resulted in more than $195 billion in damage, making it the costliest natural disaster in Texas history. Uri’s death toll was 246 people.
In January 2023, the Public Utility Commission of Texas (PUCT) announced the implementation of the Performance Credit Mechanism (PCM), a far-reaching, $5.7 billion plan to reform the state’s wholesale electricity markets — already one of the largest markets in the U.S. The unprecedented redesign specifically aims to shore up the long-term reliability of the Electric Reliability Council of Texas’s (ERCOT) electric grid.
Discussing the project on a panel at CERAWeek by S&P Global, held in Houston, the Honorable Peter Lake, PUCT chairman, said, “Everyone in Texas wants a reliable grid that delivers the lowest cost possible and a transparent and fair market.”
Pablo Vegas, president and CEO of ERCOT, explained his agency’s stance on the project by comparing the energy system market in the U.S. to other systems throughout the world.
“Essentially you have three legs of a stool. You’ve got an energy market where energy is bought and sold in real time, the ancillary services market, which the energy market supports, and the capacity market,” Vegas said.
The capacity market, he said, ensures sufficient capacity can meet a market’s energy needs at any point during the most extreme heat or cold, and to send signals based on the reliability standard of what is expected in performance, he said. That reliability standard, in turn, creates a value in the capacity market.
“Texas is a little unique,” Vegas continued. “Texas only has two legs of that stool — an energy market and an ancillary services market. Texas doesn’t have a capacity market.”
For 20 years, Vegas said, Texas businesses have enjoyed some of the lowest cost energy in the world because it was a highly efficient market designed specifically to create the lowest cost energy possible at any point in time.
“That’s a fantastic model which has worked very well,” Vegas said. “But when you’ve got a market which says, ‘I’m only designed for efficiency at a low cost,’ you’re missing a really important leg to that stool, and that stool’s in danger of falling over. We crossed over to that point in 2022 at the peak point of the summer when we relied on renewables to be there. If renewables are not there, the power will go out.”
“I want to be very clear about that,” Vegas emphasized. “As the CEO of ERCOT, I’m accountable for that and I’m accountable to the Public Utility Commission and to the legislature in Texas. I want people to know. I’m telling everybody that if renewables are not available at peak points in time, the power will go out, so we need to change the model.”
Vegas shared that ERCOT has already figured out how to incorporate renewables on a mass scale, “and we’re going to continue to do that. Now we need to figure out an incentive so we can bring that third leg to the stool and make sure we always have a balanced portfolio.”
Regarding the potential timeline on the digital implementation of PCM, David Black, CEO at Shell Energy Solutions, noted that using existing tools is “quicker and easier” than building something new, “no matter what industry you’re in.”
“Building something new is probably counterproductive and a drain on our resources,” Black said at CERAWeek. “ERCOT needs to consider using existing tools versus creating something new. From there, I’m sure they’ll come up with a good recommendation for this.”
“It’s going to be interesting,” Vegas concluded. “We just need to make sure that we’re building a foundation that will last for a long time.”
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