ERCOT

Hello everyone, this is Jason Jacobs. And I'm Cody Sims. And welcome to my climate journey. This show is a growing focused on climate change and potential solutions. In this podcast, we traverse disciplines, industries, and opinions to better understand and make sense of the formidable problem of climate change and all the ways people like you and I can help.

We appreciate you tuning in, sharing this episode, and if you feel like it, leaving us a review to help more people find out about us so they can figure out where they fit in addressing the problem of climate change. Today's topic is ERCOT, the Electric Reliability Council of Texas. And today we have two guests. Eric Goff is president at Goff Policy, which is an infrastructure consulting firm with focus on ERCOT market energy transition issues.

Eric serves as the sole representative for residential consumers in the ERCOT stakeholder process. And Jaden Crawford is director of policy at David Energy, a modern energy retailer that operates in multiple markets, including Texas. David Energy is also an MCJ collective portfolio company.

The Texas energy grid is unique because from an electrons perspective, it's fairly isolated from the rest of North America. It's also a deregulated market, which means that energy retail, or selling power to end consumers. is separate from energy generation, or the act of creating power. And therefore, there's a robust B2B market between retailers and generators, in addition to a direct to consumer retailer market. All of this has created a vibrant entrepreneurial energy ecosystem in Texas.

Companies in Texas are relatively free to experiment with new models and new technologies. And the open market kinda rules the day. But after Texas suffered wide scale energy outages after a severe winter storm in twenty twenty one, the governor of Texas, Greg Abbott, declared that ERCOT reform would be an emergency priority for the state legislature.

In late January of this year, I started to see news show up about some of the ERCOT reform proposals, and I took to Twitter to ask who could help me understand them. Eric and Jaden were recommended by multiple people I know and trust, so I invited them on to help me learn more. Eric, Jaden, welcome to the show. Thank you. Thank you. So we are going to talk about Urcot. And I have to be very upfront that I know next to nothing about Urcot. And so I am going to be learning alongside all of us.

And I'm super excited to do so. Another little disclaimer I'll give up front is even though I live in California and I grew up in Kansas, I was born in San Antonio, Texas. So Ribs and Urcot, I guess, are speaking my language, though I don't know what I don't know for sure. About Rambus or about Arcot?

Oh boy, I know enough about ribs for sure, so I think we'll dive right into the Urcot ignorance. But Eric, Jaden, great to have you. Since we have two of you on the show, let's each of you introduce yourself briefly. Normally MCJ is all about the climate journey and hearing about your stories. But because we have a meaty topic, we'll probably keep your stories a little bit short today. But Eric, describe what you're working on and how this topic is close to home for you.

Sure. So I live in Austin, Texas, and I am an consultant on the ERCOT energy market. I've been doing that since twenty nineteen. And before that I worked for Citibank, I worked for NRG, I worked for Constellation, helping them with ERCOT issues.

And I got a very generous severance in twenty nineteen and was trying to figure out what I wanted to do. And Greta Thurnberg said, How dare you to the UN and I decided I wanted to focus on energy transition issues. So I tried to pick my clients in that space. Fantastic. I I saw you even uh previously owned a composting business in Austin, is that correct? Yeah, I used to own a company that was called the Compost Pedlers, like a bicycle pedal, because we picked up people's waste bicycles.

from their homes and then delivered it to community gardens and urban farms to be turned back into food. It didn't make much money, but it was a lot of fun. So you've had the climate oriented bug or the environmental oriented bug for a while, it sounds like, even if it's only recently that you turned your professional focus in that regard. Exactly. Exactly. Well thanks for joining us today and I am super excited to learn from you. How about you, Jayton?

Yeah, thanks. It's great to be here. I started in this weird world of electricity in about 2006. I was working in finance. More specifically as a financial advisor, and I hated every second of it. It was awful for me. For those of you who do it and love it, bless you. But I ended up stumbling into the world of biodiesel and then further stumbling into the world of generation, building and operating some power plants that ran on biodiesel in the Houston area. And at that point I was just hooked.

This is just such a weird space that it worked well for me. Started doing consulting and also really working with demand response, figuring out how to get resources into wholesale electricity markets like ERCOT. in an really an effort to reduce the need to build more fossil fueled power plants. And I've really been doing that for, you know, about 17 years now. Um, currently with David Energy, director of policy. So I do our policy regulatory affairs and lead our market development efforts.

And yeah, I think you were at uh leap before that too, is that right? I wasn't leap before that. Absolutely. So both David Energy and Leap actually are MCJ portfolio companies. Though I have to say, going into this conversation, I saw some stuff going on Twitter in late January about changes happening at ERCOD and proposed plans and regulatory updates.

And, you know, I thought, huh, I don't know anything about this. I should know about this. Seems like a good topic for MCJ. And I threw out on Twitter, who should I talk to about ERCOT and the changes that are happening right now and your two names both came back to me by multiple people that I know and trust. And so Jaden, love that you work at one of our portfolio companies and that you worked at at another portfolio company previously.

But you're not on here because of that. You two are both on here because The internets at large said you're the two to talk to. So I'm excited to learn from both of you and to understand what is going on. So maybe let's start with the highest level of question. Eric, I'll send to you, what is ERCO?

