Texas governor signs dispatchable generation, market reform legislation

On June 9, Texas Gov. Greg Abbott signed two pieces of legislation that will significantly impact the electric power market within the Electric Reliability Council of Texas Inc. Senate Bill (S.B.) 2627 calls for the Public Utility Commission of Texas to oversee a newly created fund to finance 10 GW of new dispatchable generation within the ERCOT market. A constitutional amendment will be required to establish the fund.

House Bill (H.B.) 1500 calls for the creation of an ancillary services market within ERCOT's energy-only competitive retail electric framework in order to ensure reliability. H.B. 1500 also extends the existence of the commission, ERCOT and the Texas Office of Public Utility Counsel for an additional six years.

➤ S.B. 2627, which was supported by Lt. Gov. Dan Patrick, also puts limits on the PUC's ability to implement a performance credit mechanism, a construct favored by the PUC and Abbott.

➤ Of the several energy-related measures sent to the governor's desk following the close of the 2023 regular legislative session May 29, these bills were among the most controversial. In recent days, the governor has also signed measures impacting the transmission siting and approval process, as well as gas local distribution company conservation programs. Abbott previously signed bills addressing electric utility recovery of fuel costs and employee compensation expenses as well as a measure preventing municipalities from enacting natural gas bans.

➤ Abbott has yet to act on bills addressing electric transmission and distribution system resiliency planning, utility recovery of distribution system improvements and preapproval of purchased power agreements. Another pending bill would provide support for the development of hydrogen infrastructure.

Senate Bill 2627 — Texas Energy Fund

S.B. 2627, signed June 9, provides for the creation of a $10 billion Texas Energy Fund to provide low-interest loans for up to a combined 10 GW of new dispatchable generation. Establishing the fund requires a constitutional amendment, which voters will consider in November.

The PUC will be responsible for disbursing the funds for projects aimed at modernization, weatherization, reliability and resiliency, or vegetation management. To qualify for a loan under the program, a project must involve a net increase of at least 100 MW of capacity for each existing facility or the construction of new dispatchable electric generating facilities with at least 100 MW of capacity. Electric energy storage facilities are not to be eligible, nor are projects that were included in ERCOT's capacity planning model prior to June 1, 2023.

Loan amounts will be capped at 60% of the associated project cost. The loans would be for terms of 20 years and carry a 3% interest rate. Initial funds would not be disbursed until after Dec. 31, 2025, and the program would expire by Sept. 1, 2050.

The program outlined in this bill has similar goals but a different structure than that outlined under a package of bills (Senate Joint Resolution 1, S.B. 6 and S.B. 7) that were supported by Abbott but did not advance. Those bills laid the groundwork for the state to provide direct funding for up to 10 GW of new dispatchable generation.

House Bill 1500 — Sunset review, power market reform

The role and duties of the PUC are periodically reviewed by the Sunset Review Advisory Commission. Following such a review, legislation was enacted in 2013 authorizing the PUC to operate through Sept. 1, 2023. Similar reviews are conducted for ERCOT, the Texas Office of Public Utility Counsel and the Railroad Commission of Texas (RRC), though the RRC review is on a different cycle.

While H.B. 1500 was introduced to implement relatively modest changes proposed by the Sunset Review Advisory Commission following its 2022 review, the version sent to the governor's desk included significant changes to the market structure in ERCOT. Abbott signed the bill June 9, and its provisions are effective Sept. 1.

ERCOT is to develop and, following PUC approval, implement an ancillary services program to procure dispatchable reliability reserve services on a day-ahead and real-time basis. Under the program, participating resources would be required to be capable of running for at least four hours at full power, be dispatchable within two hours and have the flexibility to address inter-hour operational challenges.

Electric generation facilities that enter into a standard generator interconnection agreement after Jan. 1, 2027, would be required to certify to the PUC on an annual basis that they can generate power when called upon for dispatch for at least 15 hours during the highest net load hours during each six-month period designated by the PUC; operate during at least 90% of the highest net load hours each year, excluding planned outage hours; and provide during the highest net load hours each year at least 90% of the facility's average generation. These requirements may be met by owning generation assets or acquiring, through a power purchase agreement, resources that are capable of providing energy continuously at maximum capability for at least six hours. ERCOT is to develop penalties for nonperformance and incentives for overperformance.

