Legal & Regulatory

Texas Governor Enacts Grid Reliability Measures, Including Power Plant Weatherization, ERCOT Reforms

Texas Gov. Greg Abbott has signed into law sweeping bills approved by Texas legislators that will require power generators in the state to weatherize against extreme events and revamp organizational oversight of the Electric Reliability Council of Texas (ERCOT).

Hours before the state’s regular 140-day legislative session dwindled to its end on May 30—and amid high-profile drama related to a GOP priority voting bill—Texas House and Senate lawmakers approved a series of last-minute changes to Senate Bill (SB) 2, related to ERCOT oversight, and SB 3, the state’s reliability statute. The governor signed these measures, which he had deemed “emergency items” for the 87th session, on June 8.

Legislature also passed House Bill (HB) 4492, a measure intended to help power companies straining under massive wholesale costs in the wake of the February Arctic event during which the Texas grid operator initiated three days of widespread load shedding as it veered precipitously toward system collapse. It is unclear if or when the governor will enact that bill. 

However, despite nearly four months of investigation, repeated hearings, and political contention about why the complex event occurred, root-cause investigations are still ongoing, including at the federal level spearheaded by the North American Reliability Corp. While ERCOT previously released data suggesting about 48.6% of generation—52.3 GW out of the Texas grid’s 107.5 GW total installed capacity—was forced offline during the highest point of the crisis, it is scheduled to release its final post-event analysis in August, the grid operator told POWER.

Meanwhile, although the new legislation addresses crucial reliability gaps, the state will need to do much more to secure system reliability, five past Texas Public Utility Commission (PUC) commissioners and a senior regulatory advisor said in a notable new report.

Net Electric Reliability Council of Texas (ERCOT) generator outages at the beginning of each hour on February 14–19, 2021, by cause category. The highest amount of unavailable capacity during the period of February 14–19, 2021 occurred on Feb. 16 at around 8:00 a.m. and was 52,037 MW. Courtesy: ERCOT (Version date: April 22, 2021)

Power Plant Weatherization Mandates Coming

The 51-page SB 3 spearheaded by Sen. Charles Schwertner (R-Georgetown)—and adopted by the House with 142 yeas from the body’s 150 members—lays out a wide range of new measures that will affect the state’s diverse generation, transmission, and natural gas sector. Crucially, it also encodes two new influential state entities—the Texas Electricity Supply Chain Security and Mapping Committee, and the Texas Energy Reliability Council—that will assist the PUC and the Railroad Commission (RRC), the state’s natural gas infrastructure regulator, in ensuring oversight and reliability of the state’s vast energy system.

First, SB 3 directs the PUC to adopt new reliability standards that will apply to municipal entities, co-ops, qualifying facilities, power generation companies, and otherwise exempt wholesale generators that participate in ERCOT. The PUC’s reliability rules will require generators to “prepare” assets to “provide adequate electric generation service during a weather emergency.” A PUC spokesman told POWER on June 8 that because SB 3 imposes a six-month timeframe to develop these standards, the commission is “targeting completion no later than November 2021.”

On June 9, PUC staff filed a request for comments (with comments due by June 23, 2021) that “generally relates to properly identifying the array of weather conditions to which the new weatherization standards should apply,” the spokesman said. The request generally solicits responses on which weather emergency conditions the PUC should require key stakeholders—specifically, ERCOT generators, co-ops, municipal utilities, transmission and distribution utilities—to operate. But it also urges commenters to address, at minimum, “standards for temperature, icing, wind, flooding, and drought conditions, and it solicits comment on whether the standard “should vary by region or by type of generation facility.”

After the PUC closes the comment period, its rulemaking process will proceed in “high gear.” It will first issue a draft “straw man proposal” for public comment, and then issue a proposal for publication. The PUC then plans to publish a proposal for adoption “sometime around early November.” However, the spokesman suggested the process may be fluid “ because we have the gas pedal to the floor on this one. Our first priority is to get the rules right and to meet the expectations of the Legislature to get it done as quickly as possible,” he said.

Compliance with the standards—including inspections and recommended enforcement—will be overseen by an independent organization certified under Section 39.151 (the Market Structure subchapter in the state’s Utilities Code) under terms newly established by SB 2, a companion bill Abbott also signed on Tuesday. As described by SB 2 (see “Overhaul of ERCOT Oversight” later in this article for more details), the PUC will have complete appointee and approval authority over a certified “independent” organization—for now, the ERCOT independent system operator (ISO)—whose primary task will be to oversee the ERCOT power region.