Yeah, so ERCOT is what's called an independent system operator that is supposed to manage the electric grid for Texas. And there are other independent system operators around the country and around the world. In Texas, we do things for ourselves. We're a very independent minded state. And so we have our own grid and also therefore our own ISO. And so ERCAT manages the wholesale market, the retail market, and also reliability of the Texas grid.

And it stands for, I believe, the Electric Reliability Council of Texas. Just the acronym soup for all of us who love that. And who are members of ERCOT? Like what does it look like to be part of ERCOT? So primarily Urcot is a stakeholder membership non profit corporation that has been granted or delegated authority for the public utility commission.

to manage the grid and help to write rules and so its members are the people in the industry and in order to get anything passed to ERCAT you need two thirds of people to agree to it. And with a mix of buyers and sellers that's designed to force compromise. I'm actually a member of ERCOT. I'm I think the only individual member of ERCOT because I'm appointed to help residential consumers have a voice at ERCAT.

Oh, fascinating. And Jaden, how does Urcot fit into the broader picture of electricity and energy across the United States. Awkwardly. In the sense that most of the independent system operators and retail transmission organizations

Those two are different names for effectively the same thing. You know, the folks who manage the grid, you know, run the markets to make sure that things happen on timescales of twenty years down to two hundred milliseconds. Most of them are interconnected to other places. So that you have these connections that make the country's grid basically one big thing. The big exception though is Urcot. Urcot is kind of an electrical island.

There are some direct current or DC interties, but for the most part, it's not connected to the rest of the system. And that has some very interesting implications. It means that when you have excess generation, none of it's being exported to your neighbors, which would normally happen in other places. And it also means that when you've got problems, nothing's coming in to help.

And I think one of the things that resonates a lot with Texans is that it also means that they're not regulated by the Federal Energy Regulatory Commission or FERC. Got it. Eric, you were gonna weigh in there?

We like to do things our own way in Texas and have for a long time. And the reason we're physically separated is because FDR wanted to pass a utility regulatory act during the New Deal, and the Texan utilities went out and physically disconnected from the rest of the grid, so there wouldn't be any interstate commerce. And so we're still living through the the legacy of that history here. Wow, super fascinating. And also in Texas, you know, in terms of doing things a Texas way.

This is an aside, but I always see like every few years there's sort of a big to do around the Texas Railroad Commission. And I always sort of wonder like why does who can who cares who runs the railroads? But it turns out the Texas Railroad Commission oversees oil and gas in Texas, which is also just an aside, a very Texas thing, right?

And the Texas Railroad Commission used to be essentially like manage the cartel to keep the oil prices where Texas wanted it to be and was the initial model for OPEC. Oh fascinating. So if Urcot is sort of its own thing, how are prices anywhere similar from a megawatt hour perspective or kilowatt hour perspective? Do they have any bearing on what's happening in terms of price an anywhere else in the world, or in the United States at least, from that perspective?

Definitely. Yeah. So and the reason being is that the price of electricity is determined by a number of factors. One of the primary factors though is whatever the fuel source is for the marginal generator. And in most places that's natural gas. And so electricity prices most of the time are mostly a function of what the cost of natural gas is doing in ERCOT as well as in many other places in the US.

Super interesting. And from an energy mix perspective, natural gas is somewhere around half of Texas's energy. Is that about right? A little bit more than half, but Texas has a lot of natural gas, a lot of coal, and has the most wind and the fastest growing solar penetration, despite not much state level support for renewables. It's growing anyway because there's demand and federal incentive. And Eric, you were starting to talk about how Texas kind of turned into its own energy region.

Let's talk about deregulation. So part of what I think makes Texas unique is that it is a deregulated energy market. A lot of that happened in the nineteen nineties as I understand it. Can you explain a little bit about what that means? Yeah. So the story goes that Governor George W. Bush was convinced that competition was good for consumers and good for the industry. And so he went to his utility commissioner, a guy named Pat Wood, who's still in the business.

according to legend, put his arm around him and said, Pat, go get me a market. And so Pat did. And what it's led to is a wholesale competition where anyone can enter the market. with very few barriers to cell generation and then also retail competition where anyone that meets financial standards can be a retail provider and you can choose your electric company the way people are used to choosing their phone company.

And there are other deregulated markets in the United States, aren't there? I mean, in my mind I feel like it's about half and half, roughly. There are but and this could be the Texas to me coming out, but none of'em did it quite right. In Texas, the retailer has full control over the customer interaction. And so The bill comes out with a retailer name. Your point of contact is your retailer. If you don't like it, you leave your retailer.

And other places have retail competition, but the retailer's a line item on your utility bill rather than its own separate relationship. And here the utility is in the background and sometimes it doesn't even know who the customer is. They just know they're providing power to a particular retail. And utilities in Texas still can be private or they can be municipal owned. The deregulatory nature doesn't impact that. Is that correct?

There's some overlap in the large cities in the in the state in like Dallas and Houston, other parts of the state, you can choose your retail provider. I live in Austin where the city owns our own retail provider, that's Austin Energy. And so if you don't like what Austin Energy is doing, you vote for a different city council or what happened actually this week, city council fired the city manager because he did a bad job with the recent winter storm.

And do I have a choice as a consumer in Texas then on who I want to actually provide electrons to my house? And are the delivery of those electrons actually different depending on whom I choose, or is it just who's kind of managing the bill? So physics is still physics. The power flows were the power flows based on the resistance of the transmission distribution lines.

