The Energy Markets Podcast

S3E11: R Street Institute's Josiah Neeley unpacks how the recently adjourned legislative session in Austin will impact Texas electricity consumers

June 08, 2023 Bryan Lee Season 3 Episode 11
The Energy Markets Podcast
S3E11: R Street Institute's Josiah Neeley unpacks how the recently adjourned legislative session in Austin will impact Texas electricity consumers
Show Notes Transcript

Texas lawmakers just concluded their 88th biennial legislative session in Austin, and energy issues were very much at the fore as a range of proposals that would have incentivized investment in gas-fired generation and disincentivized renewables were hotly contested. 

The R Street Institute's Josiah Neeley discusses the energy-related aspects of the session, which he said could have turned out much worse for consumers than it did. Many of the pro-gas, anti-renewable measures proposed in the Senate were rejected by the House, while others resulted in compromises that minimized the harm to electricity consumers.

"I would say that at the start of the session, if you looked at what was being proposed, the way I would put it was it was not just bad, but comically bad, you know, comic book villain bad, some of it. And what you ended up with was mediocre bad," Neeley says. "I think consumers, they're not going to get relief from their bills, but there will be some limitation in terms of how much they're going to go up due to some of this stuff."

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EMP S3E11: R Street Institute’s Josiah Neely
(transcript edited for clarity)

EMP: Welcome to the Energy Markets Podcast. I’m your host, Bryan Lee. And today, for the second time this season, we are talking with Josiah Neeley of the libertarian-leaning R Street Institute. We kicked off this third season of the podcast talking with Josiah about R Street’s participation in a group letter urging the Department of Energy to consider funding and technical assistance in regions where entities are considering grid regionalization efforts. Josiah, welcome back to the podcast.

JN: Thank you for having me.

EMP: So, Josiah, you are based in Texas for R Street, and we invited you back today to discuss the outcome as Texas lawmakers wrapped up their 88th biennial legislative session in Austin last week. When you were with us last January, you noted that the legislative session was about to get under way, and that a key issue for the state’s lawmakers was Sunset Review of the Texas Public Utility Commission, which essentially requires reauthorization legislation of the PUC periodically. The Legislature also took up the Performance Credit Mechanism, something else we talked about. It’s a quasi-capacity market proposal that came from PUC Chairman Peter Lake, who last week stepped down from the commission. So I’m sure there’s a story there. The days leading up to adjournment must have been a whirlwind wild ride for y’all in Austin. Give us a debrief.

JN: Yes, it was it was a busy time there at the end. Not only because of energy, there was a lot of other stuff going on and issues that didn't have anything to do with energy, including, you know, impeachment, all sorts of cultural war stuff or whatever. But there was a lot of last-minute wrangling over energy issues. And there are kind of two big battles, I would say. One, as you mentioned, had to do with this PCM proposal that the that the state PUC had come up with. They said they wanted to implement it, but they were going to wait to see what the Legislature did in response. The Senate, the members of the Texas Senate, were initially very hostile to this idea. And while at the same time wanting to do something in terms of the Texas market because there was kind of a general agreement by both sides that there's not enough investment in the Texas market for new dispatchable, so-called, generation needs to be more generation, the state needs to step in to do that in some way. Is that actually the case? We can come back to that. But what they ended up doing is they ended up saying, okay, the PUC can do this PCM, but it's limited. They put on what they call guardrails. Different requirements for it. Probably the biggest one is going to be that they said it can't cost more than a billion dollars a year net. And what exactly net cost means, how you calculate that, is probably going to be a bit of a fight, I suspect. I've already talked to people who read it in very, very different ways, what exactly net cost means. The estimation had been, you know, when the PUC did their original analysis of the proposal, they said that the PCM would cost $5.7 billion, but it would also involve a bunch of cost savings elsewhere in the system. So the net cost would only be about $500 million a year. So the legislature is trying to kind of hold them to that in a way with that smaller number. I don't know if that's going to be realistic. They said they had to do that. There's some other things that they put in there in terms of limitations. But I think that the ultimate result is you will end up seeing some sort of PCM, maybe a scaled-back PCM, go forward and that is probably why Lake is stepping down now. I think he was brought in there to do this. It’s mission accomplished for him. I don't think he really enjoyed the job. You know, he never gave any indication that he viewed it as his life's work or whatever. So maybe he's off it. He’s going ride off into the sunset for the next challenge.