While ERCOT faced fierce criticism for its lack of visibility and prescience over generator forced outages that magnified the February debacle, as POWER has reported the grid entity has since the February 2011 cold snap routinely conducted winterization plan reviews at “select” thermal power plants. This summer it began, for the first time, plant visits to ensure thermal plants that have had “one or more” forms of summer condition outages in past years, are ready for this summer. “In addition to verifying that plant personnel are following their weatherization plans, we are providing recommendations and best practices and will follow up with generators as needed,” ERCOT spokesperson Leslie Sopko told POWER on June 2. These measures are especially significant because the grid entity this May warned that conditions could tighten if the grid sees a combination of factors in real-time, including record demand, high thermal generation outages, and low wind/solar output.

Under SB 3, the PUC will also establish rules requiring generators that experience repeated or major weather-related forced interruptions to contract with a third party, which will assess the generator’s weatherization plans, procedures, and operations. But pivotally, the 39.151 independent organization—the ERCOT ISO—will have the authority to approve or deny requests by generators for planned power outages “during any season and for any period of time.”

The PUC will also ensure that ancillary services—including load following, standby power, backup power, and reactive power—will be available to manage reliability issues posed by intermittent generation resources at “reasonable prices, with terms and conditions that are not unreasonably preferential, prejudicial, discriminatory, predatory, or anticompetitive.” And, the PUC will also “evaluate whether additional services are needed for reliability” in ERCOT “while providing adequate incentives for dispatchable generation.” However, the ISO, again, will have the authority to modify the design, procurement, and cost allocation of ancillary services in ERCOT “in a manner consistent with cost-causation principles and on a nondiscriminatory basis.”

Qualifications May Demand Dispatchable Generation During Winter

In another notable section embedded in SB 3, lawmakers established requirements for periods during extreme heat, extreme cold, and periods of low power production in ERCOT by “non-dispatchable” resources—mainly wind and solar—which they curiously defined as facilities whose “output is controlled primarily by forces outside of human control.” Here, the 39.151 independent organization is explicitly tasked with establishing requirements to meet the reliability of the power region. The organization will also develop appropriate qualification and performance requirements for providing services, as well as penalties for service failure.

However, the section also demands that the PUC “ensure” that resources are dispatchable during extreme weather or low non-dispatchable power periods. Resources must be “able to meet continuous operating requirements for the season” in which ancillary or reliability services are procured, it says.

Winter resource capability qualifications, notably, must include onsite fuel storage, dual-fuel capability, or fuel supply arrangements to ensure winter performance for several days. Summer resource capability qualifications include facilities or procedures “to ensure operation during drought operations.”

Along with these preparations, the PUC will cultivate a specific winter emergency preparedness report on “power weatherization preparedness.” The report, which will be submitted to the legislature every two years starting in September 2022, will essentially analyze and determine the Texas grid’s ability to withstand extreme weather events in the upcoming year and make recommendations on improving emergency operations plans and procedures to ensure continued service. The RRC, meanwhile, will also submit a similar report focused on natural gas facilities that are included in the electricity supply chain map every two years starting in September 2022.

The Texas Energy Reliability Council Now an Official Government Entity

Pivotally, SB 3 formalizes coordination between the electric and natural gas sectors by encoding a formal role for the Texas Energy Reliability Council (TERC), which has so far been an ad hoc group comprising leaders from the RRC, ERCOT, PUC, as well as natural gas industry professionals. When enacted, the bill will require “public utilities”—meaning any “entity that generates, transmits, or distributes” power to the public—and gas providers to provide “any information” related to a disaster that the council requests.

The council, which must have representatives from each of the energy system’s diverse supply chains, will then be expected to submit a report on reliability and stability of the state’s power system every two years—with the first report expected by November 2022. Also notable is that any information collected or produced by the council will be considered “public information,” except if deigned “critical energy infrastructure information.”

Some Natural Gas Facilities to Be Designated as ‘Critical Customers’

SB 3, critically, requires the RRC and the PUC to establish a process to designate “certain” natural gas facilities and other natural gas providers as “critical customers or critical gas suppliers during energy emergencies.” While designations will depend on “essential operational elements,” critical facilities must be prepared to operate during a weather emergency. 