The PUC would be required to evaluate on a semiannual basis how to allocate the costs of ancillary and reliability services among electric generation facilities and load-serving entities.

The PUC will be prohibited from requiring retail customers or load-serving entities to purchase credits designed to support a required reserve margin or other capacity or reliability requirement unless the commission ensures the following: the net cost does not exceed $1 billion annually, subject to adjustment for inflation; the credits only apply to dispatchable generation; a single, ERCOT-wide clearing price is established; generators do not receive credits that exceed the amount of generation bid into the forward market by that generator; credits are only available for performance in real-time during the tightest intervals of low supply and high demand on the grid; penalties are imposed for failure to perform; the program balances costs and reliability gains; real time co-optimization of energy and ancillary services is in place in the ERCOT wholesale market before the program is implemented; market participants must not bear the risk of nonperformance by generators; and the market monitor is granted oversight authority.

A generator that is receiving credits through the program would be prohibited from decommissioning or removing from service participating units unless the decommissioning or removal from service begins after Sept. 1, 2028, is required by federal law or would alleviate significant financial hardship for the generator.

It appears that these purchase credit provisions are intended to allow the PUC to implement a performance credit mechanism — a measure favored by the commission majority in its ongoing market reform proceedings and supported by Abbott — while adding consumer protections to address concerns raised by certain legislators and Lt. Gov. Dan Patrick about the program's costs and its ability to achieve the desired results. Under a performance credit mechanism approach, performance credits earned by resources generating during hours of highest reliability risk would be traded among load-serving entities — retail electric providers and vertically integrated utilities — in a voluntary forward market administered by an ERCOT clearinghouse.

A Grid Reliability Oversight Committee will be established with eight members: three from the Senate, appointed by the lieutenant governor; three from the House of Representatives, appointed by the speaker; and the chairs of the House and Senate committees with primary jurisdiction over power generation issues.

ERCOT will maintain an accreditation and banking system to award and track voluntary renewable energy credits generated by eligible facilities.

Transmission certification

S.B. 1076, sent to the governor's desk May 19 and signed June 2, reduces the time period for PUC review of a request for a certificate of public convenience and necessity for a new transmission project to 180 days from one year. The new law is effective immediately.

Gas energy conservation programs

H.B. 2263, sent to Abbot on May 30 and signed June 12, authorizes the gas local distribution companies to offer energy conservation programs to customers and provides the RRC exclusive jurisdiction over such program offerings. The bill would prohibit a political subdivision served by a local distribution company that implements an RRC-approved energy conservation program from impeding customer participation in the program based on the type or source of energy delivered to the customer. Costs associated with these programs would be recoverable through an RRC-approved, expedited recovery mechanism. Lost revenue would also be recoverable if the RRC determines that the operation of the program caused the utility to earn below the authorized rate of return, as established in the company's most recent rate case. The utility would be required to submit annual reports on program result for the prior year and planned programs for the coming year.

Previously enacted legislation

S.B. 1016, which became law May 5 without the governor's signature, requires the PUC, in a rate case, to presume that employee compensation and benefits expenses are reasonable and necessary if the expenses are consistent with market compensation studies issued not earlier than three years before the initiation of the rate case.

H.B. 2073, signed May 27 and effective Sept. 1, requires the PUC to allow utilities to recover or refund under- or over-collected fuel costs through an interim adjustment of the utility's fuel factor within 90 days of the balance being accrued subject to certain conditions.

S.B. 1017, signed by Abbott on May 13, effectively prohibits a political subdivision from implementing a ban on the use of gas vehicle engines.

Bills awaiting action

S.B. 1015 would allow utilities to file for adjustments under the distribution cost recovery factor mechanism twice per year versus once under the current statute.

H.B. 2555 would allow the transmission and distribution utilities to file for PUC preapproval of resiliency programs with durations of at least three years.

S.B. 1094 would allow an electric utility to apply to the commission for preapproval of purchased power agreements under certain circumstances.

H.B. 4885 would update the existing Texas emissions reduction plan to provide funding for hydrogen infrastructure, vehicles and equipment to accelerate the transition to cleaner transportation options.

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