But who pays for it is a choice if you're in the retail choice areas of of the state. If you live in an electric cooperative or a municipally owned utility, You don't for the most part have a choice of elector provider, but instead you can have a democratic control over your council or your co op board. Got it.

local jurisdiction to figure out what that setup should look like as opposed to it being standard across the board through anyone who lives in ERCOT. Not all of Texas is in ERCOT, is that right? There are some portions of the state that are on the Western transmission. Yep, west and east. So El Paso parts the panhandle on the western grid.

And then parts of the East Texas piney woods are on the eastern grid. And recently I say recently, over the last ten or fifteen years, we've had a bunch of wind development in West Texas, including the panhandle. And so the city of Lubbock and the Panhandle left the Western grid and switched to interconnect to the Texas grid because they wanted retail choice.

And can utilities themselves also have a retailer? No. They're not allowed to provide what is called in the law competitive energy services. And so that that means they can't have a retail relationship and they can't own generation. And there's some small exceptions on the generation side. Interesting.

And Jaden at David Energy, you guys work as an energy retailer as I understand it. And how does operating in a deregulated market versus a regulated market different for you all? Can you even operate you probably can't even operate in a regulated energy market, is that correct? No, we can't operate in a fully regulated market. So we need at least some level of deregulation to operate. Got it. But then that means someone could presumably then work with you. Are you all active in Texas today?

We are, yes. Yeah. So then a a business could say, hey, I want David Energy to be my electricity retailer or my provider, which means they would sign up for you, pay their bills through you, and you all would broker essentially purchase the power that's coming to their facility. Is that how that works?

Yeah, that's basically how it works. So we purchase power in bulk. So we'll have contracts to buy power to deliver to a certain place, certain quantity, certain time. And then one of the things that ERCOT actually does is runs markets, right? Day ahead markets, real time markets. So we're never gonna buy all of our power on a contract because

The reality is we don't know how much everybody's going to consume at any given point in time. And so we want to cover the bulk of that. And that helps us manage risk, right? And outside of that, we will buy power on the day ahead market. Day ahead just means like we're buying power in certain hours and certain quantities for tomorrow. And then in real time, we're buying it in real time, in like 15-minute increments.

And I'm curious as deregulation now exists obviously in Texas and has for a couple of decades, as renewables have come down the cost curve, has deregulation helped drive adoption of renewables? Absolutely. Yeah. I think deregulation has and not just deregulation, but also Urcott's energy only market construct has helped drive the adoption of renewables. And I think the latter even m more so than the former, even though they they really are part and parcel.

Yeah, there are two big ways that the Texas market has contributed to the growth of retail. One is the ease of entry into the wholesale market. Anyone can build a generator. You don't need approval. You c you just need to do it. And the other is consumers that want green energy can buy it without any significant barrier to entry. So we actually have companies that do a renewable PPA in Texas for their requirements in another state and then they're long Urcot and short in the other state.

With the hopes that they can balance out, you know, financially. But they're not even getting the power sometimes in Texas, but they're just You know, it's the easiest place to create a new generator in many cases. Create a new generator meaning a new solar farm or a new wind farm or the like. Exactly.

And how have you seen storage grow in adoption, I would presume, to be fully cost competitive? Renewables not only need to compete on just cost of generation, but on essentially cost of generation plus storage relative to gas, for example? Is that accurate? Well, not necessarily. There's a growing amount of

solar in particular, but solar and wind that is pairing with batteries. But there's not an obligation to have a battery. And so batteries are also growing exponentially is not a strong enough word to describe the growth in batteries. And many times they're separate because there's not enough solar or wind that is being curtailed to justify co-location. And so instead a battery is going where the highest value is on the grid based on the price.

So we're seeing a lot of that policymakers I think intuitively feel that renewable should be paired with batteries or it can be dispatchable. But right now the market's not demanding that substantially, although about twenty percent of the solo in the queue is paired with s with storage. Well what I'm really picking up on from you in in kind of reading between the lines of everything you're saying is that I mean it kind of seems obvious in retrospect, but this deregulated market

allows for a lot of entrepreneurialism. It allows for a lot of people to look for opportunity and go build something where they see a gap in the market without having to kind of go through a ton of I mean, I'm sure there's compliance and sort of permitting hoops, but not a ton of permission to do so. Is that correct? One hundred percent. Yeah, and I would say i it even goes beyond generation, right? This entrepreneurial capability

is not just when we're talking about supply, it's not just talking about batteries. It's also talking about like demand and capabilities of demand. And when we're talking about demand, we're just talking about using electricity, right? What we see in Texas is people really finding ways to avoid some of the price volatility that we see in Texas.

We're seeing what's called demand response. People using various technologies to very strategically reduce demand at certain points in time. That can be batteries behind a meter, like some of the big companies. that we're all familiar with. That can be smart thermostats, that can be throttling EV chargers. But this market structure really lends itself to people being able to find all kinds of ways.

to capitalize on the market, even if that capitalization is by avoiding exposure to it. And so we really see innovation on both sides of this Texas market. And I just want to add to that that because it's a competitive market, much of that demand response happens organically and the government has no idea exactly how it's working or or why. And so it's just

inherent to risk avoidance that companies will want to manage their cost of energy and they can do that through markets. And there's no government program for demand response for the most part. There is one, but, you know, that's a an asterisk. It's just What is the best way that this particular company can minimize their energy cost? Got it. So at a highest of level, what I'm hearing is power that is generated in Texas stays in Texas.

