What Congress Can Learn from Texas about Heat Waves and Competitive Markets

Posted by Dylan Reed on Nov 28, 2018 11:30:00 AM


Image courtesy of Chrishna and used under a Creative Commons license.

Severe weather events – whether hurricanes, wildfires, cold snaps, or heat waves – increasingly play a role in the lives of Americans. While extreme weather creates all sorts of problems, high on the list is the stress they put on the electric grid. Prior to this year, the 2014 Polar Vortex has been pointed to by those concerned about the ability of the electric grid to withstand severe weather events, and we’ve noted how wind and demand response helped keep the lights on during that cold snap. But in 2018, it was an expected heat wave in Texas that loomed as a potential threat to the grid. Would the Electric Reliability Council of Texas (ERCOT), the grid operator that relies more on market principles than any other in the country, be able to keep on the lights? The answer turned out to be yes – with lessons that could prove instructive to the 116th Congress when it convenes in January.  A summer heat wave, when air conditioning systems run full blast for days on end, tests the capacity of the grid wherever it occurs. But the design of the Texas electricity system raised particular reasons for concern. Other regions across the country use capacity markets to ensure that enough resources are available to meet reliability standards that take into account unusual levels of demand. In the Mid-Atlantic, grid operator PJM has seen reserve margins grow to over 25% to guarantee reliability. Texas, on the other hand, relies on competition in energy-only markets, rather than a regulatory mandate, to keep sufficient resources available to meet demand, resulting in projected reserve margins as low as 9%. Could a market with so little excess generating capacity make it through a hot Texas summer with numerous 100-degree days?

Well, the verdict is in.

In its recently released market performance summary, ERCOT found that market conditions worked well during the heat waves of 2018, meeting reliability standards without recourse to emergency, out-of-market measures. Indeed, the market worked well in spite of Texas suffering its fifth hottest summer season (June through August) ever recorded, going all the way back to 1895, and ERCOT setting new all-time system peak demand records twice in July.

The summary also noted that demand-side and distributed energy resources helped during critical moments on the grid, and these resources will continue to play an increased reliability and consumer-savings role as ERCOT updates its rules improve to increase visibility into those markets. To that end, the Public Utility Commission of Texas (PUCT) opened a new proceeding this year to look more closely at how to integrate distributed advanced energy technologies into the grid.  Almost 20 years after Texas’ electricity competition bill was passed in 1999, the PUCT is continuing to make enhancements to allow competitive markets to adapt and evolve – but the core principles of competition and customer choice continue to be paramount.

Texas’s success in beating the heat was noted by others long before ERCOT’s formal assessment. By the end of the summer, free-market champions were pointing to ERCOT as a grid system that is pro-consumer, pro-advanced energy, and pro-environment. In a September update entitled “Texas—And Free Market Competition—Survive Heat Wave,” the American Action Forum called the Texas market structure a success for dealing with extreme weather while simultaneously encouraging investment in cleaner resources and retirement of aging infrastructure like expensive coal plants. The R Street Institute also noted that “the Texas market is working, as consumers and producers find innovative ways to reduce costs and enhance service quality.” R Street also argued that Texas has the “best market structure” for encouraging the development of advanced energy resources including large-scale renewable energy, demand response, and storage.

Investment decisions in the ERCOT territory bear that out, as the grid incorporates massive growth in natural gas, wind, and solar while demand response and now storage are increasingly play important roles in meeting the electricity needs of consumers. Specifically, renewables responded well during the heat wave of 2018, with 1200 MW more capacity available than in corresponding hot days in 2017. Recent analysis confirms that advanced energy resources are now the most cost-competitive, and will continue to push out more expensive aging power plants out of the market.

What’s more, competitive markets can be a win for the environment. Competitive forces in the market are now choosing advanced energy resources – whether solar and wind paired with storage or demand response and distributed energy resources – that reduce emissions while pushing out inefficient, higher-emitting options like aging coal plants.

Texas’s reliance on competitive markets stands in stark contrast to measures in play at the federal level. This year began with the Federal Energy Regulatory Commission unanimously rejecting a proposal from the Department of Energy to provide cost recovery to all power plants with 90 days of onsite fuel – a costly plan with no proven benefit. Several months later, President Trump ordered Energy Secretary Perry to take immediate steps to stop the closure of uneconomic coal and nuclear plants throughout the country, an edict that was opposed by industry, consumers, a wide swath of free market groups, and environmental organizations. Since then, the Administration has taken no action on this proposal, but we fully expect it to rear its head before long.

As congressional leaders come to D.C. for the 116th Congress, they should consider what the federal government can learn from the Texas example. Congress can prioritize competitive markets, rather than politically driven handouts, to promote energy that is good for businesses and consumers, job creation, and the environment. Advanced energy resources continue to face some regulatory barriers in wholesale markets, and a new Congress could concentrate on changing that, making those markets work even better for everyone who relies on the power grid. We look forward to working with policymakers to bring affordable and reliable advanced energy to all Americans.

AEE and Citizens for Responsible Energy Solutions (CRES Forum) teamed up to offer, for Congress’s consideration, five ways to improve the electric power system and accelerate growth from energy innovation. These ideas would benefit various technologies, but all represent opportunities to embrace innovation and make the power grid our economy relies on secure, clean, and affordable.

Download AEE & CRES Policy Paper

Topics: Federal Policy Update, Wholesale Markets