The Future of ERCOT: Focusing on the Road Ahead
Summary
The future for ERCOT’s customers looks very bright as strong load growth and financial stability continue. Despite the events of last year, all signals are bullish as large consumers of electricity have announced investments in the ERCOT region that rely heavily on electricity as a main component of their business or production. These announcements have occurred since the February storm. The Texas model of light-handed regulation and regulatory stability have paid dividends to Texans in the form of jobs and economic growth.
Much has been written in the last 11 months about winter storms, resiliency, economic harm, and market changes. The ERCOT market has not received this much attention from the media and the public since the implementation of SB 7 in 1999. After months of finger-pointing, speculation about causes, and recommendations for changes, little was written about the reaction by commercial customers to the winter event.
The economic losses from Uri are well publicized. At last count, 130 insurance companies banded together in a massive action against ERCOT and power generators to litigate subrogation claims from storm damage that exceed $20 billion. Potential losses to market participants, most notably Brazos Electric’s $2B+ owed to ERCOT, remain unresolved. Litigation between numerous parties will linger for years as tens of billions of dollars are at stake.
Now that the winter event is over and most of the damages are quantified, have Texas businesses lost confidence in the ERCOT market system? Have existing businesses indicated a preference to leave for other regions or not expand? The evidence points to the contrary.
Texas has never experienced a worse economic disaster, and the loss of life was tragic in February 2021. Recovery will require decades. But what of future plans for the economic juggernaut that Texas has become and the jobs that spring from it?
One strong indicator of confidence in our state’s infrastructure is the collective assessment of actions by large industry. Based on all public messaging from large commercial and industrial customers, the growth potential has not slowed. The faith of sophisticated electric customers in ERCOT and state leaders continues to be high.
The public handling of the event and subsequent decisions by lawmakers and PUCT, although far from perfect, were substantively on target. Industrial concerns likely have a long list of requirements for their facilities’ power needs that would include:
Average cost for power
Ability to hedge the cost for power
Price volatility that cannot be hedged
Diversification of resources
Access to renewable energy
Impediments to growth of the transmission backbone and generation resources (cost, time to build, public resistance to growth, etc…)
Exposure to cost shifting by utilities from residential to large commercial users
Stability of political climate and risk of change that would undermine a multi-billion-dollar investment
Prospective outlook for grid after outages caused by severe weather event
Political and regulatory response to outages
Relative stability of ERCOT/Texas compared to other jurisdictions and countries
Likelihood of large cost increases in the future (transmission replacement, generation replacement, state tax burden)
When evaluating each of these criteria, Texas scores very high in almost every category. Comparing the current ERCOT competitive market with any other jurisdiction, the decision to remain in ERCOT makes imminent sense.
Tesla https://www.cnet.com/roadshow/news/tesla-austin-plant-construction-texas-cost/
Knauf https://www.knaufnorthamerica.com/en-us/mcgregor
Other industrial entities are considering new or expanded facilities in Texas at considerable expense (that I cannot disclose), and these facilities also require huge electric loads.
To what do we attribute this continued confidence in the ERCOT market? There are many factors, but here are some key differentiators for ERCOT that were likely considered by businesses.
1. Low prices and stiff competition = good deals for big buyers.
2. ERCOT has already transitioned to wires-only utilities and shed the risk of generation retirements or bad decisions. Many states continue to support vertically integrated utilities. A utility choosing the correct 40-year generation investment in the current environment is nearly impossible because of rapid technology changes. For example, anything carbon emitting may be retired prematurely and cost ratepayers a bundle, bulk solar arrays without storage capabilities cannot sustain a grid but can supplement it, and storage continues to be a high-cost solution for large-scale installations but doesn’t solve a generation shortage. ERCOT consumers avoid these high-stakes decisions and costs because generation is managed on private balance sheets.
3. ERCOT continues to invite generators from around the world to add generation. Wind now exceeds 35,000 MWs, solar is 4,000 MWs and growing rapidly, and storage installations are in the works. These assets were added on private balance sheets, not at ratepayer expense. Industrial buyers benefit greatly from this market structure as they negotiate long term purchases of power from these resources. Out-of-staters are often shocked to learn that an entire wind or solar farm can be constructed and ready to energize before a single authorization is required - to interconnect with the grid.
4. Access to renewable generation is second to none. Pressure from investors to “green up” companies has forced industrials and utilities alike to add renewable energy. Southeastern states have poor solar and wind resources, so access to renewables for industrials is difficult. ERCOT is a transmission line away from the nation’s largest all-you-can-eat renewable buffet in West Texas.
5. Liquidity in ERCOT for short term and long-term purchases is fairly robust. The volatility in February ’21 dampened that liquidity, but financial stability will return and support industrial customers as confidence grow.
6. Political stability means consistent policies, and Texas has remained under one party for almost two decades. This creates regulatory certainty, a cornerstone of attracting capital to a market.
7. The PUCT continues to be run by capable, disciplined people, including staff who do an admirable job of handling complex matters in stride. The demands of the winter storm were tremendous on PUCT staff, and their tireless efforts have earned the confidence and trust of the marketplace.
8. ERCOT is run almost solely by the PUCT without the complexities of federal involvement or haggling between multiple states. This improves regulatory certainty and accelerates decisions during crises.
9. Few subsidies for market assets exist, and that means lower costs for large consumers. The ERCOT grid is “clean” in terms of emissions, but it is also “clean” in terms of financial planning. Texas has frowned upon cost shifting and subsidizing pet projects of policymakers, and that has paid off.
10. No state can offer better access to multiple fuel sources than Texas. Gas, oil, distillates, hydrogen, wind, solar – it’s all here.
One shortcoming from the Uri proceedings delayed improvements to policy on distributed generation and energy efficiency. Commercial customers of all sizes have needs for continuous power to prevent financially devastating losses to operations. Improving the process for smaller generation units to interconnect and participate in the wholesale market will spur significant growth in power resources that are fuel diverse and widespread across the grid. A major benefit of this outcome for consumers is allocating the entire cost of these generation units to the businesses who need them the most.
For energy efficiency improvements, state leadership should consider improvements to the Building Codes for all climate-controlled buildings. Lax regulations and no inspections on millions of homes has unnecessarily super-sized the electric load in peak hours. Improved building insulation and other construction materials used for new home construction would reduce peak hour demand over time.
The bottom line: Industrial consumers in Texas continue to be satisfied with the market and have no plans to make drastic changes. Despite disagreements on components of the market design, there is still no better place for industry. One friend and industry expert said it best: “I still think ERCOT is the best power market in the world.” When viewed holistically, ERCOT is well-positioned for even more growth.