Analyst: Wind, solar 'distorting' Texas energy market

Brent Bennett doesn’t believe in myths, especially when they concern the Texas electric grid.

“First of all, the idea that Texas is a deregulated market is a fairy tale. I should make my views on that clear upfront,” Bennett said. “Because what we are is an energy-only market where we have competition to provide that energy. But the nature of the market is such that there's a heavy amount of regulation and market distortion. There are two different things. The regulation comes in the way that the PUC sets prices.

“We have reliability adders, we have all kinds of different price structures to try and incentivize plants to come online, kind of in a way, modify what prices might naturally be, right, to kind of ensure reliability,” he told Houston Daily. “What we don't have is a strict capacity market where we pay plants to stay online, nor do we have some kind of like minimum reserve margin. We are going to institute more guidelines, more reliability standards. That's going to come down the pike."

Brett Bennett | Texas Public Policy Foundation

Bennett is the policy director for Life:Powered, an initiative of the Texas Public Policy Foundation, with a professed goal to raise America’s "energy IQ."

He possesses a wealth of energy knowledge, including how it's produced and priced, and how the energy market is structured. Bennett earned a Master of Science in engineering and doctorate in materials science and engineering from the University of Texas at Austin, in addition to a bachelor’s degree in physics from the University of Tulsa.

Bennett worked for a startup company selling carbon nanotubes to battery manufacturers, and he continues to provide technology consulting to energy storage companies while joining the TPPF team.

In his opinion, adding some regulation to the Texas electric market isn’t a bad idea – as long as it focuses on solar and wind production.

“I think the idea that we have a deregulated market is, again, a fairy tale,” Bennett said. “We just have a different form of regulation that allows for more competition compared to other markets that have utilities that are essentially regulated monopolies. It's more deregulated than that. But it's far from being like a true deregulated, competitive market like you would see in consumer products or something like that.

“Because you're providing a service to the customer that is dependent on everything working together … supply and demand have to match at all times on the grid,” he said. “There has to be some level of regulation to ensure that that happens. Otherwise, no one is responsible for that, then we have blackouts all the time. So, that's the conundrum of cutting the grid.”

A major issue that needs to be addressed is market distortions, Bennett said.

“We have federal subsidies. We have state subsidies,” he said. “We have the fact the transmission market is still regulated introduces all kinds of distortions because you don't have, especially for wind and solar, any incentive to really decide where transmission is going to be cheapest because the transmission is paid for by the customer through a regulated utility.”

Wind and solar subsidies create much of the market distortion, Bennett said.

“You know, they're not, in a sense, driving the market. All they're doing is providing energy when they have it,” he said. “And that's it. And part of the reason they can do that is because of subsidies. But it’s also just the nature of those energy resources. They're variable and they sometimes bid into the futures markets, but not very often. They're not really setting the market. They're just riding it. 

“And so, in an energy-only market, they can just bid in whatever they want, and they don't have to provide any kind of reliability,” Bennett said. “They're not contributing towards keeping the grid balanced. That’s all the dispatchable generators that are doing that.”

He said as long as wind and solar play a significant role in the market, some form of reliability standards must be established – “because otherwise you have a variable supply trying to match the variable demand, and it just doesn't work.”

That view doesn’t come easy for someone who believes in market-driven systems. But if some energy producers receive assistance, there needs to be an equalizing force, Bennett said.

“If there is a deregulated way, if there is a way to do that through purely through prices, no regulation, it's never been done before and there's no example of it that's ever existed in history,” he said. “There has to be some level of regulation there. As much as I love deregulation, there has to be something there.”

Texas also has a regulated transmission market, which is a very important factor.

“We have transmission lines divided between five different companies in Texas. And they all get a guaranteed rate of return on their investments. So, that part of the market is very regulated,” Bennett said. “Probably the most deregulated, the most competitive part of the market, is on the retail side, where you have retail providers that can develop all kinds of different products, although we're going to now finance some of those products like wholesale indexed energy plans.”

He said the production tax credit is driving the market to building more resources than what the market would naturally call for, which creates a “doubly troublesome situation,” in his view.

Bennett said Gov. Greg Abbott was “spot-on” in his July 6 letter to the Public Utility Commission of Texas, strongly recommending an emphasis on reliable power for the state.

“The objective of these directives is to ensure that all Texans have access to reliable, safe, and affordable power, and that this task is achieved in the quickest possible way,” the letter states. “Through clear communication, transparency, and implementation of these critical changes, the PUC and ERCOT can regain the public’s trust, restore ERCOT’s status as a leader in innovation and reliability, and ensure Texans have the reliable electric power they expect and deserve.”

Bennett claims that was the right message in the wake of the February crisis when Winter Storm Uri left millions of people in the dark while the storm pounded the state with cold temperatures and strong winds. More than 100 people died and the economic impact was estimated at $295 billion.

“We think that a lot of the governor's directives are actually spot on, especially the second one where they're asking for wind and solar to basically confirm their requirements, basically saying they have to firm up some of their capacity if they're going to bid into the market,” Bennett said. “They have to provide some level of guaranteed capacity, especially during times of peak demand. If they’re going to play in the market, they have to come closer to approaching the characteristics of the other generators in the market. Otherwise, it's not a fair market. And you're basically giving them a free ride on providing the reliability services the grid needs.”

