ERCOT’s “all or none” policy raises electric rates and puts the state’s supply in jeopardy

Southside Matt
ERCOT LogoEnergy Reliability Council of Texas

For right at 52 years, the Electricity Reliability Council of Texas (ERCOT) has been operating as an independent, not-for-profit organization responsible for overseeing the reliable and safe transmission of electricity over the power grid serving most of Texas. In 1996, ERCOT became he broker between competitive wholesale power buyers and sellers, paving the way for deregulation of the Texas energy industry in 2002.

Because of ERCOT’s operation in the “background” in determining electricity rates, most Texans were not aware of their existence until February 2021 and the power issues that ensued from that historic winter storm. Due to actions taken and proclamations made by ERCOT during that storm, though, areas of Texas went without power in near-zero temperatures for hours and days on-end. Further, depending on the estimate one uses, anywhere from 246 to 702 people lost their lives as a result.
Winter Storm - Neighborhood Near Dallas,

As people sought to find a cause and answers, ERCOT’s name rose to the forefront. Despite deregulation of the energy industry by the state, ERCOT’s duties of negotiating prices between producers and retailers seems to have put them in the seat of Regulator. Through their position, ERCOT is able to direct when producers generate electricity and the amounts to be generated. As a result, they have a direct bearing on the cost of electricity throughout the majority of Texas.

This ability to direct producers on when and how much energy to produce, combined with equipment issues and what many consider poor planning by the industry, is largely responsible for the power outages seen in February 2021 throughout the state. This led the Texas Legislature to pass bills, later signed into Law by Texas Governor Greg Abbott, that requires power companies to prepare for such a situation in the future.

Battling the memories of having too little energy available to power the state back then, ERCOT has sought to avoid having to impose rolling black- or brownouts in the hot summer months. To do this, ERCOT has required that energy producers in the state continue to operate all available equipment. This includes equipment that would normally be taken offline for routine maintenance.

Much like a vehicle requires general maintenance such as oil changes, tire checks, tune-ups, and other items, power generation equipment requires maintenance to make sure that it runs smoothly and without issue. In more ways than not, power generation equipment is akin to a vehicle motor and engine in that, in most cases, the equipment uses combustible fuels to create explosions, fires, or heat to force a generator to turn. The generation equipment also, in many cases, uses belts similar to an automobile engine, and has components that regulate the explosions, fires, or heat that need to be monitored and maintained. The moving components need to be lubricated, and that lubrication occasionally needs to be changed.

As with the automobile engine, neglecting the general maintenance of the power generation equipment can lead to breakdowns. When this happens, the efforts, components, and costs to restore the equipment, much like having to repair an engine in a car, can escalate quickly.
Broken Down Car with Tow

While power generation companies budget for general maintenance, they only plan and budget for major repairs or replacement based on the expected “end of life” of the equipment. This is similar to how a household would budget for a major engine overhaul or even a new car based on how long it was originally anticipated that they would use the current one.

Even with the string of 100-degree-plus days in much of Texas over the past few weeks, it seems to many that ERCOT’s approach is a bit much. By having more generators in operation, the supply vs. demand principle comes into play for fuel to the generators. The higher the demand for a product, in this case the more fuel needed to operate a larger-than-normal number of generators, the higher the price of the product, the fuel, as the supply generally remains steady, sometimes leading to a deficit in the amount of supply available.

Similarly, by having generators miss scheduled maintenance, a higher risk is run that the generators will fail. The “emergency” repair or replacements cost associated with such a failure prior to the generator’s anticipated end of life will likely also be of higher cost to the producer than originally budgeted.

Companies, including electricity and power producers, are in business to make a profit for themselves and their shareholders. Shareholders pay into the companies through stocks and other financial tools based on profitability. Therefore, it is paramount that companies keep costs such as the ones above to a minimum.

As costs, particularly unexpected ones, rise for the company, the old adage that “companies do not pay taxes” comes into play. These increased costs are passed on to the consumer in order to keep profits steady.

With inflation having risen to 8.6% in May 2022, more than at any time in over four decades, ERCOT has made the decision to cause power generation companies to experience what seems like an inordinate amount of cost increase compared to the need.

In attempting to avoid a repeat of the situation of February 2021, ERCOT has seemingly created a situation of over-generation that has led to an increased cost for the companies, and ultimately for the consumer. As a solution to the cost situation, the companies will be, and already have been, increasing their rates to consumers. As is often said about taxes, once electricity and power rates increase, they do not go back down.

Such is the case for many who have contracts with their retailers ending this summer. In one case, a household that previously had a rate of 9.7¢/kWh was recently offered a renewal at a rate of 16.7¢/kWh with 12 hours daily “free”, or 16.5¢ if this “free” option had not been selected; these rates are all based on 2000 kWh of use per month. Similarly, another person whose electricity is included in their rent for a Southwest Fort Worth home saw her rent increase by almost $200/month from just over $1900 to almost $2100.

These increases were already “in the works” before ERCOT’s latest order to energy producers to keep online units that should be offline for maintenance. Even those already in agreements with their retailers are likely to see their rates increase.

Delivery Charges are part of virtually every “Energy Facts Label” (EFL), an information sheet that provides full details regarding any energy plan in Texas. Within the section titled “Electricity Price,” details are provided regarding a base charge, the cost per kWh used in tiers (Energy Charge), and a Delivery Charge. The Delivery Charge is generally based on the prevailing rate at the time and is subject to change regardless of the agreed-upon base charge and energy charge.

As the cost to the energy producers increases based on the increased fuel prices and demand and, later, by the unbudgeted cost of emergency repairs and replacements, so, too, will the costs to the consumer increase. These increases are, many claim, directly attributable to ERCOT’s “all-or-none” mentality about power generation over the summer. By calling for all generators to be online, ERCOT is causing producers to potentially waste energy production by generating more than necessary. At the same time, ERCOT is requiring producers to potentially suffer through equipment breakdowns during the upcoming winter as preventative maintenance schedules have been interrupted.

Some would say that ERCOT is in a no-win situation, and that they’re just trying to avoid a repeat in summer of the unfortunate situation of almost 18 months ago. This would be contradicted by ERCOT’s own touting of its creation in 1970. For about 52 years, ERCOT has had the opportunity to develop the experience of Texas weather and its unpredictability, to develop ways to adjust quickly to that unpredictability and the events it often brings, to monitor and prepare for the population expansion that the state has experienced, and to more-effectively manage Texas energy production overall. Instead, ERCOT has seemingly ignored warnings sometimes given months in advance about upcoming weather events and has found themselves scrambling and taking steps that are actually detrimental to the consumer and end-user of the energy products. Their inaction or late action has done little to fulfill their objective of protecting the Texas energy consumer and will prove to provide higher costs to the consumer for months to come.

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Hailing from the Great State of Texas, South Side Matt monitors government for compliance with the Constitutional values that founded the United States, and works to maintain liberty for all in that spirit. His articles focus on furthering this cause, but also occasionally go "off track" into lighter topics such as cooking, general life and others.

Fort Worth, TX

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