Texas Conservative Coalition Research Institute
Senate Committee on Business & Commerce
February 6, 2020
Regarding the Committee’s Charge:
Interim Charge on Electricity: Assess the electricity market in Texas. Examine changes in customer demand, such as on-site storage, distributed generation, and electric vehicles. Study the usage of "non-wires alternatives," including energy storage, and recommend legislative changes if needed. Identify barriers to the electric market at the state or local level. Make recommendations to maintain grid reliability and encourage the continued success of the electric market.
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An Assessment of the Electricity Market in Texas
The electricity market in Texas is strong. The Electric Reliability Council of Texas (ERCOT) manages the electricity load for over 25 million customers in Texas.[i] That represents roughly 90 percent of Texas’s electric load. ERCOT manages an electric grid containing over 46,500 miles of transmission lines and over 600 generation units.[ii] ERCOT members include “consumers, cooperatives, generators, power marketers, retail electric providers, investor-owned electric utilities, transmission and distribution providers and municipally owned electric utilities.”[iii] Its physical coverage area is roughly 75 percent of the state.[iv] While ERCOT’s footprint in Texas is considerable, there are four regions in the outer geography of the state that fall outside of ERCOT’s coverage area. These non-ERCOT service areas are structured as traditional regulated monopoly utilities, and are still subject to regulation by the Public Utility Commission (PUC) of Texas and the Texas Legislature.
Multiple publications regularly provide updates on Texas’s electric markets. “The 2018 State of the Market Report for the ERCOT Electricity Markets,” published in June 2019 by Potomac Economics, states that the ERCOT wholesale market was quite competitive in 2018.[i] Several key findings include:
Higher natural gas prices led to higher energy prices in 2018.
A new record peak hour demand (73,473 MW) was set on July 19, 2018 (a 3.3% increase over the previous record set in 2016).
Average demand increased by 5.3% from 2017 to 2018.
The “Scope of Competition in Electric Markets in Texas: Report to the 86th Legislature,” published by the Public Utility Commission, “examines the status of electric markets in Texas” and “identifies trends affecting competition in the wholesale and retail electric markets and Commission activities of notable interest.”[ii] As the report explains, [t]he competitive electric marketplace in Texas continues to support a healthy number of retail electric providers and a wide variety of products to customers, competitive prices in wholesale markets, reliable services, and a diverse mix of generation resources.”[iii]
In terms of customer choice, more than 115 retail electric providers offer over 300 unique products to customers in ERCOT.[iv] These include such unique contractual options as 100% renewable energy or “free electricity on the weekends” and similar time-of-use pricing.[v]
As is the case in so many other areas of the economy in which there are true markets, retail prices in the competitive market beat the more regulated markets handily. Not only have rates in the competitive ERCOT market decreased by 31% since deregulation of the retail electricity market nearly twenty years ago, but today’s prices in the competitive energy market are considerably lower than the national average.[vi] Indeed, in September 2018, the average energy price in Texas’s competitive market was 10.3 cents per kWh, while the national average was 13.02 cents per kWh.[vii]
Changes in Customer Demand
Today’s charge requires an examination of “changes in customer demand, such as on-site storage, distributed generation, and electric vehicles.” Certain aspects of consumer demand are tracked by ERCOT, which publishes a quarterly “Capacity, Demand, and Reserve Report” (CDR Report). The CDR Report from May 2019 explains that ERCOT “continues to experience above-normal growth in electric demand, with the system-wide growth rate expected to be 2.5 to 3% through 2022.”[viii] Within that expected growth rate, the aforementioned “on-site storage, distributed generation, and electric vehicles” will have an impact.
On-site Electricity Storage
On-site electricity storage is becoming more popular. From 2014 to 2018, installations of residential energy storage increased from 2.25 MWh per year to 185 MWh per year.[ix] Over a similar span of time, from 2012 to 2017, the per-kilowatt-hour cost of residential energy storage decreased by roughly fifteen percent per year, and over fifty percent overall.[x]
Distributed Generation
Distributed generation, in which electricity is generated near the point of use instead of a centralized source such as a power plant, is also increasing in demand. This electricity is typically generated using renewable sources, such as wind and solar. It is defined in the Utilities Code as “electric generation with a capacity of not more than 2,000 kilowatts provided by a renewable energy technology, as defined by Section 39.904, that is installed on a retail electric customer's side of the meter.”[xi] Electric customers may interconnect to an electricity distribution system if, among other requirements, their renewable energy generation has a five-year warranty against breakdown or undue degradation and the rated capacity of their energy generation does not exceed utility or electric service capacity.[xii] According to one study, the distributed generation market was over $54 billion in 2016 and is expected to nearly double by 2022.[xiii]
Distributed generation is a live public policy debate in Texas, as evidenced by Senate Bill 2066 (86R), which passed the Senate and through the House Committee on State Affairs, but died in Calendars. SB 2066 would have required several disclosures of a seller or lessor of distributed generation who enters an agreement with residential and certain commercial customers for on-site distributed generation. The bill generally required more transparency in distributed generation resources.