EMP: When you were with us in January, you said, you know, looking forward to this whole process, you said, “Will the energy-only market still exist at the end of this process? Will the market still exist? Who knows?” So, I guess, the worst-case scenarios were avoided.

JN: Yeah.

EMP: But we've got this amorphous, ambiguous PCM that's going to create lots more billable hours going forward.

JN: Yes and, you know, I mentioned that there were two big there are two big battles this time. The battle over the PCM was one of them. The other one, the Senate, as I said, was not happy with the PCM but they also wanted to do something. And their proposal, which I mean, it's hard for me to come up with words to adequately describe it, but their proposal was to basically have the state – well, they were going to give Warren Buffett $10 billion or $12 billion dollars, some huge amount of money, to build backup power plants that would just sit there in case, you know, break-glass-in-case-of-emergency type of thing. He said, you know that Berkshire Hathaway said, okay, well, you know, we'll build these plants. We'll have fuel on site. It will be really good you'll never need the lever even know where they're, you know, but it'll be insurance. That was something that the Senate, you know, I think that ended up passing out of the Senate, oh, gosh, you know, 27-4 or something like that. I mean, Texas politics is very strange. You know, sometimes it's Republican versus Democrat, but very often, because the Republicans have been so dominant in the state for so long and there's other reasons the way it's structured, the battles are often House versus Senate. And so you get these weird, lopsided results where the House Democrats are voting with the House Republicans against the Senate Democrats and the Senate Republicans. So you kind of saw that with the energy thing. The Senate sent over this Berkshire Hathaway plan and it was kind of DOA in the House. You know, the House said, no, we don't want to do that. And so there was some wrangling back and forth. And they ultimately kind of compromised, and they set up a thing where the voters in November will have to decide whether to approve a new state loan program. They are going to set up some loans and grants for power plants where if you build a new power plant in Texas that's dispatchable, and you complete it, the state will give you what they call a completion bonus. You know, just some extra money or whatever. This is, I guess, maybe kind of a – it's a scaled down version of what the original Berkshire thing was. It's no longer tied to Berkshire, I guess you could say.

EMP: Well, why was it tied to Berkshire Hathaway in the first place?

JN: Well, I mean, so they're the ones that came up with the idea. They brought it to the Legislature. I'm being a little cute because, of course, the bill did not say specifically you would give the money to Berkshire Hathaway. But it said you would give the money to someone and they had to meet all these criteria. You know, they had to have however many trillion dollars under management and they had to have this experience and if you looked at all the criteria and put it together, possibly there was some Saudi prince somewhere who would qualify, but realistically, it would have been Berkshire Hathaway, you know, that was going to be the only one who could have qualified for this deal.

EMP: You talked about the give and take between the Senate and the House. That was very interesting. And it really seemed to be the Senate coming up with anti-renewable proposals that the House was swatting down. You know, I read in Doug Lewin's Texas Energy and Power newsletter, proposals that would have empowered consumers to reduce their energy consumption and otherwise increase energy efficiency were pretty much a dead as the rubber hit the road in the last days of the session, but measures that would have increased consumer costs to subsidize gas-fired generation remained quite viable. Lewin summed it up when he wrote, quote, “Over the past 20 weeks, state leaders have, with frightening consistency, focused on the wrong energy-related issues. They wasted time and energy attacking Texas’ nation-leading clean energy sector — something most states and countries pine for — while ignoring consumer-centric solutions that would reduce bills and increase reliability.” Do you want to go into detail on that? I mean, there were several bills that would have penalized renewable energy, SB 624, SB 1287, and penalized renewables and rewarded natural gas.

