Josiah Neeley: Legislature missed opportunity to strengthen grid

When I talk to people about how the recently concluded Texas legislative session turned out in terms of the electric market, the almost universal reaction is, “It could have been worse.” While not much good came out of the legislature this year, things weren’t nearly as bad as they could have been.

For example, the state did not enact a plan to make Texas ratepayers pay for the construction of “back-up” power plants to be used only in times when the private market could not generate enough power to meet demand. That plan would have saddled Texans with $10 billion in higher electricity bills for power plants that would be used rarely if at all, and would likely have undermined private investment in new generation.

Instead, the legislature passed SB 2627, which gives the state Public Utility Commission the power to make grants and loans to new or existing “dispatchable” power plants, and to some other entities. The state has initially allocated $5 billion of state money to fund this program, and it will have to be approved by voters this fall before it can go into effect. It’s probably not the best use of tax dollars. But it could have been worse.

The legislature also chose not to enact some severe punitive measures against renewable energy. Renewables have come under increasing fire over the past few years, partly due to the mistaken impression that they played a central role in the February 2021 blackouts. In reality, while all energy sources faced outages, the biggest problems were with natural gas.

One proposal would have altered the way that Texas’ grid operator, the Electric Reliability Council of Texas, allocates costs for its ancillary services market. The ancillary services market exists to help deal with sudden, short-term changes in supply and demand that could destabilize the grid. Historically, the cost of these services has been paid for entirely by load. SB 7 and SB 2012, however, would have shifted 40 percent or more of these costs onto renewable generators.

Independent analysis suggested that the proposal would have added $4 billion a year in additional costs to consumers. Instead, the legislature directed the PUC to study the issue and prohibited renewables from being eligible for new market mechanisms the PUC might implement to encourage new investment from generators. That’s not great, but it’s not as bad as it could have been.

Granted, “it could have been worse” is not a high bar. Ideally it is best for the legislature to not only reject bad ideas, but to enact good ones. And that mostly didn’t happen this year. Texas’ natural gas infrastructure remains vulnerable to a repeat of the type of extreme weather event that happened two years ago last February. Attempts to get this infrastructure weatherized have been slow and piecemeal. There also hasn’t been much done to increase the flexibility of the demand side of the grid.

Smart meters and other new technologies are making it possible to adjust electricity consumption in real time in response to scarce conditions. Incentivizing those who can most easily reduce their electricity use during peak periods could take a lot of strain off of the grid. But so far not much has been done to take advantage of this potential. And nothing was done to encourage additional transmission, either within or outside of ERCOT.

In the end, it all comes down to expectations. If you expect great things from government, the results of the legislative session on energy may seem like a disappointment. But the session did not fundamentally alter the nature of the Texas electricity market, and the changes that were made will not likely undermine new private investment in the system. It was a mediocre session, but, well, it could have been worse.