Electric Vehicles
While on-site storage and distributed generation may result in less strain on the grid, the increase of electric vehicles will require more generation as electric vehicles become more common. However, this is expected to occur so gradually that utilities and regulators should be well positioned to adjust as necessary. One expert expects no serious impact to the grid until roughly 15 percent of vehicles are electric, which a Bloomberg New Energy Finance report estimates will happen by 2035.[xiv] Moreover, Texas is purchasing electric vehicles at a far lower rate than other geographic locations. Only .32% of 2017 vehicle sales in Texas were electric, compared to 29% of vehicle sales in Palo Alto, California.[xv]
Several researchers published a February 2019 paper in Applied Energy that conducted a state-by-state assessment of the amount of electricity that would be needed to charge a fully electrified fleet of personal automobiles. The paper estimates that a fully electrified Texas would need an additional 110 terawatt-hours of electricity per year, which is roughly a 30 percent increase over current consumption.[xvi] However, a passage summarizing the assessment’s findings with respect to Texas paint a very positive picture of Texas’s current position:
In 2018, the Electric Reliability Council of Texas, the organization that manages most of
Texas’s electric grid, hit a new peak demand of roughly 73 gigawatts on July 19. Looking
at the off-peak hours for July 19, 2018, we found the ERCOT grid had spare capacity to
provide more than 350 gigawatt-hours of additional electricity if idled power plants
continued to operate throughout the day, not just during peak demand.
Based on our estimates, the charging requirements for a fully electrified fleet of personal
cars in Texas would be about 290 gigawatt-hours per day, less than the available surplus
of generation capacity. In other words, the Texas grid could theoretically charge a fully
electrified vehicle fleet today if vehicles were charged during off-peak hours.[xvii]
It is worth noting that when the same analysis was applied to California, it found that electric vehicles “could push the total demand for electricity beyond the existing capacity of the Golden State’s grid.”[xviii] But given that Texas could “theoretically charge a fully electrified fleet today if the vehicles were charged during off-peak hours,” and given that the nation is not expected to reach even 15% electric vehicles until 2035, the state is well positioned to provide for this gradual transition.
The Usage of “Non-wires Alternatives,” Including Energy Storage
Non-wires alternatives increase generation and energy efficiency without the need for traditional “wires and poles” infrastructure. A more specific definition states that a non-wires alternative is “an electricity grid investment or project that uses non-traditional transmission and distribution (T&D) solutions, such as distributed generation (DG), energy storage, energy efficiency (EE), demand response (DR), and grid software and controls, to defer or replace the need for specific equipment upgrades, such as T&D lines or transformers, by reducing load at a substation or circuit level.”[xix]These alternatives can address environmental concerns, but make sense economically, which is why some estimates see global spending on non-wires alternatives increasing from $63 million in 2017 to $580 million in 2026.[xx]
A good illustration of how non-wires alternatives work is as follows:
The key to NWAs is that consumers benefit from lower rates due to less utility investment. In many states regulators are exploring or have implemented ways to share some of those benefits with utility shareholders so that both parties are incented to pursue such projects. Let’s look at a hypothetical example of a non-wires alternative (NWA):
Due to load growth, the utility needs to expand a distribution feeder at a cost of $50 million
As an alternative, a third party offers to provide an aggregated battery storage project for a 10-year contract with a full-life cost of $30 million
The utility saves $20 million of overall expenditures but foregoes earnings on capital investment
In return, the [utility regulator] allows the utility to put 4% x $30 million into the ratebase
The result is the utility earns a rate-of-return (profit) on the contract cost, while ratepayers see lower rates than the alternative[xxi]
This hypothetical is reflective of real-world examples. The Peak Load Management Alliance (PLMA), which includes such members as Entergy, Oncor, and Honeywell, among many others,[xxii] co-published a November 2018 Report on “Non-Wires Alternatives” in which several case studies show real-world examples that the hypothetical is intended to illustrate.[xxiii] For instance, the Arizona Public Service Punkin Center had a grid issue in 2018 involving a thermal constraint on a distribution feeder. The traditional solution would have been to rebuild 17 miles of distribution line. Instead, the non-wires alternative was to deploy a 2 megawatt, 8 megawatt hour battery system to provide energy during peak hours.[xxiv] The outcome of the project is described as follows:
Outcome: The Punkin Center battery project successfully provided reliable peak shaving
service on the thermally constrained feeder during the summer of 2018. The project proved
to be a cost-effective solution for APS to serve the rural community, compared to reconductoring
of the line. The success of the project demonstrates the capability of this NWA solution to serve the residents of Punkin Center for a decade and possibly longer depending on the load growth.[xxv]
Other examples include the Con-Ed Brooklyn Queens Demand Management Plan (New York), in which the traditional solution to a sub-transmission feeder constraint would have been to build a new substation. Instead, a 52 megawatt load reduction was implemented using energy efficiency, demand response, distributed generation, distributed storage, and conservation voltage optimization.[xxvi] The paper details 10 similar projects that successfully utilized non-wires alternatives.