JN: I think the idea used to be that, we got nothing against renewables, we just don't want them to have unfair advantages in the market, which, you know, okay, that's an understandable position. That seems now to have kind of evolved to, no, we got to stop renewable energy at all costs. So yeah, there were there were various proposals out there.

EMP: Let me interject a second, Josiah, because I think there's an ideological underpinning for that. And that's based on the lie that renewables contributed to the grid failure in 2021.

JN: Right, yes, so that's true. Although you have seen this, even before that, I think some of this was going around. There is a kind of trend in politics where things get kind of unmoored. You know, maybe they start off having some sort of basis and then they kind of get unmoored. And it becomes kind of impressionistic and, you know, mood-based where, I don't know, you know, like, I just know that wind power is bad, right. Like hippies like wind power and so I don't like it, you know? And I'm being a little glib about it. But there is an element of that to some of this, right. So, you're right. A lot of folks when you had the blackouts in 2021, that was initially, you know, people tried to blame that on renewable energy. I think you look at the facts that's clearly not the case.

EMP: But you know, it's a lie that's solidified with the base. I had an interaction with someone over social media where I said, no, it was not renewables that caused this to happen. And I explained what happened and, you know, and I got an answer back about being a woke ideologue.

JN: Right, right. Yeah. So that is definitely there. I think it also is important to think about the kind of political economy aspect of it because this is not just about, you know, talk show callers, or whatever. These are big industries, you know, and you do have different fuel types that are competing against each other. You have very powerful economic interests, you know, among electric generating companies, among fuel companies or whatever, and wind energy may not be a threat to the reliability of the grid, but it could be a threat to the bottom line of various people, right. So everybody, you know, I would say that most of the energy battles in Texas, you know, a lot of the big giants out there are the big economic interests, pro and con. I mean, a lot of the bad ideas they get stopped – got stopped – at least in part because there were powerful interests on the other side that didn't want that. Generators have a lot of heft but so do the industrial consumers, so does the natural gas folks or whatever. So that's, that's just politics. You know, and that is obviously no industry or lobbyist is going to come out and say we want this because it benefits us and hurts our competitors. That's not the way political rhetoric works. But that is that is also I think, a big part of the story. Yeah.

EMP: Well, I interrupted you as we were about to tick off some of these proposals that got swatted down and what might have gotten through.

JN: Yeah. So there was, you know, a couple of the ones that I think were concerning to Doug and other people, there was a kind of exclusion of where you can build new wind farms, how close they can be to various things, which I think in some iterations would have effectively blocked off, you know, two-thirds of the state or a substantial portion of the state just you would not have been able to build new facilities. There was a number of attempts to try and assign costs to renewables. So the Texas market, you know, we have the energy-only market. We also have an ancillary services market which is used to kind of adjust for sudden changes in supply and demand. So, you got keeping the grid balanced, you know, if you have a power plant that trips offline unexpectedly, or you have say, like a steel mill or there's something that fires up, takes a lot of electricity, you need something to balance that pretty quick. The way they do that is through what they call this ancillary services market. Wind, you know, wind energy does also can like ramp up or down pretty quickly. The analysis that I've seen, it says that it hasn't actually been adding to ancillary services costs that much but it was something that was kind of like latched onto, and there were proposals to try and say, okay, we're going to shift a bunch of ancillary services costs to renewable energy, you know, maybe 40% of the total, maybe 60% of the total, depending on what the calculation was going to be. Worst versions of that also did not occur. So that could have been a several billion-dollar shift, you know, as well. And all of these things, of course, you got to keep in mind the companies stand to benefit or lose. But ultimately, extra costs in the market are going to end up impacting consumers. I think there was an analysis that said that, you know, the biggest version of this cost-shifting thing would have ended up netting consumers an additional $4.6 billion a year or something like that, right. So that's, that's not chump change. So luckily, I think a lot of that stuff did not – there was a lot of drama, there was a lot of fire and brimstone. Most of the really bad stuff did not end up happening. Most of the good stuff also didn't end up happening. That's the way it goes.

