Dive Brief:

• Early feedback on a grid reliability study and proposals to redesign Texas’ energy-only market has skewed negative, with a mix of consumers and experts warning that the analysis completed by consulting firm E3 is flawed and will not guarantee improvements to grid reliability.
• Comments are due Thursday to the Public Utility Commission of Texas, but independent energy analyst Alison Silverstein filed last week to warn E3’s study overstates the availability of gas and coal generation and fails to sufficiently account for extreme weather risks.
• E3’s analysis did not include the extreme weather seen during Winter Storm Uri, which devastated the Texas grid in 2021 and launched the state’s market redesign. But the firm defended its methodology, saying it considered 40 years of weather which did include both very hot and cold seasons.

Dive Insight:

E3’s analysis was published before the PUCT’s November meeting and regulators set an expedited comment schedule ahead of the holiday season. The bulk of responses are expected at the filing deadline, but an early sampling suggests skepticism about the analysis and proposals.

The E3 report “is too deeply flawed to be trusted to guide reliability and market decisions of this import,” Silverstein said. “Many of those flaws misrepresent or mislead” the reliability risk faced by the state’s grid operator, the Electric Reliability Council of Texas, she said.

In particular, Silverstein said the E3 study “doesn't adequately address the reliability challenges associated with more extreme weather and extreme load,” and it “underestimates thermal generator outages and assumes perfect fuel supply despite Uri failures.”

The study does not include Winter Storm Uri in its dataset, but E3 officials stand by that decision.

"It was a little confusing the way it was written," according to an E3 official who declined to be named. The weather record used in the report ran from 1980 to 2019. "There was extremely cold temperatures in that data set," the official said. Specifically, 1983 and 1989 had extremely cold temperatures that were on par with the temperatures seen in Texas during Uri, they said.

"It is accurate to say that the study does include extremely cold winter weather conditions and we capture the high levels of demand that are associated with those extreme cold temperatures,” the official said.

As for generator failures, “when the weather gets colder, load goes up. And generator probability of failure goes up. And we have both of those dynamics captured in the model,” the E3 official said. “What we do not have captured in the model — and this is by design and this was an intentional decision — is that we do not have the extreme level of generator outages that were observed during Uri specifically."

"We're intentionally not assuming that the system would fail at the same level of magnitude in the winter as we observed during Uri,” the official said, because E3’s assumptions around generator failure rates reflect actions taken by the PUCT and the Texas Railroad Commission, which oversees gas pipelines, to weatherize power generation and shore up fuel supply since Uri hit.

The PUCT is considering adopting a Performance Credit Mechanism, or PCM, outlined in the E3 report which would be earned by generators based on their availability during hours of greatest risk to the system and is designed to incentivize development of new dispatchable generation. But the PCM has “serious flaws,” “entails significant risk” and “fails to strengthen the grid against extreme weather events,” individual consumers said in comments on E3’s study and the market redesign proposals.

The PCM appears to be the commission’s preferred market reform approach. E3 estimated it would cost consumers about $460 million annually.

Independent energy analyst Robert Borlick recommended the PUCT incentivize the “development of robust retail demand response, which will increase ERCOT system reliability and further lower electricity customers' costs.” Otherwise, he recommended ERCOT’s energy-only market “be retained in its current form.”

The R Street Institute, a nonprofit, nonpartisan public policy research organization, was more sanguine on E3’s report.

“The PCM is a workable framework to add additional incentives for installed (reserve) capacity,” R Street said in its comments. “Additional discussion, deliberations and decisions will be needed to transform the PCM concept into a detailed design, ready for implementation.” 

R Street also noted that criticisms of E3’s evaluation of market design proposals “focus on the failures that occurred during Winter Storm Uri,” but said “to be clear, the Uri-caused catastrophe was not a market design problem. ... energy issues during Uri were generator performance problems, not installed capacity problems.”

More comments are expected to be filed on Thursday from load-serving entities, fossil generators, storage and renewable owners and developers, customer advocates and industrial consumers, said Silverstein.

Texas lawmakers have signaled concern about the PUCT’s market reform efforts. In a Dec. 1 letter to the commission, a group of nine state senators said the PCM proposal and others “should not be adopted ... without further consultation with the Legislature.”

"We've been in contact throughout this and will continue to be in contact with members of the legislature to let them know how this is proceeding,” PUCT Director of Communications Rich Parsons said.

The commission is proceeding towards a vote on market reforms but "we've made very clear to the legislature that we will not implement anything without their guidance,” he added.