The Electric Reliability Council of Texas (ERCOT) region will likely see real-time market prices approach the regulatory cap of $5,000/MWh on Wednesday, not long after price spikes on April 28 and April 16. The fact that the market is showing signs of scarcity in the spring, long before the heat of this summer or the cold of next winter, says a lot about what is coming for the ERCOT grid.
News reports last month led with unusually high temperatures as the main cause, but 80s in April and low 90s in May are hardly uncommon in Texas. What’s happening is that electricity demand in Texas is growing rapidly, but dispatchable capacity is not growing to keep up. The grid is increasingly dependent on wind and solar to keep the lights on, even during the milder shoulder months. Usually in Texas, wind output increases as the sun goes down, but that doesn’t always happen, which was a big part of the problem this past month.
The day-ahead forecast for wind generation at 8 p.m. on April 16 was 10 GW, but instead, wind only produced 5 GW. Imagine the media hoopla that would ensue if 10 large natural gas generators tripped offline during a period of grid stress, given the ink that is spilled when half that much goes down. But this volatility is rarely mentioned because it is “normal” for wind. ERCOT had a better forecast on April 28, but prices still spiked as wind only produced 4 GW during that critical hour.
Another point being raised is that a large amount of gas and coal generators have been offline in the past month, as if to emphasize that wind and solar generation is not at fault for these limitations of gas and coal power plants. However, the increasing stress on the grid is shortening maintenance windows and making planning more difficult. Some power plants are deferring maintenance, which increases the risk that they will break down or have to do the maintenance at more inopportune times.
These critiques also overlook the fact that these tight situations were much rarer a decade ago when the grid had a lower amount of wind and solar and a larger reserve margin of gas and coal. From 2014 to 2016, real-time prices only went above $1000/MWh on two occasions. That has already happened twice this year, along with three days of prices over $100/MWh during a storm in January.
It must be noted that a significant part of the problem is how ERCOT has been operating the grid over the past few years. ERCOT and the PUC are creating artificial scarcity by attempting to maintain a higher operating reserve margin by increasing the procurement of ancillary services, which holds generators out of the market, and by increasing reserve prices. Most of these price spikes might have been avoided had the grid been operated as it was in the past. But the grid operators will counter that such measures are necessary in the face of the volatility of wind and solar output and increasing demand volatility.
In a nutshell, the problem is that even as the ERCOT region added 10 GW of wind and 15 GW of solar between 2019 and 2023, the system’s net load, which is demand minus wind and solar output, set new records in 2023. That means the demand for gas, coal, and nuclear capacity in ERCOT is still rising, but the supply of those resources has remained roughly flat over the past decade. The balance of investment between wind and solar and dispatchable resources needs to be corrected for the ERCOT region to continue to meet electricity demand without overbuilding wind and solar or building massive amounts of energy storage.
Furthermore, the only dispatchable resources being built right now are quick-start natural gas generators and batteries, which only come online when prices are very high. Demand reductions and energy storage filled in the gaps last month as the sun went down, but only after prices surged. These resources can help keep the lights on, but only at a steep cost. Like a car stuck in stop-and-go traffic instead of cruising along the highway, this is the most expensive way to operate an electric grid.
This elimination of efficient and cheap baseload power that runs 24/7 is also playing right into the game plan outlined in the EPA’s new carbon rule for power plants. The EPA is trying force baseload plants to install carbon capture or to operate for a very limited amount of time each year, essentially serving as very expensive standby power when wind, solar, and batteries are not enough to cover demand. Texas is heading down this road already, and if the EPA succeeds with its plans, it will be impossible for Texas to avoid skyrocketing costs.
Every credible study shows that the cost of backing up wind and solar increases exponentially as their penetration increases, but we have yet to put in a mechanism to ensure these costs are properly balanced in the ERCOT market. If we don’t require wind and solar generators to perform more reliably and reduce their variability, then we will need to shovel more and more money into backup power plants to keep the lights on. It’s that simple.
What California and Europe are teaching us is that if governments are unwilling to give up subsidizing wind and solar, ratepayers will pay more and more money to keep gas and coal plants available when the wind and sun drop off. Those regions have yet to experience out-of-control blackouts, but they are stuck in a spiral of out-of-control energy costs. Nearly a quarter of PG&E customers in California are delinquent on their electricity bills, and heavy industry is fleeing Europe due to high energy prices.
Texas is hanging on to low power prices for longer due to historically low natural gas prices, which are keeping down the cost of backing up wind and solar. But the signs of strain are already showing. Residential electricity prices in Texas have not followed gas prices downward over the past 18 months, remaining stuck at 20% above prices just three years ago. If gas prices increase in the next few years, expect electricity prices to increase even more.
The key for Texas is to avoid the mistake of chasing wind and solar subsidies with subsidies for gas and coal by requiring wind and solar generators to pay for the backup power costs they impose. Texas Gov. Greg Abbott called on the PUC to do this in July 2021, but no action on this request, not even a study, has been undertaken to date.
The question Texans should be asking is, if wind and solar are so cheap, why are our power bills rising faster than inflation? At some point, we need to look at California and Europe and realize that we need to make some changes to avoid their fates. The sooner we come to that realization, the better.