EMP: Well, forgive me for being hazy on the details here. I just did not track this as closely as I would have liked, but there was one proposal addressing renewables that would have created an oversight board consisting of legislators. Do you know what I'm talking about?

JN: So, there were, there were like 20 different proposals for boards. I don't know, you know, some of them, some of them happened. None of the ones that I saw were specific renewable oversight boards. It's possible that that got stuck in there somewhere.

EMP: I think maybe it had to do with siting. 

JN: Yeah, yeah. Yes, it's possible that you know, there has been an increase in like, siting disputes, I would say. Like you have, you know, with solar or wind, a lot at the county level, you'll have siting problems or other things like that. This, I think, mostly I would just describe it as kind of growing pains. You see it with any industry. You know, when you have more wind farms, there's going to be more disputes over wind farms. Same thing with solar panels, same thing with pipelines or whatever. 

EMP: You know, we talked a little bit about you know, the independence of the PUC the independence of ERCOT. And, you know, how Texas is, at one point was different from California, which is just the political apparatus has firm control over the PUC there and the grid operator, and for the good or bad. But it seems more and more, there's a political blanket being put over the independence of the PUC and ERCOT.

JN: Yes. I mean, that's definitely true. ERCOT in particular has been restructured to be much more political in terms of like, who makes up the board. A lot of the stakeholders, industry stakeholders, other stakeholders have kind of been cut out of the process to a significant extent. If this new electricity bank or whatever fund gets approved by the voters, it'll be interesting to see how much does that affect the nature of the PUC. Because, whereas before the PUC was a regulator, now, they are also going to be a funder. Obviously, that's going to change the nature of their role, how they're viewed, the type of people you want in those positions. And I don't think you can kind of predict, ultimately, how that's going to shake out. Like how are people going to view – you know private capital people who are operating in the market, people who are thinking about investing in the market. You know, it's bad enough that you have to worry about what sort of regulation you're going to get hit with. Now, you're also kind of thinking about going hat-in-hand to get some money from the PUC. What kind of dynamics is that going to create? I don't know. 

EMP: I can tell you. It's going to be a political piggybank is what it’s going to be. 

JN: Yeah.

EMP: Speaking of piggy banks, I can only imagine how much money is going to be spent in the lead up to this ballot initiative. Right before the election, you're going to be so sick and tired of the ads. I guarantee you.

JN: I've already been hearing, you know, throughout the legislative session, there were ads I heard about the PCM and, you know, pro and con of that mechanism. So, yeah, I think you're absolutely right, with that much money on the line people are going to want to make sure that the vote goes the way that they want it to go.

EMP: Well, I guess, you know, the jury's still out on the PCM. There's going to be a lot of wrangling still around that. What are some of the other details we should touch on before we push off here?

JN: Another issue has to do with what's called firming. So this was another proposal that was kind of out there, got orphaned, raised at various points, to try to get renewable energy to firm itself somehow. Either have like, you know, backup contracts or other things. In the Texas experience, maybe this is true in other places too, a face-saving measure, sometimes if you can't get some passed, we will do a study about it right? So they're supposed to do a study about firming and, you know, see what can be done. But particularly given the timeframes involved or whatever, I suspect that that will kind of maybe fall to the wayside a little bit.

EMP: When you call for a study, that's a way of just putting it onto the backburner. 

JN: That’s right, yeah.

EMP: Lewin’s take on this, Doug Lewin's take on this, he said, quote, “Fortunately the damage from the session is minimal. And entrepreneurs and innovative companies can continue to bring solutions and power to the still dynamic Texas electric market despite the misguided attempts of some policy makers and special interests to keep them out.” Do you agree with that? Was the damage minimal? 

