The Future Texas Grid And How To Get There

The Texas grid 10 years from now on will be dominated by renewable electricity resources, batteries, and the four legacy nuclear power plants of today. Coal power plants will be gone. Some natural gas power plants will be on the grid to provide short-term backup supply, but they will be used less and less frequently. The Texas Legislature is grappling with various proposals, none of which appear geared toward preparing the Texas grid for the future or solving the immediate problem of a market that works against both electricity producers and consumers. So how do we get there?

Economists will tell you that the power plants with the lowest cost of operation, the lowest marginal cost, will win out over time. It is easy to see how this will play out with an overly simplified comparison. Just looking at the full-time labor requirements, the new 1.3 gigawatt Samson Solar Energy Center in North Texas will have a full-time workforce of 12, and a small herd of sheep to keep the grass mown. The South Texas Project with two nuclear power plants produces 1.3 gigawatts per plant with a total of 1,100 very highly trained employees. The fuel costs of the Samson plant will be zero. The fuel costs of nuclear, coal, and natural gas power plants are all greater than zero, to which must be added costs of water usage, scrubbers, and the disposal of coal ash or nuclear waste. Wind costs more to operate than solar but less than the other generation assets.

Renewable energy is not free. Assertions to the contrary are wrong. One misleading study asserts that the wind and solar farms bid into the ERCOT wholesale market “by providing energy at zero or near-zero prices.” It overlooks that these wind and solar farms had already presold their electricity at a price much greater than zero just to be built. The Samson Solar Energy Center is being built with the electricity presold via power purchase agreements to McDonald’s, AT&T
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, Honda, The Home Depot, Texas A&M University, and Google
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. The study failed to consider the added costs of new transmission lines necessary to bring that renewable electricity to market.

To be reliable, intermittent wind and solar energy resources require a large investment in efficient batteries. Batteries will become the new dispatchable resource for the grid and, over time, increasingly push aside natural gas power plants. The best batteries today can provide only a maximum of four hours of discharge. They have a high upfront capital cost but virtually zero in terms of employee headcount. It would require a large number of batteries to fully replace legacy power plants. But the way they are being integrated into the grid in California and Texas is simple. The batteries charge when there is a surplus of electricity and prices are low, even negative, no matter the source of electricity. They discharge when demand increases during the day and sell their electricity at a higher price. It is a daily, market-driven arbitrage.

The Texas Legislature is confronting well-funded competing interests and a long broken electricity market that killed hundreds of Texans during the 2021 winter storm and caused as much as $200 billion in economic losses.

From 2010 to 2021, the Texas economy grew from $1.25 trillion to $1.99 trillion. The portfolio of coal, nuclear, and natural gas power plants shrank. For eight of the 10 years prior to 2021, the average price received by power plants in ERCOT was less that than the average cost of building and operating new coal, nuclear, and natural gas power plants—and wind and solar farms for many of those years without the federal subsidies. In other words, there was no incentive for Wall Street to invest in generation. For more than a decade, the rate of return for electricity transmission companies has not been competitive with other asset classes. Investors who have a choice between investing in the S&P 500 and simple electricity transmission companies choose the higher return asset.

What do we do today? The first thing we do is offer to pay any consumer—not just cryptominers—not to use electricity during peak demand periods. This is called demand response. Airlines do this by offering compensation to passengers willing to give up their seats on overbooked flights. In the old days Houston Lighting & Power paid consumers to be able to switch off their air conditioning compressors during hot days. ERCOT customers have the smart meters necessary to implement this solution already. In California, more than a million consumers opted out of their electricity service several times last summer—and they were not even paid to do so. This approach is not popular with commodities traders because it will lessen price volatility, with many fewer price spikes going forward.

Second, because the state of Texas has not kept up with the growth in population and electricity demand, new generation capacity and new transmission capacity must be added quickly. This can be paid for out of the taxpayers’ pocket or the consumers’ pocket, but it obviously comes out of the same pair of pants. With a massive budget surplus, the state can afford to purchase or guarantee the purchase of more batteries, and new back-up natural gas power plants even as they are used less and less, year by year. Once installed, the state can then auction these off to the private sector. To keep existing power plants in the market, the Public Utilities Commission and ERCOT will need to pay for these plants to be maintained and ready to go.

Going forward, the state must enforce compliance with contracts between consumers and everyone in the electric utility supply chain. Multi-billion dollar bailouts of companies that failed to provide electricity (and the natural gas to generate it) in February 2021 was a complete repudiation of conservative, free market principles. The participants in ERCOT know that the state will not let them go bankrupt. This is the wrong incentive. Participants who fail to deliver must be subject to consequences.

The ERCOT electricity market needs comprehensive reform and extensive investment to sustain the economy of Texas. It will not happen without a return on investment. It will cost us money. It is that simple. The leadership in Austin can no longer afford to play ERCOT weather roulette with the lives and livelihoods of Texans.