The PUC has a plan to raise Texas electricity rates. The plan is called the Performance Credit Mechanism (PCM) and it is specifically designed to transfer money from consumers to companies that operate power production facilities on the Texas electricity grid. So why would the PUC do this?
For many years the Texas electricity grid has struggled to keep up with the growing electricity demand from an expanding economy and a fast-growing population. The state has been able to keep up in large part due to remarkable growth in renewable energy sources. Today Texas has by far the biggest portfolio of wind energy in the country. Add to that a large and growing number of solar power facilities and the result is a mix of renewable energy that accounts for about a quarter of the state’s electricity production.
Texas Short on Dispatchable Power
Renewable energy sources have many benefits, but they have at least one major drawback. They are not an on-demand sources of electricity. They only produce power when the wind blows, or the sun is shining. When grid operators need more power at any given time to keep the lights on in Texas, they can’t simply crank up the output of the wind turbines.
To keep the grid operating smoothly with the right amount of electricity to balance out real-time demand, grid operators need what is know as dispatchable power. In other words, they need power plants that they can ramp up quickly when the need arises. For this they need fossil fuel power plants. Specifically, they need natural gas-powered electricity.
Texas now finds itself in a situation where we have a high electricity capacity on paper but not enough dispatchable power to be available at a moment’s notice when the wind isn’t blowing. The state needs more dispatchable power. In practical terms that means more natural gas power plants. The state of Texas does not build power plants. They leave that to the free market. How do you incentivize companies to build more power plants in a free market? You give them money, of course. This is where the PUC’s new PCM scheme comes into play.
How the PCM works
Under the PCM, electricity providers will purchase performance credits from the producers of electricity. In Texas, electricity providers are distinct from the companies that produce the power. Electricity providers in Texas include the Retail Electricity Providers such as TXU that sell electricity to consumers, rural electric co-ops and municipal electricity providers. These credits would, in theory, obligate the producers to provide electricity during times of high demand on the grid. This would result in an additional source of revenue for the producers of electricity.
Why would Texas electric companies purchase PCM credits?
Because the PUC would force them to. The PUC would use some complicated, as yet undefined, formula to calculate how much each provider would have to spend on PCM credits. If one follows the money trail, it’s not difficult to see that the only way the electric companies can raise the additional money they need to purchase these credits is to raise electricity rates. (or pass on additional fees to consumers which amount to the same thing.)
Not surprisingly, the biggest proponents of this new plan are the electricity producers. They are being handed money now in exchange for a nebulous promise to have power available when it’s needed at some unspecified time in the future. Many of them pushed hard for the PCM and promised to invest in more power plants.
Impact on Texas Electricity Rates
The Texas legislature, on the other hand, is much more circumspect about the new plan. They used the 88th Texas legislative session to put limits on how much money the PUC is allowed to pump into the scheme. Under a new law (SB 1500), the PUC will have a cap of $1 billion on the size of the program. Critics of the PCM argue that this is necessary because the plan is untested, poorly defined and could possibly raise electricity costs on electricity consumers without providing the intended benefits. The $1 billion cap is significantly less than the PUC wants for the program.
The net result of all of this is a $1 billion increase in Texas electricity bills.
Written by Jason Thomas | Co-Founder Vault Energy Solutions