Entrepreneurs are free to come in and experiment with new ways of generating power, new models of delivering power, new models of selling that power to buyers, whether they're consumers, whether they're businesses. And even arbitraging markets between Texas and other parts of the grid purely from a financial instrument perspective, even though again, electrons generated in Texas stay in Urcot. Am I understanding correctly?

Great. Okay. And so then in twenty twenty one, horrible disaster struck, right? There was this winter storm. Hundreds of people died because they didn't have access to heat. And there was this sort of emergency declaration by the governor of Texas that Urcott needed to reform and it was a huge priority for the state legislature. I think they found out that a third of the board of Urcot didn't even live in Texas, including the chairman of the board.

So what what was wrong? Where were the cracks here that sort of spread open widely? Yeah, I I would say that the cracks weren't where the patches are being applied. And so what really happened in twenty twenty one was not dissimilar to things that happened before. It's been known for quite some time that the Texas system, right? Not just the electric grid, but upstream of that, right? The gas system that feeds the electric grid.

is not capable of handling cold weather. And we're seeing increased instances of extreme cold weather in Texas. Like this is a thing that we know happens with climate change. It's a thing that we've seen happening for years. And it's happened in Texas before, not to this level, granted. But what really happened wasn't that we didn't have enough generators to be able to supply. It's the generation of all types failed in the cold.

There was a lot of talk from politicians and from oil and gas folks that the problem was that this is because we relied on wind and solar and we had a storm and the windmills and the solar couldn't do what gas could do. And that's really not true. It is true that a lot of the wind generation failed because the turbines iced over and stopped spinning.

But that was because they weren't winterized. We have turbines operating in Canada, in the Arctic, like they operate in cold places all the time. This is something that can happen. We saw a lot of mostly gas go offline. from a combination of the cooling infrastructure freezing over, but mainly because the gas infrastructure froze and there wasn't enough gas to supply the gas plants and the homes.

And so you had a lot of curtailment where these gas plants couldn't operate. And when I say curtailment, I just mean there's a decision made to decide who gets to use gas and who doesn't get to use gas in this point. Right. So we had gas plants went down.

We had nuclear plants go down because the cooling infrastructure froze. Coal plants froze. The problem wasn't so much that we didn't have enough generators. It's that everything that we had in Texas couldn't handle the cold, and so it didn't handle the cold. We're gonna take a short break right now so our partner Yin can share more about the MCJ membership option.

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It sounds to me like in addition, maybe there actually needed to be more regulation on the safety protocol side of things that was maybe missing. Is that a fair question to ask? It is a fair question. I think when we talk about deregulation, like we're not talking about like

it's the wild west and you can do whatever you want, right? That's not what we really mean when we're talking about deregulation. When we're talking about deregulation, we're saying that we're not using a regulated monopoly structure to deliver power. And I think Eric you were gonna say something and I probably just talked over you'cause I love this topic so much.

No worries. Yeah. I was just gonna say that there was a failure across all industries in Texas too. It wasn't just the power industry. Just Texan are not used to the severity of the winter weather that happened. And we have had, you know, extreme weather weather in the past, but it's occurring for whatever reason, more frequently than it used to.

And it just hadn't been built into the expectations for anyone. So there were water utilities that failed. There is a big refinery that had product that congealed in their pipelines inside the refinery. And led them to be shut down for weeks and increased the national price of gasoline. And so I bring those up just to point out that like There wasn't a particular failure in the electric market, but rather there's a failure in Texas for expectations about weather.

And so With that background, you mentioned that the patches are being applied to the wrong cracks or in the wrong place. What patches are currently being applied to Urcot now in light of this winter storm? Yeah, so I there were a few things that happened early on. Some of them I uh in full support of, some of them I think were a little bit performative. One of the things that happened was that the maximum offer price, so the maximum amount that a generating unit can offer.

used to be nine thousand dollars a megawatt hour. That is admittedly very high, but that's by design. That's not a bug, that's a feature. That was reduced to five thousand dollars.

And then in addition to that, Texas has what's called the operating reserve demand curve. That was really put in place to help kind of solve like this kind of missing money problem where you have renewables that are keeping prices low most of the time, kind of suppressing the incentive for these dispatchable types of generators like gas to be built.

Which means that you can run into a problem where like you can have some resiliency issues. And so the operating reserve demand curve was put into place to create these adders onto the price of energy when what's called the minimum contingency levels shrunk to I think it was two thousand megawatts, Eric, is that right? It was smaller, but yeah. Yeah. It's changed over time.

The other thing they did is said, Yeah, we should make these things kick in a little bit sooner. And so they did that. And even though they reduced that maximum offer price by changing when the operating reserves demand curve came into play. In twenty twenty two it added five billion dollars of market benefit to generators. And so that I fully support, right? In terms of

in Texas when you have an energy only market. And when I say energy only, what that means some markets, have what's called like a capacity market, meaning we're gonna pay you to build generators based on what we think demand's gonna be X number of years in the future, and you're gonna bid on that. And if you win, you are obligated to build that generation or create those demand response portfolios, whatever it happens to be, on a forward basis. In Texas they said no.

We're gonna do this kind of on a free market type basis. We're gonna do energy only, where the energy price is the signal that you need to build generation. And so what we've seen since those changes were made is generation. Starting to enter what's called the Q, right? And so we're seeing these generators being built now on the basis that it's now profitable again for them to do it.

