Texas Got Early Warnings About Costly Grid Policy, Records Show

Rachel Adams-Heard and Naureen S Malik
·7 min read
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(Bloomberg) -- Texas grid officials received repeated warnings last summer that their efforts to shore up the state’s increasingly strained electric grid risked driving up power prices, records show.

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Concerns first arose just days after the state launched a new policy meant to keep more backup electricity supply in reserve in case of emergencies, known as the Ercot Contingency Reserve Service, or ECRS. Complaints about ECRS soon reached Governor Greg Abbott’s office. “Yo - you getting hit on ECRS stuff?” an employee for the grid manager texted a member of Abbott’s staff, according to documents obtained via open records requests. “Oh for sure,” the Abbott staffer responded.

Yet the Electric Reliability Council of Texas, or Ercot as the grid manager is known, pressed on. In September, just three months after ECRS was introduced, a Bloomberg investigation found that on one key day it had helped spike power prices to the highest levels since Winter Storm Uri three years ago. The grid’s main watchdog later estimated that ECRS had ballooned wholesale prices by $12 billion in less than six months — and had done little to bolster reliability.

While Ercot has disputed the watchdog’s estimate, the grid operator is now reviewing how it sources backup power. In a statement, Ercot said it’s working with a stakeholder group to “to mitigate the effect ECRS has on pricing during critical hours” without compromising reliability. The Texas Public Utility Commission, which oversees Ercot, said “ECRS played a key role” to ensure reliability when demand spiked over the summer and during a recent cold snap. The commission is working with Ercot, its independent market monitor and industry stakeholders “to evaluate ECRS and ensure it is serving its intended purpose of improving reliability and being procured in a manner that is cost-effective for Texas consumers.”

That the once-sleepy market for power reserves triggered such fallout underscores just how contentious managing the most closely watched grid in America has become. In many ways, Texas is a microcosm of a global conundrum: Electricity demand is surging at the same time that grids are becoming more reliant on intermittent renewable energy that fluctuates based on weather and time of day. The state has dramatically increased the amount of power reserves it procures each day to protect against this variability. But sometimes those policies come at a cost — one that regulators and politicians are now scrambling to reconcile.

Read more: Texas Moved to Protect its Fragile Grid. Then Prices Skyrocketed

Ercot introduced ECRS on June 10 as a vital way to keep the lights on. This was a new type of backup power that the Texas grid operator procured each day in the state’s “ancillary services” market, where power plants get paid to be on standby for times when supply and demand aren’t enough to ensure the grid stays stable.

ECRS was designed to be especially agile: These resources had to be able to turn on in 10 minutes, enabling Ercot to respond to situations when the grid suddenly looked precariously tight, like when the sun set and solar power dropped to zero but Texans were still guzzling electricity.

But Will McAdams, then a member of the PUC, saw a problem with the way Ercot was managing its backup supply. Because older (and typically more expensive) units weren’t nimble enough, they couldn’t participate. Instead, “the most efficient and flexible” resources were getting paid to be on standby, McAdams wrote in a June 14 memo. Yet when they were on standby, they weren’t generating power normally, and the more expensive units were being tapped to take their place.

Something similar happened on June 20, when power prices spiked to a cap of $5,000 per megawatt hour even though a key measure of grid health looked relatively fine. Traders and other market experts pointed to the same thing: ECRS was making it look like supply was tighter than it was.

Ten days later, PUC staffers got an email from Carrie Bivens, who led a team at Potomac Economics that served as Ercot’s independent market monitor. Attached was a memo that she planned to send to their bosses that day, outlining concerns with the state’s ancillary services market after the introduction of ECRS. But even with the market’s recent wild ride, PUC staffers seemed surprised.

“I was not expecting you sharing with the commissioners that quickly and giving us very short time to review,” said Harika Basaran, who also referenced a meeting with Gov. Abbott’s office and asked if that had expedited Bivens’ timeline. Representatives for Abbott didn’t respond to requests for comment for this story.

In a separate exchange among PUC staffers, one member asked if anyone had gotten “a heads up” the report was coming. Another responded, “I knew they were concerned about prices for ECRS but didn’t know that a memo to commissioners was in the works.”

The Ercot employee texted asking the Abbott staffer about “getting hit on ECRS stuff” on July 13, to which he replied that he was “for sure.”

“Doooope,” the Ercot employee replied. “Who was reaching out about it?”

“That traders don’t love it,” said the Abbott staffer. “And it was defs a topic of convo at tac,” he added, using the acronym for Ercot’s Technical Advisory Committee, a stakeholder group that includes power generators, consumer groups and consultants.

On Sept. 14, Bloomberg published its investigation, which found that capacity from cheap and efficient gas plants sat idle thanks to ECRS, a phenomenon that helped drive up prices. The next day, Bivens released the results of Potomac’s analysis, which said that the increased reserves that came with ECRS “likely raised real-time market energy value by ~$8 billion in three months” — a figure, she said, that was likely to increase.

Bivens presented the report at a working group meeting a week later. Though some people applauded her findings, critics said that she overlooked other factors beyond ECRS that drove prices to spike on June 20. A vice president at a major power generator said the higher prices could have been justified, because they pointed to what the market required to meet demand while also ensuring reliability. Another person even asked if the higher prices were the purpose of ECRS.

One by one, Bivens addressed them. No, the point of ECRS was not to increase prices, she said. Her analysis aimed to isolate the effect of ECRS, she explained. As to whether Texas needed that reserve capacity to avoid an emergency? Bivens said she saw no evidence that was the case.

Then, in November, news broke that Bivens and McAdams were unexpectedly resigning. McAdams, who has since joined a Texas lobbying firm, and Bivens, who recently started as executive director of regulatory affairs at NextEra Energy, declined to comment.

In December, Potomac estimated the cost of ECRS had since grown to more than $12 billion. “I don’t want to exaggerate how bad this is, but this is the worst performance we’ve ever seen since the beginning of organized electricity markets almost 25 years ago,” David Patton, Potomac’s president, said when he presented the report. “I’ve never seen anything remotely this bad.” Ercot disputed the analysis in an uncharacteristically sharp statement that said the analysis ignored other factors and didn’t represent the cost to consumers. Potomac stood by its work.

While the PUC — which oversees both Ercot and the market monitor — avoided weighing in on Potomac’s findings, Commissioner Lori Cobos said at a December meeting that she was “very much concerned about costs to the market, whatever they may be.”

She said the PUC will be involved in Ercot’s review of the ECRS methodology. That process is supposed to be completed in April, right in time for hot summer months when the grid will be tested again.

“It’s great that we are going to revisit, and I think we essentially have to because of the dollars that it appears to be costing,” said Josh Rhodes, a research scientist at the University of Texas at Austin. “If it had added $100 million we probably wouldn’t have paid attention. $12 billion is a lot of money.”

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