He said Texas fell about 40 gigawatts short at the height of the storm, 30 of that due to downed generation, about 12 of that due to planned maintenance and other somewhat unavoidable things during that time of the year.

“And then the other 18 was due to weather or gas supply issues. The weather was about maybe half the problem,” Bennett said. “Then there's 10 gigawatts that we were short of capacity. And that's because we're counting on wind and solar to meet our growing demand. And there was none of it during the height of the storm, very little wind and no solar. Now, there were some periods during the day that we had some sun and a little bit of wind, but it really it was really almost nothing during the height of the storm.”

This happened at a time when Texas is seeking more energy while other states are reducing demand. No new gas, coal or nuclear plants are being constructed.

“Electricity demand is growing, and we're not building any more gas or coal power plants or nuclear,” Bennett said. “So, we're counting on wind and solar to meet that gap. And in fact, that gap was exposed February.

“But also, there's been a tremendous lack of investment in our thermal generation,” he said. “That's why you're seeing a lot of power plants have trouble this summer, I think is because basically these power plants are losing money and their operators don't have a lot of incentive to reinvest in them, to maintain them for extreme weather events, because basically all the money in the market is being sucked out by wind and solar, all the investments going towards wind and solar because that's where they can make money."

He said many cooperatives are “basically integrated systems,” such as Austin Energy.

“Those guys performed very well during the storm, not losing much money or making a little bit of money,” Bennett said. “But you can see that the symptoms, a lot of that underinvestment of the market followed by the explosion of wind, solar and the lack of investment and everything else.”

When people say gas and coal weren’t able to respond to the crisis, that’s because the market's not giving them the right incentives to do that, he said.

“We got to make sure the market is properly structured in order to incentivize reliable generation,” Bennett said. “It is tricky because you have to pay for all that. You have to pay for reliability. We’ve seen how expensive unreliability is.”

If coal, gas and nuclear producers are being required to improve their preparedness for extreme weather, wind and solar must provide reliability, he said.

“If they don't, then those costs are going to be socialized across the grid, across all customers, basically,” Bennett said. “We as customers are going to have to pay that cost some way. When you hear the PUC chairman saying, you know, we're going to doing our best not to increase costs to customers, that we simply try to change the price structures and the investment patterns grid, that's what he's talking about. And we think that's necessary. It's not ideal. Obviously, the ideal thing would be that we wouldn't have all these interventions. But it's necessary.”

Electric Reliability Council of Texas Interim President and Chief Executive Officer Brad Jones presented a “Roadmap to Improving Grid Reliability” earlier this summer.

It’s a series of policy recommendations to improve reliability in the Texas Electric Grid. Presenting this roadmap, Jones stated that recent legislation, SB2 and SB3 provided guidance. He also said ERCOT received input from the PUC based on Gov. Abbott’s recent directives. Jones also emphasized government regulations.

The ERCOT “Roadmap to Improving Grid Reliability” strongly emphasizes more regulation and government intervention in the market.

For instance, ERCOT consistently uses language suggesting increased regulatory burdens, including the following excerpts: Propose a new market rule for generators; propose a new market rule requiring generators; adopt a more aggressive approach to operating the grid; and revise market protocols so that firm load shed (when utilities reduce power on the electric system) is accounted for in market scarcity pricing signals.

The ERCOT “Roadmap to Improving Grid Reliability” places an emphasis on increasing the role of renewables, including batteries and transmission for renewables, in the market. 

According to a Houston Daily report, Gov. Abbott had much harsher condemnation for renewable energy sources than the recent ERCOT roadmap. In an order to the PUC and ERCOT, Abbott asserted that the PUC needed to support infrastructure for natural gas, coal, and nuclear power. Furthermore, Abbott also ordered that reliability costs should be allocated to producers of energy that cannot guarantee reliability, like wind and solar.

Capacity markets, the alternative to Texas' competitive system, pay power generators in advance at a set price. Generators are paid again by the consumer as the electricity is used.

A Reuters article admits that in a capacity market, "Generators get paid whether they produce power or not."

The ERCOT “Roadmap to Improving Grid Reliability” is in alignment with the idea of a Texas Capacity Market, insofar as it discusses restructuring pricing systems to promote reliability.

In an interview with The Texan, Public Utility Commission of Texas Chairman Peter Lake stated that “Our electricity market used to focus on affordability and then reliability, but from now on reliability is the first focus over affordability.” The way Lake wants to pursue reliability is by restructuring the Texas electric market to create “incentives for generators who commit to showing up and do show up.” He continued by stating “We will pay for reliable power in any form.”

Bill Peacock, policy director at the Energy Alliance, elaborated on the unreliable nature of intermittent generators. During the winter storm that plagued Texans with lengthy power outages, Peacock noted that “the more wind and solar you get onto the grid, the more problems you're going to have with reliability.”

He described how the storm not only contributed to increased demand, but it also created weather conditions that made renewable energy generators unable to operate at even their already diminished expected levels.

According to Peacock, in an op-ed for the Dallas Morning News, “capacity markets do little to improve reliability” because they are “extremely inefficient and anticompetitive.” However, capacity markets are pursued by Texas lawmakers because they shift market power “from consumers to politicians and regulators” and also “shift risk from generators to consumers,” as well as “redistribute money from consumers to big business” to the tune of $4 billion per year.