Texas Regulators Adopt Performance Credit in Market Overhaul Proceeding, Teeing Up Battle with Lawmakers

Dive Brief:

• The Public Utility Commission of Texas on Thursday voted unanimously to adopt an energy market overhaul, but the controversial and complicated Performance Credit Mechanism approach, or PCM, that they selected appears likely to spur more debate.
• Regulators were directed by Texas lawmakers in 2021, through Senate Bill 3, to ensure grid reliability and boost dispatchable generation. But the author of the law says the PCM is "a costly and complex proposal" and is promising hearings and potential legislation to fix the the PUCT's "unacceptable" decision.
• The document approved by the commission Thursday recommends creation of the PCM but calls for the Electric Reliability Council of Texas to develop the details. PUCT Chairman Peter Lake said the decision also "defers any implementation to the legislature."

Dive Insight:

Senate Bill 3 was passed in the wake of Winter Storm Uri, which devastated the Texas grid in February 2021 and led to the death of almost 250 people in the state. Regulators spent 2022 considering market enhancements before landing on the PCM in November.

The credit, modeled by consulting firm E3, would be earned by generators in ERCOT based on their availability during hours of greatest risk to the system. But there has been concern that the credit would primarily keep older plants from closing down, while taking years to implement.

E3 estimated the PCM would cost consumers about $460 million annually.

Energy analyst Doug Lewin has called the PCM "a blank check" for generators and said it will lead to "more market power concentration."

Following the commission's decision, state Sen. Charles Schwertner, R, one of the authors of SB3, called the decision "unacceptable." Schwertner is also chair of the Texas Senate Business and Commerce Committee. 

"To be clear: SB 3 did not direct the PUC to replace the state's energy-only market with an unnecessarily complex, capacity-style design that puts the competitive market at risk without guaranteeing the delivery of dispatchable generation," Schwertner said in a letter to the PUCT immediately following their vote. He said colleagues may look to reverse course.

"In the weeks ahead, the Texas Senate will hold hearings and consider whatever legislation is necessary to correct this error and fulfill our obligation to the people of Texas," he wrote in a tweet.

The PCM model has support from Texas Gov. Greg Abbott, R, who says generators have committed to building thousands of new megawatts of dispatchable generation "if the PCM is adopted and implemented."

And the Texas Competitive Power Advocates group, which represents generators and wholesale power marketers in ERCOT, said the PCM "builds reliability into the competitive market in Texas, paying for the reliability ERCOT needs."

Other industry and conservation groups in the state still have concerns, however, and they say much appears to hinge on how the implementation is designed by ERCOT.

The Texas Oil & Gas Association said it has questions "regarding the PCM's ability to maintain a market-driven system that provides both reliability and affordability to consumers."

The discussion ahead of the commission vote included talk of "pay for actual performance which is encouraging but not sufficiently defined and has yet to be modeled to understand the full cost to consumers," Todd Staples, president of the Texas Oil & Gas Association, said in a statement.

And the Texas Association of Manufacturers said it is "concerned with today's action by the PUC to approve a novel proposal that is not well understood, and has not been modeled, but appears to be designed to ensure a certain profit level for existing generation."

The manufacturers association said it wants to see the competitive market maintained "while improving incentives for additional dispatchable generation."

The Sierra Club said it is concerned the PCM will "provide extra money to long-standing fossil fuel generators and will fail to ensure the reliability or new investment that all Texans are looking for."

"There is potential for huge consumer costs and risks through this mechanism, a fundamental change from our current market," Cyrus Reed, conservation director of the Sierra Club Lone Star Chapter, said in a statement.

Reed added that allowing demand response, energy efficiency and distribued resources to participate  "will be key to keeping costs lower and assuring that Texas does not overbuild for the few hours a year that the PCM would actually be used."