ERCOT Market Design, Subsidies For Renewables, ‘Fails To Adequately Pay For Reliable’ Generation

Many reports have been published about the causes of the deadly blackouts that hit Texas a year ago. But a new report from the Texas Section of the American Society of Civil Engineers contains one of the best — and most succinct — analyses of the reasons why the ERCOT grid came so close to collapse on February 15, 2021. 

The executive summary of the 123-page report says, “This assessment concludes that 1) revenue insufficiency from ERCOT’s energy-only market model, influenced by federal and state  subsidization of intermittent resources, fails to adequately pay for reliable dispatchable generation and, 2) that these market model deficiencies are the leading contributor to making the ERCOT system less reliable.”

There it is. In plain English. Some of America’s top engineers — not politicians, or journalists, or renewable-energy promoters — are declaring that ERCOT’s market design simply doesn’t ensure reliability. That assessment rhymes with what Ed Hirs, an energy fellow at the University of Houston wrote in a piece published last month. Hirs said the ERCOT system failed because generators did not invest in winterization. Why not? Simple: they weren’t making enough money to justify doing so. He wrote, “For eight of the 10 years prior to 2021, the average wholesale price of electricity in ERCOT was too low for generator companies to earn returns on capital. Consequently, they had every incentive not to invest in winterization. The ERCOT market rewarded volatility at the expense of reliability, despite a decade of warning.” 

One of the key reasons why generators weren’t able to make returns on their invested capital is the flood of subsidized renewables that have come into Texas. And that problem is about to get worse. As I pointed out in these pages last week, the total amount of wind and solar generation capacity on the ERCOT grid could total more than 70,000 megawatts by the end of next year. If that happens, the ERCOT grid will have more weather-dependent renewable generation capaity than it has all forms of gas-fired generation. All of that intermittent capacity, the build-out of which is being driven by federal subsidies that are far greater than those given to hydrocarbons or nuclear, will further undermine the integrity of the Texas electric grid. If all of the forecast solar is indeed added to the ERCOT grid, Texas could have about as much solar as now exists in California.

Indeed, the solar sector is getting about 250 times more in federal tax incentives per unit of energy produced, than the nuclear industry. Furthermore, as I explained in these pages back in 2020, the wind industry is getting about 160 times as much as the nuclear sector. Those numbers are based on 2018 data from the Congressional Research Service which I combined with energy production data published by BP. 

Those lavish federal subsidies, along with flawed market design, have allowed weather-dependent renewables to “free ride” on the dispatchable generation from plants that burn natural gas. The civil engineers’ report underscores the importance of that problem. In one of its recommendations, it says policymakers should “ensure that the energy-only model of ERCOT does not negatively impact the higher reliability capacity market of the natural gas industry at either the intrastate or interstate level. Like any customer, the electric industry must not be allowed a free ride on a system paid for by others. The generators must be required to pay for the quality of service that it requires and not rely on subsidization by the natural gas industry.” 

It must be noted that ERCOT’s dependence on gas-fired generators has surged in recent years because about 6,200 megawatts of coal-fired capacity on the ERCOT grid was retired between 2016 and 2020. Furthermore, the retirement of those coal plants, combined with the ERCOT grid’s increasing reliance on weather-dependent renewables and natural gas, is occurring at the same time that Texas (unlike most other states) is seeing significant demand growth. Since 2010, electricity generation in the state has been growing by about 1.5% per year.

In the body of the report, the engineers recommend the formation of a market mechanism that “rewards reliability, whether a unit is dispatched or not, balanced with reasonable electricity prices for consumers to replace the current flawed energy-only market, with subsidized intermittent generators, that solely depends on scarcity pricing to provide revenue sufficiency for reliability investments.” The report goes on, saying that weather-dependent renewables are reaching the tipping point in their share “of the energy market and should bear the cost of negative reliability impacts on the system through a reliability standard that requires funding reliability payments to dispatchable generation with the system.” 

The report is comprehensive, clearly written, and full of great data. (Texas has 7,056 water systems, the majority of which serve fewer than 500 people.) It covers the need to invest in black start capability, “the growing interdependency between infrastructure sectors,” (read: gas producers/pipelines and electricity generators), water and wastewater infrastructure, the “water-energy nexus,” and the need to prioritize a “reliability and resilience culture.” About the last item, the report says “reliability and resilience are not performance outcomes that can be inspected or audited into the system. Reliability must be integrated into daily operations like how a business successfully approaches safety.” 

The report is full of facts and provides a good overview of the state’s critical infrastructure. I’ll close with one other sentence that jumped off the page: In a summary of chapter four, which discusses the need to establish a “foundation of reliability-focused regulations and incentives,” the engineers declare that “Subsidizing activities that result in negative impacts to reliability must be eliminated.” Amen to that. 

Again, here’s a link to this outstanding report.