And so some of the patches that are being talked about now, again, these are mostly, mostly performative. The big one that's being talked about right now is called the performance credit mechanism or PCM. And this is this really strange convoluted concept where it's kind of like the mirror image of a forward capacity market, but it's kind of like capacity in the rearview mirror market.

where the idea of this is that if you have generation that was available to be dispatched in hours where after the fact it was determined were critical, You are gonna get paid some amount of money for having been available, right? So it's not a forward capacity market. It's kind of like Think about a forward capacity market as getting insurance, right? You're buying insurance to ensure that you have enough supply there when you need it.

But this is kind of like if you had an accident And you then went to the market and said, I am going to pick a policy based on who would have served me had I got insurance before I had the act. Right. It's really, really weird. And it doesn't really incentivize new build generation. What it does do, and why a lot of the generators really love it.

is it kind of just pads the pocketbooks of existing generation. They're there already if they were either delivering or if they were offering, right? If they were, even if they weren't dispatched. They're gonna get some additional revenue. They don't know what, because nobody knows which hours are gonna be the right hours. We don't know exactly how much is gonna be transacted in any given year. But If they're there, they're going to get extra money for basically just having already existed.

Okay, so I'm hearing two things. One, there was a cap on the max price, which, you know, seems reasonable, right? Like, hey, let's not let price gouging happen when we're in an emergency. And then two is this sort of new market mechanism that is rewarding people who may have excess capacity at a given moment, but that you're not encouraging them to have it available up front. You're more rewarding them in the past because they did have it.

at the time when it might have been needed, now looking backward. So that's the performance credit mechanism that I'm hearing you describe. That's right. And this may be an aside, so I'll try to limit it, but I want to push back on the price gouging comment just because that's the way a lot of people perceive those high prices. And so it's a natural reaction to those high prices. But there's an intention behind it which is

to discourage large consumers from continuing to consume electricity. Many large industrials have complex and sophisticated contracts that expose them to that real time price. So that when the price gets high, they can turn off and reduce their consumption and then sell back the supply they bought in advance. something that's is worth more to them than making a widget. I mean, that is demand response, right? That's what that market mechanism is. Yeah. And so it's just like encouraging them

If electricity is worth more to somebody else than it is to them, they won't consume the electricity so someone else can. And it's designed to figure out the value of electricity when we don't have enough of it. But what it sounds like what what maybe is there an assumption that what was happening was when consumers couldn't get power in their own homes?

residentially because the retailers didn't want to pay that high price all of a sudden, but industry was creating price to go even higher and higher and higher and thus was hurting residential consumers. Is that is that the theory behind that change? Retailers don't have a choice. We have to serve the demand. Like we don't get to decide to do that or not do that. We have to do it.

And so I think the reason that the offer cap was lowered was because in addition to people losing power, the wholesale price of electricity was nine thousand dollars for days. Right. And so ultimately that means that this filters down to consumers. Consumers ultimately end up footing the bill for that. Yeah, I saw these stories back, you know, in twenty twenty one of people who were like, My electricity bill for the last month was three thousand dollars, something crazy, right?

Yeah. There were some retailers that had taken this is an example of when we needed more regulation. You asked that question earlier. So there were some retailers that took those complex products that were, you know, for industrial customers and large commercial customers, and applied those to residential customers. And the Public Utility Commission has customer protection rules that apply to small customers that didn't have that prohibited.

Make sure I understand that. So they were trying to apply demand response mechanisms to consumers and for residential customers who didn't shut off their power usage, they allowed them to continue to buy it at extremely high prices. Yes. Versus I know in California we get these text messages that say, Hey, it's time to shut off. We actually get money back if we shut off. As opposed to Yeah and so now a retailer like David or others

can still give customers the benefit of those high prices by paying them for selling something back that they bought in advance. Whereas, you know, these retailers that went out of business because they couldn't pay their bills, were just passing through the wholesale price to the end use customer without having any sort of program in place to like help them curtail. And so that was where the state stepped in to disallow that. And that maybe should have been done beforehand.

Maybe I'm actually gonna uh defend some of those companies for a second in the sense that when they set those up, it wasn't really imagined that there would be a Yuri type scenario. And I think the idea was, yeah, there are gonna be some intervals where you like the price is gonna be nine thousand dollars a megawatt hour, but for the most part, on average, you're gonna pay less. And that was true.

until it wasn't. And so I'm gonna agree with Eric that there probably should have been some guardrails on that for customers who aren't sophisticated enough to know what that kind of fat tail risk is, right? And so I think there probably should have been some excess regulation there. I do think the thing I liked about what they were doing though was they were really trying to directly

incentivize customers to do the right thing at the right time, both from a wholesale prices scenario, which directly correlates to a carbon scenario as well. And I liked the idea of it. I think it went horribly wrong, and I'm very glad that there are some guardrails in place now that protect customers, but I do think that they were coming from a good place when they set these up. It just went really wrong.

And then moving on to the performance credit mechanism, Jaden described it a bit. Eric, I'd love to hear your take on it. Again, Jaden described it as this like reverse insurance. sort of scheme. I'm curious what you think about it and and also what you think a better alternative would be if you don't like this as a plan either. Yeah. So I appreciate one thing about the performance credit mechanism, which it's better than the idea that it killed.

