SB 6: Bill Analysis and Cost Estimate
The author H.L. Mencken once wrote that “for every complex problem there is an answer that is clear, simple, and wrong.” This is a good summary of Senate Bill 6. Grounded in the admirable desire to avoid a repeat of the Texas blackouts of 2021, the bill would create two separate mechanisms intended to guarantee that the state has the power it needs to meet electric demand in an emergency. Unfortunately, the bill would not only add an estimated $10 billion to Texans’ electric bills, but portions of the bill would serve to undermine future investment in electric generation, ultimately undermining the Texas electric market.
SB 6 contains two main components:
- It creates a new state-funded initiative to build 10 gigawatts (GW) of gas generation.
- It sets up a new state fund to provide low-interest loans to new and existing gas plants.
Texas Energy Insurance Program
SB 6 authorizes the Public Utility Commission (PUC) to certify one or more companies to build, own and operate up to 10 GW of gas generation under the rubric of the Texas Energy Insurance Program (TEIP). Generation resources that fall under this program differ from normal power plants in two crucial respects. First, the plants are limited in when they can generate. TEIP resources are allowed to generate for up to 336 hours a year for “testing” purposes. Other than that, they may only provide electricity to the grid when doing so would be necessary to avoid blackouts. Second, unlike normal competitive generators, the costs of building and operating these plants up to $1 billion per GW are to be socialized across all Texans’ electric bills.
SB 6 contains a number of stringent requirements on who can be certified to build TEIP generation, such as that the applicant or the applicant’s parent already owns or operates electric generation assets totaling at least 10,000 megawatts; has an “A” credit rating; and is able to fund the investment with cash on hand or secure financing within 60 days of certification.
Few applicants are able to meet these requirements, but one company that can is Berkshire Hathaway. Not coincidentally, the TEIP is similar to a proposal put forward by Berkshire Hathaway during the 2021 legislative session. At that time, Berkshire suggested that they could build the 10 GW of generation for $8.4 billion. This year, however, representatives of Berkshire Hathaway have testified that inflation and other cost increases mean that they would now need $11 billion to build the plants. It is therefore reasonable to conclude that the direct cost to build the TEIP plants will be the full $10 billion authorized by the bill.
The bill provides that whoever is certified to build the plants may claim a 10 percent return on equity on top of their costs. Assuming 100 percent equity financing for 10 GW of these new units, this would cost every Texas household $3-4 per month (for a very long time). This amount does not include operation and maintenance costs.
TEIP assets will compete against private generators in the ERCOT market
When TEIP assets are used (either during an emergency or during the 336 hours of annual testing), at least some portion of the revenues generated by the assets would be returned to Electric Reliability Council of Texas (ERCOT) customers. The bill provides that the owner of the TEIP assets would not profit from operating for purposes of testing, and assures that operations costs would be recovered during testing. Determining how much revenue would be generated via the testing hours is difficult, as SB 6 leaves the timing of those hours at the discretion of ERCOT. In 2022, average monthly prices in the ERCOT real-time market ranged from just over $30 a megawatt-hour (MWh) to over $150 a MWh. In theory, if the certified entity decided to test its plants entirely during periods of peak demand, it could generate $16.8 billion a year in testing revenues alone. On the other hand, prices are actually negative or at zero for a significant number of hours in ERCOT each year. Assuming average testing revenues reflect the average monthly prices in ERCOT in 2022, they would generate approximately $237.4 million a year.
Testing revenues represent a kind of catch-22 for the TEIP. To ensure that the generation assets are able to perform in peak demand conditions, testing will likely need to occur more often during periods when wholesale market prices are high. This would reduce the direct costs of the TEIP as the revenue generated would be rebated to consumers, but it would increase the indirect costs by taking revenues away from competitive generators and making investment in new generation less attractive. However, further changes to ERCOT’s real-time energy market, such as revisions to the Real-Time On-Line Reliability Deployment Price Adder, would be required to minimize the impacts to other generation from the testing energy injections from TEIP units.
Is the TEIP insurance?
The TEIP is framed as being an insurance program to preclude the need for rolling blackouts that happened during Winter Storm Uri. Yet it is a poorly designed insurance scheme for several reasons. First, there is no guarantee that the TEIP plants will actually function in the emergency circumstances when they would be called upon to do so. SB 6 allows the PUC to impose a penalty on TEIP assets for failure to perform. However, this penalty is limited to $400 million per GW, meaning that even if none of the TEIP assets never perform, at most the state can recoup $4 billion of the $10 billion it paid for the plants. SB 6 also provides that the PUC cannot impose penalties for failure to perform if there is equipment failure beyond the control of the certified entity, even if the equipment failure could not reasonably have been predicted or remedied.
Second, even with its massive costs, the TEIP alone is not enough to protect against another Uri-scale event. During Uri, more than 10 GW of load was shed for approximately 60 hours. At times, up to 20 GW of load was estimated to have not been served. Even if the TEIP plants all performed perfectly, 10 GW of insurance capacity would not be sufficient, on its own, to avoid all load shed in another Uri-like situation.
Finally, most actual insurance programs work by diversifying risk over a wide range of scenarios. The TEIP does not. Essentially, the TEIP is akin to a person who is worried that their car will not work in a crisis, and so buys a second car to keep in the garage and hopefully never use. This is not a sensible use of state funds.
Texas Energy Insurance Fund
While most of the attention regarding SB 6 has focused on the provisions related to the TEIP, the bill also includes a separate program for new and existing competitive generators. The bill would create a new special fund with state money, under the control of the PUC. This fund would be used to provide loans, at zero interest rate, to finance maintenance or modernization of dispatchable electric generation facilities operating in the ERCOT region. Creating such a fund requires the passage of a constitutional amendment by the legislature and approval by the votes, which is provided for in SJR 1. The amount of money to be deposited is not yet determined.
This proposal to centrally procure and guarantee cost recovery for such a large amount of generation must be recognized as a complete departure from two decades of reliance on competitive markets. It would be a mistake to think that this one thing, this one time, will not have lasting impacts to how private capital will be deployed in Texas. The program is, however, not entirely without precedent. California has recently authorized their version of generation capacity insurance by authorizing more than $50 billion in general tax revenues to provide for a “State-led Strategic Reserve” that will comprise generators and storage systems that are only to be used in emergencies. Texas does not need to follow suit. We estimate that the direct cost of the legislation will exceed $1 billion per year, plus lost earnings on whatever money in appropriated through the TEIF loan fund. The indirect costs are unknown but could seriously impair the functioning of the competitive ERCOT market.