November 10, 2023

The People’s Republic of Texas

We have written in the past how the extreme – and opposite – energy policy positions taken by California and Texas have led to severe electric reliability issues in both states.  California taking a “climate-is-all-that-matters” approach and Texas taking a “free-markets-solve-all-problems” approach.  Evidence shows that the best run systems use competitive markets to drive down costs overlaid with public policies to make sure the lights stay on for everyone, not just those that can afford back-up generators.  The latter part isn’t socialism, its democracy in action, making sure that public goods like national defense, literacy and infrastructure reliability are there to provide benefits to all.

Now comes Texas Proposition 7, establishing a $10 billion fund to provide grants, loans and incentives to build back-up power generation.  It passed by a margin of 65% to 35%. The fund will be administered by the Texas Public Utility Commission and will operate under rules set out by the Texas Legislature[1] and signed by the Governor on June 9th that became effective only if the proposition passed. Proposition 7 is now codified in the Texas Constitution as one of over 500 amendments since 1876.[2]

An excerpt of the text of the amendment reads as follows:

….to provide loans and grants to any entity to finance or incentivize the construction, maintenance, modernization, and operation of electric generating facilities, including associated infrastructure, necessary to ensure the reliability or adequacy of an electric power grid in this state.[3]

While not mentioning batteries per se, the amendment excludes them by referring only to “electric generating facilities.”  Batteries store electricity, they don’t generate it.

Those who objected were mostly opposed to any subsidy for power generation that would include natural gas or any other fossil fuel without providing equal incentives for clean energy. But let’s face it, the Inflation Reduction Act already does that in spades.  In fact, the only county voting against Prop 7 was Travis County home to Austin, which doubles as a refuge for California transplants.[4] Others objected to the use of any non-market-based tool to incentivize more supply.

And while Texas’ growing demand for power is among the fastest in the country, this bill does not represent an abandonment of a free market for power generation.  It’s more like a state-level version of the Strategic Petroleum Reserve for electric power.  And while Texas consumes more electricity than any other state as a percentage of its power generation, wind and solar make up only 22% and 4% respectively ranking Texas at tenth and fifteenth on that measure.[5]   It’s notable that a state dedicated to free markets with renewable penetration well below the 60-70% levels demonstrated elsewhere finds the need to take this approach to insuring grid reliability.

Perhaps, just as important was the other energy bill (House Bill 1500) signed by the Governor on June 9th that did not need further public approval. HB1500 provides both penalties and incentives for power generators to be available at times of high demand.

The incentive system is an alternative to a capacity market present in other parts of the U.S., where an auction process rewards the maintenance of surplus capacity.  More interesting is the reliability requirement, beginning in 2027, for any generator seeking a new interconnection with the power grid.  Failure to provide power for at least 15 hours during peak demand events during a six-month period would incur a penalty.  So too, would generators not operating at 90% of capacity during peak demand periods.[6]  Clearly this advantages dispatchable (available at the flip of a switch) power versus intermittent power like wind and solar, while incentivizing the latter to pair their generation with batteries or another form of back-up. It is a notable intervention into a free market.

When the U.S. deregulated the electric power markets, a process that was years in the making, it dramatically lowered the cost of wholesale electricity but gave up a policy tool that could ensure reliability.  Those capacity markets are a patch meant to address that, a patch Texans were adamantly against because of the potential costs of interfering in a free market.  In a free market, producers rarely, if ever, have a requirement to provide their product 24/7/365. Imagine the additional costs if copper and aluminum producers that sell their product to the London Metal Exchange would have to promise 24/7/365 reliability.

Texas’ HB 1500 lays new ground.  It effectively says that if you want access to the grid, you have some obligation to the public to be available when needed.  Perhaps this makes sense because the grid is a combination of regulated monopolies, financed with private capital, that have an obligation to serve, and are limited to an allowed rate of return.  AKA, a public-private partnership (PPP).

In fact, three other propositions that passed this week in Texas, also fall into the PPP category: Prop 5 creates a $3.9 billion fund to aid research at “emerging” research universities, Prop 6 creates a water infrastructure fund and Prop 8 creates a $1.5 billion broadband fund for the 7 million residents lacking internet access. The citizens of Texas seem to speak with a different voice than politicians adhering to dogmatic narratives.

Having a free-market power generation system working in concert with a grid comprised of regulated monopolies is messy, but it works.  The trade-off between the costs incurred by this public obligation to serve versus the efficiency that comes with competition will never be resolved, nor should it be.

Come to think of it, the tension is remarkably similar to modern society as a whole that has two separate but intertwined governance systems:  the free market economy where one dollar equals one vote and the political economy where one person equals one vote. And we know that system is the worst, except for all the others.

This information presented contains EIP’s opinion which may change at any time and without notice. The information provided above is based on data obtained from third party publicly available sources that EIP believes to be reliable, but EIP has not independently verified and cannot warrant the accuracy of such information. In providing the information, EIP has made several assumptions that if changed, materially affect the information and conclusions provided.

[1]https://ballotpedia.org/Texas_Proposition_7,_Creation_of_State_Energy_Fund_Amendment_(2023)#Senate_Bill_2627_(2023)
[2] https://ballotpedia.org/Texas_Constitution
[3] Texas Constitution, Article 3.
[4] New York Times, November 7, 2023.
[5] EIA, Bloomberg NEF.
[6] https://www.spglobal.com/marketintelligence/en/news-insights/research/texas-governor-signs-dispatchable-generation-market-reform-legislation

 

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