So there was an idea on the table that we don't need to get into'cause it's dead called the LS obligation. And that was bad for many, many other reasons. And the PCM part of the compromise was to kill that idea. So I very much appreciate that that even worse idea is no longer the table. However, the PCM has many flaws in it because you don't know the value of what you're going to do until after it happens. So a rational actor should be able to enter into a situation and say, okay, here

are my expectations based on what I know and here's the value of my actions. In this case, you don't know whether or not the next hour will be one of these worst case hours until the next year or the next month or whatever the government ends up deciding. And so you can have a situation where your retailer curtailed you as a a home customer because they thought this was one of those hours, but they won't know that until next year or next month.

And so there could be situations where people are not consuming electricity when they should have been because there's no problem on the grid. There's no issue. It was just a financial transfer of money and no connection. to reliability. And that's the fundamental problem is that It's designed to transfer money from one party to another in a way that's disconnected from the fundamental reliability of the grid. And if that disconnection exists, then it'll lead to bad outcomes.

What would you propose as an alternative, Eric? So I think that the energy market works very well today and we can build on something that we know works well instead of trying to reinvent the wheel. So there's another kind of insurance product called ancillary services. And th these are basically things that ERCOT or the ISO ISOs across the world buy these in order to

make sure there's enough capacity for tomorrow, or to make sure that if a generator trips offline unexpectedly, the lights won't go out for the whole grid because you have enough backup to replace it. And there are proposals by the Independent market monitor, which is a official position in ERCOT and many other ISOs.

to just buy more of that if the state wants to have a higher level of confidence in the electric grid. And that fits within the existing construct without creating the risk for the world's ninth largest economy of creating something from Holkl. Does this mechanism exist in other deregulated markets? Yes. This exists throughout the whole world. Europe has ancillary services. California has ancillary services. New England has ancillary services. And this is a saying by

more insurance, buy more ancillary services. And that comes at a cost to consumers, but that's an easy policy trade off to say, you know what, as a state, we want more insurance because the grid is so important to people. versus trying to create a new structure that hasn't been tested anywhere in the world. One thing that Jaden didn't say is this PCM has done nowhere else in it's fun to say the solar system, but nowhere else in the world.

I saw it called a first of its kind proposal, right? So it's clever, I guess, is the way to think about it. Yeah, and sometimes, you know, innovative things are good to do, but when it's something as important to people as electricity, let's let some other place try this before, you know, Texas, as I said, is the ninth largest economy in the world. And we don't want to mess that up with something that many experts say is a bad idea.

Did you really just say don't mess with Texas? I think Yeah, I did say don't make the taxes. But help me understand. So then this ancillary services model, is it sort of like a almost like a power purchase agreement for on demand access to power? Yeah, exactly. Right. And so Jaden gave an example earlier where David Energy or any other retailer buys a certain amount of electricity in advance to cover their risk. And some of that is by direct transfer of megawatts from a generator to

A consumer and other is like an option. So, like if the price gets a certain amount, I want to have the right to buy it from you at that price. I mean it's like a futures market. It's how jet fuel works, for example, right? A hundred percent. The difference between that and this is that this is a contract that's created by ERCOT with specific requirements.

where the demand isn't based on the inherent demand of the market, but instead based on ERCOT says, I want three thousand megawatts. And so it's intervening into the outcome of the market where ERCOT is demanding something in excess of what the market would deliver. And so for that reason, it's still the government intervening in, you know, the natural market, but it it fits within the context of the existing marketplace.

And it would presumably only be triggered in one of these emergency scenarios or that's where ERCOT as a sort of a regulatory body comes into play is that they're the ones who can control Exactly. Switch gets flipped. So Urcat buys the call option rather than David Energy buying the call option.

Great. Okay. That makes sense. And what's holding this idea back? If this is what's done elsewhere in the world, presumably it's been on the table, why has that not made it through from the proposal phase? I would say it it is on the table. So if I'm a generator and I can make three dollars or five dollars, I'm gonna tell you the idea that makes me five dollars.

But fundamentally it is on the table. It's one of the ideas being considered by ERCOT and the Public Utility Commission and the Texas legislature, but the PCM is the one that was recommended by the Public Utility Commission and is kind of the leading choice right now. And so the opponents to that are recommending do you ancillary services or or other ideas. Okay.

And I guess it makes sense. I mean, if you're a generator and because of the nature of deregulation and the firewall between generating and servicing retail consumers your customer is not the retail consumer, right? Like you're not necessarily focused on their needs, even though we're all humans. Like we all to some extent have empathetic care in the world. But if you're running a business and your focus is on

Maximizing profits to the power generation that you you can deliver. I guess I understand why those motivations exist. And they do. I I think that firewall idea is an interesting one as well, right? Like David Energy, I see Eric's laughing. David Energy can't own generation, right? But there are what are called gen tailers.

in ERCOT. Gen Taylors are organizations that own lots of generation and also own customer relationships. And there is at least a theoretical firewall between the two companies. I thought we established that couldn't be the case. Maybe did I misunderstand? Well they are a technically different company. But the P and L's all roll up to the same broader organization.

So w we talk about utilities and utilities mean something different in Texas than it does in other places. In Texas a utility owns the wires and the poles and the meter. And in California and in South Dakota, the utility owns the wires, the pulse, the meter, and the generator.

