Doug Sheridan says Our Take…
Last week, we wrote about ERCOT’s frequent and increasing reliance on demand response programs and how it appears to have artificially inflated the market-clearing price of generation on the system….
Doug Sheridan says
Our Take
…
Last week, we wrote about ERCOT’s frequent and increasing reliance on demand response programs and how it appears to have artificially inflated the market-clearing price of generation on the system, resulting in higher electricity bills for Texans. Ercot denies any wrongdoing and blames the price increase on sweltering temps and a 6.7% growth in peak load last summer.
But Ercot's explanation belies the fact that over the last five years average electricity rates in the state have risen by almost a third. And that’s before adding back increased federal tax credits and other subsidies paid by taxpayers... plus the billions in state funds the legislature and governor used to help sweep the costs of winter storm Uri under the rug.
Meanwhile, Ercot is correct that power demand is growing in the state. According to the EIA, summer electricity demand in Texas—of which Ercot serves over 90%—has grown by approximately 30 GWHrs since 2019. This 20% growth compares to about 5% growth for the US as a whole over the same period.
But it's how the demand growth is being addressed that's the rub. To wit, it's been mostly through a combination of more renewables—which appear to have serviced approximately three quarters of the incremental demand since 2019—and increased utilization of existing natural gas-fired generation. The final component is demand response, which leans on Bitcoin Inc. miners and other grid users to cut back on power consumption when conditions are tight.
The problem with Ercot's approach is two-fold. The first issue is that renewables are intermittent and unpredictable. By now, this is well understood. The second is that demand response solutions are only short-term fixes, creating a duration mismatch between supply and demand—and introducing additional risk. It’s classic basis risk... like a bank funding long-term loans with short-term CD’s.
You see, Ercot’s plan is fine as long as crypto miners and others are willing to cooperate. But how much can these responders be counted on to cut back when the opportunity costs of shutting down spike?
Are Ercot ratepayers now on the hook for compensating responders when they miss out big on economic opportunities—like the spiking of crypto prices? If the answer is yes, will Ercot decide that since demand response helped suppress the addition of new dispatchable generation on the system, Texans must in time simply learn to accept rolling blackouts?
The truth is Ercot’s market design and energy mix are not serving the long-term interests of Texans. In fact, they are exposing the grid to unnecessary risk and uncertainty, imposing higher costs on consumers in the process.
Texas needs to rethink its strategy and adopt a more balanced and reliable portfolio of energy sources, as well as a more transparent and fair pricing mechanism. Otherwise, it’s only a matter of time before it faces another crisis like winter storm Uri, or worse.