Q&A: Texas winter grid reliability still not guaranteed

Michael Nasi, an environmental and energy attorney with the Jackson Walker law firm, spoke with Argus about challenges Texas and other midcontinent US energy markets face and how different states are trying to regulate the energy sector to keep utilities' portfolios balanced and power reliable. Nasi also is special counsel to Wyoming's Energy Policy Network, a group that advocates for preserving coal-fired generation.

The following interview is edited for length and clarity.

Texas power plant operators completed phase 1 compliance of the state's 2021 weatherization rules. What does that mean?

Because [February 2021 winter storm] Yuri impacted ERCOT (the Electric Reliability Council of Texas) worse than anyone, Texas needed to come out and do a lot more in phase one than other grids. It was an accelerated implementation of a whole bunch of different measures. As a result, weatherization standards [for utilities] got created and approved; inspections are already done.

So, now they need to have a better understanding of critical infrastructure. The critical infrastructure map of Texas is highly confidential. It has been drafted. I do not know if it is considered final, but it is very comprehensive.

Does this mean that ERCOT will meet power demand this winter?

Well, as a co-op representative, I am not convinced we are ready for the winter because we do have too many critical designations. We are having to sort through literally thousands of applications to discern who truly is [critical]. That job of figuring out who is critical falls upon the people who control the circuits. The commissions can say: "Here are the people we want to make sure you protect," but they're not going to give you a plan of how to do that.

And the part that is very much broken still, that has not been fixed, is easily the most difficult politically to deal with. That is that we have a significant amount of natural gas that is managed through the intrastate pipeline system.

Other states have intrastate pipes; nobody has nearly as much as Texas. And in some parts of the state, there are geographic monopolies, which has created some business practices that are extremely difficult to deal with for power generators. Certainly if you were to Google Energy Transfer and Vistra, you would find a colorful series of articles about a fight that's going on there. Full disclosure, our firm represents Vistra in the litigation.

Are there ways to deal with such practices?

My views are colored by being a generator lawyer. But I also represent a group called Texas Competitive Power Advocates, the trade group representing the thermal fleet in Texas, which basically means gas-fired generation.

That problem and infrastructure issues are not yet solved because the intrastate pipeline fight is a serious one. The Railroad Commission of Texas [a key regulator for energy in the state], does not currently, as a body, support any additional requirements on those pipes.

So, a capacity release is going to be one of the biggest topics of the next legislative session because the concept is that you can always negotiate that into your contract. The idea is that if you get an outage and your winterization does not work for some reason, you should be able to remarket that gas and make sure the people who need it get it.

Capacity release is not something that is available to generators on many gas pipelines because the gas pipelines just simply will not negotiate into the contract. And that means that the gas pipeline gets to sell that gas again and penalize the power plan for not using it.

So, the real problem is, if you really want to think about it as "half-empty," now we have more power plants ready to take gas, and we really have not solved the gas problem. But I think we will figure it out because I think enough of the pipelines want to solve it.

What does this mean for coal plants?

As the winter goes, the resilience of those coal plants…saved SPP (Southwest Power Pool), they saved MISO (Midcontinent Independent System Operator), and they really in a smaller level saved the Texas market because we had these frequency disruptions that caused problems.

But no, every one of the markets that got impacted by Yuri have a market reform designed to value winter fuel. So onsite storage of nuclear and coal is definitely a high priority market reform item. It's just the triage has been: let's figure out a way to not have natural gas disruptions, because it is such a bigger part of our peaking fleet that we cannot have a situation where that happens.

So, what are the next steps in Texas power market reforms?

Phase two is the actual market reform. For example, moving forward, what is the price signal going to be to get people to build thermal generation or not retire it, which really means natural gas, probably.

The problem we have is that all these market reforms are designed to attract natural gas investment at a time when we just missed this extraordinary decade where we should have been building natural gas like crazy.

The phase two is very much in place.

The Public Utility Commission of Texas (PUC) adopted a blueprint to address the state's wholesale energy market design. And it had three different ideas.

The commission agreed to develop a backstop reliability service tool to target and meet specific reliability needs. This is to work as an insurance policy to help prevent emergency conditions in ERCOT. But both a reliability index and back up reliability were never meant be a solution to the whole problem. Those were kind of emergency tools.

The third [idea] is called load-serving entity obligations (LSEOs). And nobody who likes the LSEOs would like me saying this, but it is the way California does its market. The LSEO basically says, for each such load-serving entity, each city co-op, you have to secure X percentage of power. And [the Texas PUC] are deciding how much that percentage should be. They're modeling it right now.

The PUC has told the legislature is that they are going to have a report out in November to talk about the initial assessment of its cost with the goal to be moving toward implementation of LSEO over the next three years.

How is SPP working on its seasonal reliability?

SPP does something similar to LSEO on a smaller scale with the regulated units. They do not have regulatory authority over those units as a market, but they say in order to participate in SPP as a market participant, you have to have a certain amount of accredited capacity.

Just about a month ago, SPP unanimously passed a bigger reserve margin requirement. They need to maintain a bigger buffer. They are going to implement more stringent accreditation standards. Wind and solar will get less accreditation. Thermal dispatchable will lose accreditation if they actually have problems more often. So instead of being able to rely upon a five-year average, they maybe have an average of two to three years.

Last year, Wyoming created a $1.2mn fund for the governor's office to challenge in the US Supreme Court other states' actions that impede the export of Wyoming coal or the continued operation of coal-fired power plants that use Wyoming coal. What happened with that fund?

That fund was truly for litigation if another state sued them, or perhaps there was a lawsuit where EPA (Environmental Protection Agency) was compelled to do something that would impose a restriction on Wyoming. I think the discussion now is going to be about whether those dollars really should be about protection, or should they actually just be broken up and help fund the state's coal marketing program. That program is a standing item; they fund it.

The Wyoming Energy Authority (WEA) is a client of our firm. And we frankly all have joined together with the University of Houston to develop a compendium of policies throughout the SPP and MISO to understand how coal and gas plant retirements are evaluated from a prudence standpoint, and how integrated resource planning occurs, and then to figure out how CCS can be more meaningfully evaluated before retirement for some projects.

The first round (of the compendium) is SPP.

People say the market is choosing X, the market is choosing Y. But we do not even know what the market is.

Let me tell you about this compendium: every one of the commissioners in every SPP state that we have told about our project, asked us when we finish to share it with them. They know their own world, but do not know how North Dakota does it, or South Dakota, or Nebraska, or Minnesota. And they would like to know that…because each of these states has a totally different way of doing it.

[WEA and the University of Houston] wanted to have a piece that said, "Okay, so given all of those policies, what, how does CCS fit in? Is it even evaluated?

I will tell you that lots of mountain, western states and northern midwestern states are looking at the Wyoming model, not because they want to go out and fight, but because they do not want to just keep on taking what the markets give them.

What role should carbon capture, sequestration and storage (CCS) play in the energy transition?

I am a big believer that it is easier to understand an issue if you understand the context of why different actors act the way they do. It is just a matter of cost and motivation.

CCS is going to be a big deal because of the way that the expanded 45Q tax credit covers the risk and cost in a way that it never did before.

By Elena Vasilyeva

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