And so there were companies like before deregulation, Houston Lighting and Power owned all of that. They were the natural monopoly. And now Center Point owns the wires, the poles, and the meters, and the generation was sold. through a number of transactions eventually to a company called NRG. And NRG also owns the customer relationship where they own the generation in the Houston area, some of it, and they own they've inherited many of the customers

away from that old Houston Laden power. They've acquired new customers to retail competition, but they're the largest generator in Houston, and that's why the NFL Stadium is named NRG Field or whatever it's called. Right. And that's important. This distinction is important between this theoretical firewall idea because one of the things that the performance credit mechanism is, is a requirement on suppliers like David Energy.

and the supply side of NRG to buy these performance credits. It's completely optional for generators to sell them. Just because you have a generator doesn't mean you have to sell these performance credits. So if you elect not to, you actually own the supply of those. And to Eric's point earlier, you're going to make the decision between X dollars or X plus dollars and You really owe it to your shareholders to always choose X Plus.

Yeah, makes sense. I understand, I guess I should say. And I mean, Texas presumably also needs more generation, right? Like significantly. There's a huge population inflow into Texas, et cetera. So I I would assume the capacity needs of Texas are growing. The capacity needs are growing. People are moving to Texas. Industry is growing in Texas. These are all good problems to have if you're Texas. So, yes, there is the need to grow capacity. Renewables are also growing.

This does mean you need to grow dispatchable generation as well, right? You don't need to completely remove renewables. Like the idea that renewables are are a problem is just not true, right? Yes, you need to have some amount of dispatchable generation to ensure that you have enough power whenever you need it, regardless of whether the wind is blowing, the sun is shining. All true.

So you do need to increase capacity. I think that the idea of never letting a good tragedy go to waste is in full effect here, right? And it is the case that the things that caused URI are not being solved by the performance credit mechanism. It's being a bit conflated with this broader question around capacity and resource mix in Texas. And so I think the idea that we have to increase capacity is very true.

But the performance credit mechanism isn't really gonna grow necessarily capacity. Like on its own, it doesn't do it. It definitely transfers money from consumers to existing generators. It does that very, very efficiently. But it doesn't necessarily grow capacity. I think if we want to grow capacity, one of the easiest things that we can do is more of what we have already seen since 2021 that is working, right?

These changes to the ORDC that I was talking about earlier, that increased these revenues by$5 billion. There were significant increases in the queue as a result. I think one of the things we could do to increase capacity is start ratcheting that Maximum offer price up again until we start seeing the type of megawatts in the queue that we want. That means we have to decide how much we want, right? We need to decide what is the right amount of capacity to have.

Like what is that reserve margin that we want to see? But by increasing the maximum offer. price in addition to the changes that were made to the the operating reserves demand curve, we can definitely start increasing the capacity within the energy only market construct because we're seeing it already happening right now. Eric, how about you? Thoughts on my question? Does Texas need more generation?

So Texas has gotten tens of thousands of megawatts of new generation under the existing regime, which isn't the PCM. It's what is referred to when Jade mentioned the energy only market in Texas. And even up until the present moment, we're getting new generation be built in Texas without new reliability market to try to get above and beyond that.

So for example, yesterday the front page of the Houston Chronicles business section talked about how NRG had had a fire that caused one of the generators in the Houston area to break down and they had to replace the turbine. And they did replace the turbine. They found another turbine and shipped it to the Houston area and installed it.

And they thought that was worthwhile to their shareholders to do without the need for the performance credit mechanism. And meanwhile, you know, there are other companies that said If you get the performance credit mechanism, we will ship a turbine to Texas and install it. So somehow it's happening anyway.

without the need for additional government intervention. It's just because they want to maintain their investment and continue to make money in the way that they are today. There's another company that's building new dispatchable generation, natural gas. Today that has been installing more than a thousand megawatts over the last several years. And they say that they want the PCM, but

Of course they would because they'll make even more money. But for some reason they've made the decision to install natural gas capacity today under the existing mechanism. And then one last point. There's been an enormous growth in solar plus storage since Winterstorm Uri because there are pictures that went out on social media of one house that had their lights on and a block. And that was because you had solar plus storage at your house. And so there's this

resiliency value above and beyond the market value to know that okay, whatever my dollars and cents savings are from installing solar plus storage or lack of that, it's still worth it to me because my lights will stay on. And That's not just a solar plist storage story. There's also companies like Generac that are doing home natural gas. And they're growing substantially as well in Texas because residential consumers value keeping their lights on and are willing to pay for it.

Yeah. And you're talking residential solar plus storage in this case. In particular. Yeah. So for people who are listening who live in Texas or even if they don't live in Texas, who are motivated here to get involved, what should they be doing? Well, they could start a new retailer. But yeah, so what you can do is to communicate with the Texas legislature about your desire to have a a light touch approach to these changes.

I don't think that we're in a rush, but many politicians feel the sense of urgency around making dramatic changes because of the literally dramatic experience that the state had that I think that some companies are taking advantage of the political opportunity here and

We should take our time to make sure that we get it right. And if we need to take interim steps, like a bridge mechanism to there's no harm in buying more ancillary services if you're gonna do the PCM anyway or some other thing anyway. In the meantime, you're just buying insurance for tomorrow. While we're deciding do we need to make some drastic decision, we could just buy more insurance, more ancillary services tomorrow. And that would literally buy us time to have a thorough discourse.