However, the bill also requires specific weatherization measures by “gas supply chain facility operators.” That includes any “critical” facility used for producing, treating, processing, pressurizing, storing, or transporting natural gas” on the power supply chain map, which a newly established “Texas Electricity Supply Chain Security and Mapping Committee” is expected to produce by September 2022.

The RRC will inspect these facilities to ensure they comply with its rules related to gas facility weatherization, and the state will act on violations not remedied in a timely way. Penalties are set “not to exceed $1 million” for a violation, but each day a violation continues or occurs will be considered a separate violation.

Notably, the Texas Electricity Supply Chain Security Committee—which will comprise the heads of the PUC, RRC, ERCOT, and the chief of the Texas Division of Emergency Management—is envisioned as a state electric reliability organization. Along with developing visibility into the state’s power supply chain, it will “establish best practices” for power and gas service providers to maintain service during extreme weather events, as well as recommend oversight and compliance standards for these facilities to the PUC and RRC.

Pricing Reforms and Public Protections

SB 3 also emphatically gives the PUC the authority to establish an emergency pricing program for the wholesale electric market. The market must take effect “if the high system-wide offer cap has been in effect for 12 hours in a 24-hour period after initially reaching the high system-wide offer cap,” the bill says. The PUC, however, will determine the criteria for which the emergency pricing program will cease. The PUC will also establish an ancillary services cap. “The emergency pricing program must allow generators to be reimbursed for reasonable, verifiable operating costs that exceed the emergency cap,” it says.

Also, the law tasks the Texas Department of Public Safety with establishing a “power outage alert” that will be activated when power supply in the state may not adequately meet demand. In addition, it tasks the Texas Division of Emergency Management with developing public disaster preparedness measures, including education materials. Another section requires utilities and retail providers to inform customers about their procedures for implementing involuntary load shed, and details about industrial and retail customers who may be considered “critical customers.”

Overhaul of ERCOT Oversight

SB 2 essentially amends the state’s Utilities Code to require PUC commissioners to adopt and enforce rules relating to the reliability of the regional power grid, and accounting for the production and delivery of power among generators and all other market participants. But it also allows the PUC to delegate, with commission approval, these responsibilities to an “independent” organization, which the PUC will have “complete authority” to oversee and investigate, as noted above.

According to the Utilities Code, the ERCOT ISO “may meet the criteria relating to the other functions of an independent organization” provided in the subchapter by “adopting procedures and acquiring resources needed to carry out those functions, consistent with any rules or orders of the commission.” But SB 2 also says that if the ISO does not comply with changes to Section 39.151 after Sept.1, 2021, the PUC can decertify it as the independent organization established for the power region.

Under SB 2, however, any independent organization appointed to oversee ERCOT will have an eight-member board selected by the ERCOT board selection committee. The bill also requires that all members of an independent organization’s board must be a “resident of Texas,” and have “executive-level” experience in finance, business, engineering (including electrical engineering), trading, risk management, law, or electric market design—but they may not own assets in the market or hold any fiduciary duties related to the grid. Lawmakers notably scrapped amendments that required board members who represented the power industry, including independent generators, investor-owned utilities, electric co-ops, and public power entities, as well as commercial consumer interests.

SB 2 also determines that the ERCOT board selection committee must be composed of a member appointed by the governor, a member appointed by the lieutenant governor, and a member appointed by the speaker of the house—essentially ensuring state leadership will have essential control over how the independent organization is shaped. However, the ERCOT board selection committee must also retain an outside consulting firm to help select members on the independent organization’s governing body.

Addressing Financial Strains

According to legislative documents, SB 3 could cost the state an estimated $38.7 million to implement through August 2023 and tens of millions of dollars more through 2026. SB 2 will have no marked impact on its general revenue.

However, on May 30, the legislature also passed HB 4492 and SB 1580, bills which work together to authorize the use of securitization and financing from the state’s main budget reserve, the Economic Stabilization Fund (ESF), to cover the substantial unpaid balances of electric cooperatives and retail energy providers to the wholesale power market stemming from the unprecedented February event. According to Moody’s Investors Service, defaulting balances in the region from the event total about $3 billion.

