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Winter is coming. It’s an unavoidable truth hovering over Austin as the Texas energy market’s governing bodies attempt to fix an aching electric grid in a race against Mother Nature.
February’s winter storm and subsequent electricity crisis, which led to the deaths of more than 250 people and knocked out power for nearly 70% of Texans, served as a wake-up call for a state that prides itself on its independent, deregulated electricity market.
After months of in-depth discussions with energy experts, market participants and concerned public figures, a fix still hasn’t been finalized. Texas Public Utility Commission chairman Peter Lake has presented a first draft — a “strawman,” of sorts — and he knows his suggested fixes will almost certainly change before the regulatory agency signs off on a market redesign blueprint by the end of the year.
Charged with the task of balancing impending cold weather and the future of Texas energy, Lake said he knows one thing for sure.
“We aren’t going to get a second chance,” Lake said. “The people and businesses in Texas deserve and demand that when they turn on the switch, the lights come on.”
Lake, a 39-year-old Tyler native who left Texas to pursue degrees at the University of Chicago and Stanford University, was thrust into the debate over the state grid when Gov. Greg Abbott appointed him to his current position in April.
Before chairing the PUC, the entity responsible for regulating the state’s electric and gas utilities and directing the market redesign, he served as chairman of the Texas Water Development Board and worked a number of private sector jobs, including director of business development at Lake Ronel Oil Co.
Now Lake and his colleagues are facing down a problem afflicting not only the Lone Star State but the rest of the world.
For weeks, energy experts have been warning of a global energy crisis spurred by a resurgence in demand following the COVID-19 pandemic and exacerbated by winter temperatures. Natural gas, oil and coal prices are skyrocketing.
Rolling blackouts have already begun in China as the country scrambles to find more reliable sources of power. Across the globe, rising electricity prices have backed European politicians into a corner. They have to decide whether the answer lies in the speed at which the continent transitions away from fossil fuels.
PUC commissioners are in good company in their quest to remedy what Lake calls a “generational” shift in energy use. But they’re left without an example of how to navigate a market redesign in a state that consumes one-seventh of all energy in the U.S.
“I will shamelessly steal good ideas. I’ll give credit, but I will absolutely steal a good idea,” Lake said. “And nobody, nobody, not a single person, has said, ‘Yep, I know what to do.’”
The strawman
For about 20 years, Texas’ energy market has been deregulated, meaning power generators sell their supply in a competitive market. Customers get to choose their provider and their type of energy plan, which vary in design and price.
Wholesale energy prices shot up during the winter freeze as supply dwindled, leaving some customers with astronomically high bills. Texas legislators and regulators said preventing similar price jumps and energy supply issues by revamping the grid is their top priority.
Lake’s redesign “strawman” serves as a starting point. “Equally as important as identifying promising concepts is identifying the concepts that should no longer be considered,” he wrote in the proposal.
He identified eight categories of focus in a five-page document riddled with acronyms, technical details and lingering questions. The concepts include reforming how electricity reserves are allocated, preparing for how the state handles high-demand periods and increasing the number of energy plants that can be turned on in times of need.
It outlines the principles Lake and energy experts have long touted, like the need for energy sources that can be ready at a moment’s notice, the need for a larger margin of safety during emergency events and the potential drawbacks associated with relying on renewable energy sources.
The concept that garnered the most attention was a proposal to require energy suppliers to have enough resources to provide power during peak-demand periods.
Under Lake’s proposal, power producers would need to have 50% of the resources necessary to operate for three years out, 70% two years out, 90% one year out, 95% six months out and 100% one month out.
Commissioner Will McAdams was immediately wary of the load service obligation, saying he wasn’t prepared to endorse the concept without more details on how it would impact electric providers.
The strawman included questions about how the commission could continue the viability of the competitive retail market under such a regulation and how it could “prevent market manipulation by [power generation retailers] at the expense of independent retailers.”