Do changes need to be put in place today to enable the ability to transact ancillary services? No, EarthCat can make the decision tomorrow if they wanted to. But it URCOT does have to actually approve it as an available mechanism. Yeah. So Urcot is the one that says, yeah, how much they want to buy and what they want to buy. Right,'cause you said they're the ones who have their their finger on the switch, I guess.

There's something else I think that people in Texas can do. Yes, engage with your legislators and ask them to take a light touch approach, but also engage with the Public Utilities Commission of Texas. Engage with your suppliers and make them explain to you how what's being proposed is actually going to do what they say it's going to do.

I think that a lot of times this industry's really it is complicated. It's esoteric. It's weird. And we're used to talking to each other. We're used to talking at each other in our own language. But that doesn't mean that people don't and can't understand what's happening. Demand to know how spending this amount of money Demand to know why transferring money from your pocket to these generators for already existing is going to save you money. Make them answer the question.

And if they realize they can't answer the question, maybe it goes away as well. But ask that and demand to know. You have a right to know. Okay, so we've talked about the performance credit mechanism. We've talked about the ancillary services model, which is what the rest of the world uses. Is Urcott considering anything else besides those two?

Yeah, th there's one idea before the Texas legislature that is going out and just directly procuring new natural gas generation. So if they believe that there's a market failure where there's not enough natural gas generation just go and either spend state money or spend consumer money to buy more. And so Berkshire Hathaway is pushing that idea to go out and do an RFP. to buy a certain amount of new natural gas capacity and it would be

competitive procurement, government contract, and they would hope to win it. So that that's the idea. It feels very I mean to me Yes, I was born in Texas, but I'm definitely not in the flow of Texas. Feels very un Texas to essentially nationalize power in that regard, which is what that kind of would be, is it not?

It would be a state procurement. The difference between nationalization and this is that the state might not own that capacity, but it would be paid for by the state and owned by Berkshire Hathaway. Okay. Or somebody else. So that may be something that ends up getting further looked at much as the performance credit mechanism is currently sort of making its rounds through the legislature. Is that is that what we might expect to see in the coming months?

Yeah, we'll see discussion of of that plan or versions of that plan where there's pushback in a meeting yesterday at the Texas Senate about whether or not to do that or instead have the utilities that we said earlier cannot own generation. to let them own generation through this mechanism for the sole purpose of of this backstop. So we'll see what happens. It's it's something that is being considered by the Texas government.

Yeah. And one thing to kind of clarify about this as well, is that if they bought this generation or if this generation was procured on behalf of Texans, If it was operated, it would completely mess with the market signals that would encourage competitive generation and crater prices to the point where you wouldn't have new competitive generation. And so what they're saying is, yeah, we're gonna build it, but we're gonna put it in the closet and just kind of

hang on to it until we need it. Which means that in your effort not to have a capacity market, all you've done is eliminate the market, which to your point, Cody, is very much not a Texas thing. So it's very interesting that this is a topic of conversation in that you're going to charge folks to build all of this generation capacity that you deliberately don't use unless there is an emergency.

Or unless folks later decide that we should be using it because it would be a shame not to use a thing we paid for and you kind of run into that flow of events that inevitably occurs. Yeah, if we have it behind, you know, break glass in case of emergency, it will be very expensive because most people when they invest in something new, they intend to make money with it. And this is saying, We're not gonna make money with it. You're just gonna give us

the cost of doing it. And inevitably people will want to use it because it's there. Why wouldn't you want to use it? And that will cause all kinds of problems, potentially. It sounds a little bit like the strategic oil reserve of the US federal government to some extent, like the same kind of model. Exactly. And just like that, when the price of gasoline gets high, but there's no strategic issue

President Biden released oil in order to lower the price of gasoline. And that was smart politically, just like it would be smart politically to use these generators in the future. Well fantastic. Well guys anything I should have asked that I didn't ask? Yeah, I think, you know, this is a really complex conversation and we uh managed to avoid most of the acronyms, but at the end of the day this is just My question is...

Do we need to make a radical change to the market design in response to this one off event? Or can the market react to it on its own? And so that's a big question. Do you trust markets or not? We don't need to get into that. But fundamentally, people lost billions of dollars in Winterstorm Uri, in addition to hundreds of lives that were lost.

And those companies that lost billions of dollars realize that they have a strong incentive to not do that again. And so that's what markets are good at is to help manage risk and make very complex decisions. And a policymaker wants to be able to say to his or her voters, I did something to fix it. And that's compelling, but at the same time it's really getting into a complex area of law and economics that that really deserves a thorough consideration, you know, before you make drastic changes.

Yeah, and I would just say if there are folks who want to learn more about how all of this works, if you're curious about how electricity markets work, if you're curious about distributed energy. and you don't want to go about it in this crazy textbooky, like super, super nerdy sort of way. There is a group out there called the DER Task Force.

I would encourage people to check it out, join, ask questions. It's got lots of professionals like myself, like Eric, lots of people who are consumers, lots of people who are wondering what they can do, what's real, what's going to make a difference. So it's really just kind of a community. And I would encourage people to just if you have questions and you want to know more, check it out. It's free.

That's great. Yeah, and DER is for to unpack the acronym SUP is distributed energy resources, right? That's right. Eric, Jaden, thank you so much for coming on today. Super appreciate you updating us in terms of what's going on and where folks Like each of us can help. So thanks for your time. Thank you, Cody. Right. Thank you very much. This was fun. Thanks again for joining us on the My Climate Journey podcast.

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