Brazos Electric Cooperative and Rayburn Electric Cooperative, two prominent coops that defaulted on amounts owed to the wholesale market, represent about $2.5 billion of the cumulative $3 billion figure (Brazos owes $1.88 billion, while Rayburn owes $640 million). SB 1580 will allow the electric cooperatives to securitize their share of the unpaid balance, Moody’s said. The agency deemed SB 1580 as “credit positive” for the generators “because they will allow for timely repayment for amounts earned from dispatching generation resources” into ERCOT during the storm.

The remaining amount, held by several parties, will be covered by default balance financing authorized by HB 4492, the ratings agency explained in a sector comment released on June 7. HB 4492, meanwhile, authorizes financing of up to $2.1 billion for reliability deployment price adder charges and ancillary services in excess of the systemwide offer cap of $9,000 per MWh. “This provision is positive for utilities whose financial losses from the winter storm were compounded by these additional charges,” it said.     

Short-pay amounts owed by ERCOT counterparties as described in an ERCOT settlement notice dated May 28, 2021. Courtesy: Moody’s Investors Service

Former PUC Commissioners: Much More Work Remains

But according to a June 3–released report by five former PUC commissioners, though the new legislation addresses some problems that contributed to the disaster, Texas “has more work ahead” to ensure it never again faces the failures that profoundly affected its power, natural gas, water, and transportation infrastructure.

The unprecedented February outages “were triggered by an extreme weather event but were exacerbated by underlying problems that affected the entire energy system from the production of natural gas to the delivery of electricity to the customers,” said its authors, Pat Wood III (who has also previously served as a commissioner at the Federal Energy Regulatory Commission [FERC]), Robert W. Gee, Judy Walsh, Brett Perlman, Becky Klein, and Alison Silverstein, who is also a former FERC advisor and noted industry lawyer.

“Until this February, the Texas electricity system had largely achieved” its underlying goals, they wrote. “We created a strong, competitive, reliable electricity system whose overall performance for more than 20 years lowered electric bills for all customer classes, created innovative options for electricity customers, attracted an unprecedented level of new natural gas and renewable generation, and kept the lights on as our state population grew by 40%.” However, the February events also exposed “several policy failures” as well as “operational and planning failures across our state’s electric, natural gas and water systems,” they said.

The report outlines 20 recommendations that aren’t addressed by recent legislation. Foremost among them is that the state must act to impose mandatory weatherization to minimum standards for natural gas production and pipelines, with meaningful enforcement. “It is not clear that SB3’s new requirements will be sufficient to assure continuing delivery of natural gas at reasonable prices during future winter emergencies,” the former officials noted. Also, ”SB3 places no compliance deadlines on the natural gas weatherization requirement, so the interdependence between natural gas supply and electric power generation could remain unaddressed for some time.”

At ERCOT, further changes should mandate that the grid operator improve demand forecasting capabilities, as well as broaden its scenario analysis with more aggressive worst-case outcomes, they said. The PUC and ERCOT should also evaluate whether the grid operator needs different winter versus summer planning, operations, and protocols. SB3 directs the PUC “to study ancillary services to determine whether and how those services need to change going forward and to evaluate whether additional seasonal and other products are needed to enhance reliability. This will be important work,” the report says.

However, the report also cautions against adding an “out of market” generation capacity reserve scheme. “A capacity market would have not prevented” the blackouts, it suggests. “Similarly, adding emergency capacity through a fleet of additional generators funded without regulatory scrutiny through a non-market charge or tax will raise costs to every electricity customer and chill other new or existing investors’ willingness to compete in the ERCOT market.” Along with ensuring power plant weatherization as covered in the legislation, ERCOT must ensure designated black-start assets will be available to restart the grid in the event of a collapse, the authors noted.

The report also calls for updating Texas building energy codes to help tamp down power demand, and increasing energy efficiency across the grid. Increasing demand response for grid emergencies will also be crucial they said. “SB3 ‘allows’ electric utilities to establish load management programs for use in the event of a grid emergency. It also tells them to seek voluntary load cuts from large customers before cutting residential loads.” However, “these measures are not enough,” it says.

Sonal Patel is a POWER senior associate editor (@sonalcpatel@POWERmagazine).

Updated (June 9): To add PUC comments about a timeframe related to coming power plant weatherization standards.

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