Avoiding backdoor bailouts on the Texas grid


Texas is blessed to have a competitive market for electrical generation. Unlike most states, Texas’ electric-power mix is not decided by bureaucrats who guarantee that utilities can recover their costs. Instead, whether a generator thrives or fails depends on whether they can match their competitors on the open market.

But while the Texas electrical grid is fundamentally market-based, it does contain a backstop to preserve reliability. If a generator announces that it is shutting down because it is uneconomical and the Electric Reliability Council of Texas (ERCOT – the state’s grid manager) concludes that the immediate loss of that generation would lead to blackouts, it can offer the generator what’s known as a “reliable must run” or RMR contract. Under these contracts, ERCOT pays the generator to keep running, with extra costs ultimately passed along to consumers. RMRs typically deal with local reliability issues stemming from transmission constraints, and are a temporary fix while a solution (such as a transmission upgrade) is put in place.

ERCOT tries to use RMRs sparingly. Indeed, any use of an RMR can be seen as a failure; ideally, market forces would ensure there was adequate supply to meet electrical demand. But the option does exist and is sometimes used to keep power plants up and running.

More troubling are potential loopholes in the process that could allow power plants to shift their costs onto ratepayers. A generator might announce it is closing, receive an RMR and then later reverse its decision to close based on improved market conditions. A generator might even attempt to get ERCOT to pay for expensive environmental upgrades, claiming the plant would be uneconomical if it had to bear those costs itself.

ERCOT is currently is the process of revising its rules governing RMRs to take account of these issues. Under one set of proposals, a plant that received an RMR contract for capital expenditures and then later decided to stay in operation would have to pay back the money used for the upgrades.

ERCOT also is looking at ways to improve its analysis of which generators are critical to reliability. In order to prevent the contracts from undercutting viable generation, it may put electricity from plants operating under an RMR at the back of the line for dispatch.

These changes are important to make sure the RMR process doesn’t become a backdoor means of bailouts to uneconomical power plants in Texas.

Image by Dirk Ercken


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