“I’ll be the first person to say that I will ax the [load service] obligation if we don’t get comfortable with a version that preserves the retail market and allows the retail market to thrive,” Lake said.
Responses to potentially implementing a load service obligation have been mixed.
“The [load service] obligation looks pretty much like a capacity market in drag,” Allison Silverstein said in a Utility Dive article. Silverstein, an independent consultant working with the American Council for an Energy-Efficient Economy, also questioned whether it would improve reliability.
Houston-based NRG Energy Inc., on the other hand, filed public comments with the commission supporting the proposal. It expects its storm-related costs to total $1 billion this year, according to a company filing.
Ed Hirs, an energy fellow and economics lecturer at the University of Houston, said Lake’s proposal only nibbles at the edges of issues burdening the grid and Texas energy generators.
The PUC is “between a rock and a hard place” in its mission to balance the wants of power generators, legislators and everyday Texans, Hirs said, while also maintaining the market’s deregulated image.
As of now, the strawman proposal doesn’t address the market’s root problem, Hirs said, which is that it’s difficult for generators to make enough money to justify investments that will make them more reliable.
“It took us years to get into this situation, with a lack of investment in reliable energy generation,” he said. “And it will take at least two years to fix it, and that’s if everybody’s really running with great urgency.”
What we know now
While a market redesign is far from done, an effort is underway to winterize power plants statewide. PUC commissioners unanimously approved a two-phase plan in October that will require power plant and transmission line operators to make their “best efforts” to weatherize.
They have until Dec. 1 to meet standards identified about a decade ago following a February 2011 winter storm that shuttered the state.
Weatherization includes insulating pipes and other critical equipment, creating windbreaks to protect parts of the plant and implementing heat tracing on pipes. Companies will need to document that they’ve taken those steps, although there won’t be penalties if they experience weather-related failures.
Some companies began weatherizing for next winter even before the new standards were approved. Vistra Corp., the state’s largest electricity generator, said it will spend around $50 million on weatherization this year and an additional $30 million in 2022.
Irving-based Vistra took a massive blow from the February freeze, losing about $2 billion over the course of a week. The state economy suffered an $80 billion to $130 billion loss during the storm, according to a report by the Texas Comptroller of Public Accounts.
The tricky side of weatherization lies in how the state’s energy providers are regulated. Oil and gas providers are governed by the Railroad Commission of Texas, meaning rules passed by the PUC don’t apply to them.
A large part of the grid shutdown during the winter storm came from natural gas freezing in the below-average temperatures. In response, state legislators mandated that plants weatherize, but because the law only requires “critical” infrastructure to weatherize, some natural gas providers can opt out through a $150 application fee.
“Natural gas is fundamental to electricity, and electricity is fundamental to everyday life,” said Vistra chief executive Curt Morgan. “So it cannot walk away and say, ‘We don’t want to be part of it,’ or ‘We don’t like it because we don’t want to be critical.’”
Weatherizing measures would probably cost electricity generators $430 million annually, according to the Federal Reserve Bank of Dallas.
Moving forward
The PUC is running out of time to make a decision about the future of the Texas grid.
The data going into this decision-making is based on averages, which don’t always translate into real-world consequences, Lake said.
“Averages only work over infinite amounts of time and infinite repetitions, like flipping a coin. But when we’re running the Texas grid, we’re skydiving,” he said. “You can only be wrong once after that.”
Creating a system that runs more carefully and has additional options in case of an emergency is paramount — and quite different from the way the market currently operates.
“Your primary chute opens 99.9% of the time, on average, but no one jumps out of the plane without a back-up chute,” said Lake.
To Lake, the question at this point isn’t whether Texas will soothe its energy woes but when. In a perfect world, he’d have more time to travel the state and world, meeting with other energy leaders to discuss new and innovative options. But that’s not his reality.
“We’ve got to do it all in real-time,” he said. “Very much building the airplane while we’re flying it.”