Recommendations
Expand the Competitive Electricity Market
Texas has been a leader in the competitive electricity market since 1999, when the Legislature deregulated the generation (wholesale) and retail electric markets through SB 7 (76R), yet there are multiple exemptions to this market-centered reform. Austin and San Antonio, for instance, are exempted from the competitive retail electric market. TCCRI has long argued that one of the most successful deregulations of a sector in the nation’s history should be extended to all markets in Texas. We continue to make this recommendation in today’s testimony.
Pass Legislation to Facilitate Better Storage and Transmission of Energy
During the 86th Legislative Session, Senate Bill 1941 (Hancock) would have done a great deal to help ERCOT region providers and customers by allowing transmission and distribution utilities to contract with power generation companies to provide energy from energy storage facilities. The bill passed the Senate 31-0 and passed through the House Committee on State Affairs with 9 Ayes and 0 Nays. The bill was placed on the General State Calendar late in Session, but never received a vote on the House floor. Similar legislation should be pursued next session with the goal of facilitating more utilization of non-wires alternatives.
Stay the Course on Grid Reliability
Texas is known for being a leader in energy policy. Setting aside policy, the energy sector in Texas has been successful largely due to a sensible, yet relatively light regulatory hand of government. The private sector is left to innovate and regulators step in only when and where it is necessary. Nevertheless, lawmakers must stay in touch with the needs of the private sector. As new technologies become available, lawmakers must be prepared to bring them into the fold with the same successful regulatory approach that has proven to work.
END NOTES
[i] https://www.potomaceconomics.com/wp-content/uploads/2019/06/2018-State-of-the-Market-Report.pdf i
[ii] https://www.puc.texas.gov/industry/electric/reports/scope/2019/2019scope_elec.pdf 1
[iii] https://www.puc.texas.gov/industry/electric/reports/scope/2019/2019scope_elec.pdf 1
[iv] https://www.puc.texas.gov/industry/electric/reports/scope/2019/2019scope_elec.pdf 2
[v] https://www.puc.texas.gov/industry/electric/reports/scope/2019/2019scope_elec.pdf 3
[vi] https://www.puc.texas.gov/industry/electric/reports/scope/2019/2019scope_elec.pdf 3
[vii] https://www.puc.texas.gov/industry/electric/reports/scope/2019/2019scope_elec.pdf 3
[viii] http://www.ercot.com/content/wcm/lists/167023/CapacityDemandandReserveReport-May2019.pdf 8
[ix] https://www.mckinsey.com/industries/electric-power-and-natural-gas/our-insights/how-residential-energy-storage-could-help-support-the-power-grid
[x] https://www.mckinsey.com/industries/electric-power-and-natural-gas/our-insights/the-new-rules-of-competition-in-energy-storage
[xi] 39.916(a)(1)
[xii] 39.916(b)
[xiii] https://www.marketsandmarkets.com/Market-Reports/distributed-generation-market-67245289.html
[xiv] https://about.bnef.com/electric-vehicle-outlook/#toc-download
[xv] https://cleantechnica.com/2018/07/01/please-stop-saying-evs-are-only-1-of-auto-sales-in-the-us/
[xvi] https://www.sciencedirect.com/science/article/abs/pii/S0306261918316350?via%3Dihub
[xvii] https://www.citylab.com/transportation/2018/12/americas-power-grid-isnt-ready-electric-cars/577507/
[xviii] https://www.citylab.com/transportation/2018/12/americas-power-grid-isnt-ready-electric-cars/577507/
[xix] https://e4thefuture.org/wp-content/uploads/2018/11/2018-Non-Wires-Alternatives-Report_FINAL.pdf p 7 fn 1
[xx] https://e4thefuture.org/wp-content/uploads/2018/11/2018-Non-Wires-Alternatives-Report_FINAL.pdf 10
[xxi] https://www.enerdynamics.com/Energy-Insider_Blog/Are-Non-Wire-Alternatives-Reducing-the-Need-for-Infrastructure-Investments.aspx
[xxii] https://www.peakload.org/plma-member-directory#Oncor
[xxiii] https://e4thefuture.org/wp-content/uploads/2018/11/2018-Non-Wires-Alternatives-Report_FINAL.pdf
[xxiv] https://e4thefuture.org/wp-content/uploads/2018/11/2018-Non-Wires-Alternatives-Report_FINAL.pdf
[xxv] https://e4thefuture.org/wp-content/uploads/2018/11/2018-Non-Wires-Alternatives-Report_FINAL.pdf
[xxv] https://e4thefuture.org/wp-content/uploads/2018/11/2018-Non-Wires-Alternatives-Report_FINAL.pdf
[xxvi] https://e4thefuture.org/wp-content/uploads/2018/11/2018-Non-Wires-Alternatives-Report_FINAL.pdf