San Antonians who hunkered down over the Christmas weekend, nervous they might lose power during the four-day hard freeze, recognize that CPS Energy must, above all else, be reliable.
The citizen members of the utility’s Rate Advisory Committee, which I chair, came to the same conclusion last year as part of its planning process. Among other duties, the committee makes recommendations to the board of trustees on power generation plans,
Last month, the committee recommended an eight-year transitional generation plan that would increase reliability in several key ways.
Next week, the San Antonio City Council will hear a presentation on this plan before trustees vote on whether to approve it on Jan. 23.
To understand why the committee recommends Portfolio 2, it is critical to understand how Texas electric power became unreliable.
In the 1990s, deregulation was politically popular as trucking and airline deregulation had introduced competition and customers had benefited from lower costs. In 1999, Gov. George W. Bush signed Senate Bill 7 declaring that “competition in the electric industry will benefit Texans by reducing monthly rates.”
Senate Bill 7 exempted municipally owned utilities and rural electric cooperatives but did allow them to opt into deregulation if they preferred. CPS Energy did not opt into deregulation.
After retail deregulation in 1999, the Electric Reliability Council of Texas (ERCOT) started operating a grid with a retail energy market in which different providers used different economic models. A majority of the retail power marketers competed only on the basis of the price of electric power supplied to customers, which is referred to as an “energy-only market.”
A number of municipally owned utilities and rural electric cooperatives continued to supply customers in protected markets. Rates are set by the Public Utility Commission of Texas or local governing bodies such as the San Antonio City Council and are referred to as “capacity markets” as they allow utilities to include reserve capacity in their electricity rates.
Paying for just electricity in an energy-only market can be cheaper if sufficient generation capacity is installed and available when needed. In an energy-only market, the customer is only paying for the actual electric power supplies. The customer typically makes no payments for reserve capacity — additional power ERCOT requires utilities to maintain beyond an expected peak demand.
For the last 22 years, Texas’ energy-only market has not sufficiently incentivized power generators to invest capital for reliability. Meanwhile, older plants still providing the ERCOT required reserves are expensive to maintain, unreliable to operate and often beyond their useful life.
Immediately after deregulation, the Texas economy experienced the dot-com bust of 2000 and the real estate collapse in 2008. CPS Energy took advantage of this low demand period by purchasing the Rio Nogales combined cycle natural gas plant in Seguin in 2009 for less than the cost to add pollution controls to the utility’s Deely coal plants which were closed at the end of 2018.
Early in the deregulation period, the power plants built during regulation were still relatively new. After the 2008 recession, population and economic growth in Texas accelerated, increasing the demand for power in Texas. Government subsidies supported massive additions of wind and solar generation in Texas. Unfortunately, sufficient dispatchable natural gas power plants have not been built to provide power when the wind does not blow and the sun does not shine.
After the winter storm in 2021, the Legislature charged ERCOT with improving the reliability of the grid. ERCOT has taken some steps to improve the winterization of power generation plants, as has the Texas Railroad Commission with natural gas production facilities. As part of the effort, the Public Utility Commission of Texas (PUC), which oversees ERCOT, contracted with a consultant to provide options for increasing reliability of the grid.
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Last month, the PUC board proposed a very complex and untried option, which the consultant did not recommend, the industry did not support and the Texas Legislature did not accept. A plan to stimulate investments in generation to increase reliability on the grid appears to be years away.
ERCOT continues to insist that the free market will provide sufficient economic incentives and timely signals for generators to invest in reliability. The history of the last 22 years has proven different. Therefore, CPS Energy cannot rely on ERCOT or wait on legislators in Austin to assure reliable power for their customers.
Though forecast models are seldom entirely accurate, modeling various alternatives under the same assumptions provides a useful way to differentiate risk between options. The greatest risk for CPS Energy between now and 2030 is not having sufficient power to support the growth of our community, and the reserve capacity required for extreme demand periods and natural emergencies.
Failing to have sufficient and reliable power under the control of CPS Energy will constrain economic growth, expose customers to dangerous blackouts during emergencies and drive up costs by relying on the ERCOT grid for power — which might not be available or only available at very high prices.
These reliability and affordability risks are simply not acceptable.
Portfolio 2 increases reliability by increasing quick-start natural gas generators to offset the intermittency of solar and wind plants, reducing risk by increasing reserve power generation and providing a path to deploying new technologies by affording time for new technologies to become commercially available.
This plan also allows CPS Energy the flexibility to control the order and timing of the investments to assure reliability. The plan retires the utility’s two Sommers natural gas steam plants, and the Spruce 1 coal plant. Those retirements result in a combined loss of 1,390 megawatts.
To make up for those lost megawatts, the plan permits the following additions:
- 808 MW of quick-start reciprocating internal combustion (RICE) engines powered by natural gas,
- 500 MW of West Texas or Texas Coastal wind,
- 280 MW of solar in addition to the 900 MW already approved in the Flex Power Bundle,
- 960 MW of short-duration battery storage in addition to the 50 MW already approved in the Flex Power Bundle,
- 50 MW of long-duration battery storage, and
- 880 MW of natural gas-fired combined cycle capacity in addition to an agreement with a third-party operator of a combined cycle plant for 500 MW of capacity for 10 years under the Flex Power Bundle
In addition to the power previously authorized by the Flex Power Bundle to close the Brauning natural gas plants, the plan converts the 785 MW Spruce 2 plant to natural gas. Taken together, the plan adds 3,478 MW — much more than the 1,390 MW it loses between now and 2030. Since the plan adds significantly more capacity than is retired, CPS Energy has the opportunity to add capacity as market demand and reliability dictate.
But a plan is only as good as the execution of the plan.
Portfolio 2 provides the flexibility and optionality to reduce the risk of making investments that might become obsolete or redundant as new technologies are commercialized. Early in the eight-year period, smaller incremental investments in RICE units and short-term batteries can be matched with the addition of community solar investments.
By providing near-term reliability, Portfolio 2 allows CPS Energy to defer larger investments in natural gas and wind-powered generation later in the planning period. It also allows CPS Energy to use new technologies if commercially available before 2030 to avoid investments in natural gas plants that might become stranded assets or wind generation that might not have transmission capacity.
The Inflation Reduction Act recently signed into law by President Biden greatly increases the chances that new technologies in power generation, power storage, energy conservation and demand management will be commercialized in time for CPS Energy to meet the city’s 2040 and 2050 climate action plan goals.
Focusing on increasing reliability now will provide CPS Energy the financial strength and time to make lower-risk decisions on zero-emission technologies in eight years.
This commentary has been updated to reflect the Public Utility Commission’s role in planning for improved grid reliability.