JN: Yeah, so I would say that at the start of the session, if you looked at what was being proposed, the way I would put it was it was not just bad, but comically bad, you know, comic book villain bad, some of it. And what you ended up with was mediocre bad. You know, it wasn't great. But yeah, so it's definitely livable. You described us, R Street, as kind of libertarian-leaning, which I think is a fair cop and, you know, a mediocre performance from government, can you really expect more? Probably not most of the time. So certainly, compared with, you know, what we were afraid of, I think the session worked out okay. I don't think that you, you know, it's not the sort of thing where I think people have to be worried about making investments in the Texas electricity market. And I think consumers, they're not going to get relief from their bills, but there will be some limitation in terms of how much they're going to go up due to some of this stuff. 

EMP: So the pain was limited. 

JN: The pain was limited. That's right. Yeah.

EMP: All right. Well, there was one item that caught my eye because, you know, in terms of the clean-energy transition, electrification is key, and I think one proposal that passed will require EV owners to kick in $200 a year. Is that towards the fuel fund?

JN: Yes. So there has been for several sessions now wrangling about some sort of EV fee, since the EVs aren't paying the gas tax. 

EMP: And that pays for roads.

JN: That pays for roads. That's right. Yeah. And I think the typical vehicle, I think, if you look up like how much they pay in in gas tax a year, it's somewhere in the realm of like $65, $85, maybe $100. So $200 a year you know, that's probably excessive. I think the way you have to do is you have to pay two years up front, so you know, $400, that can be a little bit much. So that's not good policy in my opinion.

EMP: So it was punitive to a certain extent.

JN: Yeah, there's a I think there is a punitive element to it. I think different people have different perspectives on this. Probably even $400 ,$200 a year or whatever, compared to the price of a car overall, I don't see it as deterring a lot of EV car sales.

EMP: You still come out ahead because you're not paying for the gasoline.

JN: Yeah, right. You don't pay – yeah, well, that helps you make up for some of it. One thing that I, as we were talking, I didn't mention that I do think is you know, there's one element that's potentially positive in this whole grant program, which is, they did include that you could include some money for grants for microgrids or other, you know, emergency backup power for hospitals, other things like that. That's an intriguing area of development, so it'll be interesting to see what happens with that, like, how does the money actually get spent? So that'll be something to keep an eye on too, I think.

EMP: Well, it'll be interesting to see how things progress in two years in terms of this pro-natural gas, anti-renewable bent that the legislature had. I won't ask you to talk about how lawmakers are influenced by campaign contributions and the political clout of the gas industry in Texas. We won't talk about today. But you know, clearly, if it's not the lie that renewables contributed to the blackout in 2021, it’s that renewables are a threat to grid reliability. That's a big lie that we're seeing all around the country today from those who want to maintain the status quo.

JN: Yep, that's absolutely right. And, you know, I suspect that's probably not going to change anytime soon. Although, I mean, it's a weird world. So who knows?

EMP: Well, you know, so, essentially, the Legislature has still not addressed the root causes of the deadly Winter Storm Uri grid failure in 2021, which was the gas system freezing up for the most part, but it was also exacerbated by inefficient heating, particularly in the south part of Texas, which, you know, everybody threw on their heaters at the same time, and they're all energy inefficient. So have they ordered the gas industry to winterize?

JN: Yeah, so the gas industry, no. So the generators, there have been winterization requirements put into place by the PUC. The gas infrastructure, I mean, that's a whole different story, as you know, that's not under the PUC. It's under our not-quite-aptly named Railroad Commission, which is elected. There's been a lot of feet dragging on that.

EMP: Yes or no, have they ordered the natural gas industry . . .  

JN: No, no, no, no, no.

EMP: And have they done anything to encourage replacement of old, highly inefficient home heating systems?

JN: I can't say that they've really done that. Yeah.

EMP: Well, let's see what happens in two years. (laughter) All right. Anything else, Josiah, you want to add for the good of the order before we adjourn?

JN: No, I don't think so. It's been enjoyable as always. Thank you for having me back.

EMP: Josiah Neeley, R Street Institute, thank you very much. 

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