Surging renewable energy in Texas prompts electricity generation adequacy questions

By Garrett Golding

Renewable electricity amounted to one-quarter of the power consumed in 2020, up from just 8 percent in 2010 (Chart 1). More is on the way, with solar capacity set to quadruple by 2024 from comparatively low levels today.

Because availability can be intermittent, renewables require backup from other power plants to meet electricity demand.

Meanwhile, aging coal, nuclear and gas (together known as “thermal”) power plants in Texas require more-than-expected downtime for maintenance and repairs—raising the risk of generation falling short during high-demand periods.

What’s more, Texas’ electricity consumption will only increase with population migration, electrification of transportation, and growing demand from industrial sources such as data centers and petrochemical facilities.

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With little investment taking place in new thermal generation, does the design of Texas’ electricity market provide enough incentive to develop capacity for future power needs?

Increased use of battery storage and demand-response programs—incentives utilities pay customers for voluntary, scheduled reductions in energy consumption—as well as new gas power generation may all be required for Texas consumers to enjoy reliable electricity in the future.

More Use of Renewables Poses Challenge for Grid Management

With daily wind and solar generation variables due to changes in weather and time of day, balancing power supply with demand becomes more challenging each year for Texas’ grid operator—the Electric Reliability Council of Texas (ERCOT).

This increases the need for “dispatchable” power—quickly summoned electricity, primarily from natural gas power plants—that can fill the gap when renewable power generation dips.

This challenge will only become greater as ERCOT anticipates utility-scale solar capacity to surge from 7,800 megawatts (MW) today to more than 28,000 MW by 2024. On a summer day, that amount of solar capacity can power nearly 4.5 million Texas homes.

Reserve Margin the Key Reliability Measure

Each season, ERCOT forecasts its expected power generation capacity, demand (load), and reserve margin—the excess generation above peak load, usually the hours of greatest demand on the hottest or coldest days of the season.

To prevent blackouts, ERCOT targets a minimum 13.75 percent reserve margin to cover an unexpected demand surge or power plant failure.

When forecasting for available generating capacity, ERCOT accounts for weather patterns for renewables and downtime schedules provided by power plant operators.

Based on these inputs, ERCOT anticipates reserve margins exceeding 30 percent between 2023 and 2026 (Chart 2).

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Extreme Events Create Reliability Issues

While these above-target margins may appear adequate, summer margins can be significantly reduced during high temperatures, extensive power plant outages, and low renewables output.

If all of these events were to occur during the current summer season, ERCOT’s own forecast says the grid would be more than 14,000 MW short of generation, causing widespread outages.

The winter storm of February 2021 was one such scenario where every unlikely event occurred simultaneously.

Electricity demand surged beyond forecasts, there was insufficient winterization of power plants and natural gas facilities, more plants were offline for maintenance than expected and renewable generation was extremely low.

Looking ahead, the margin for error is shrinking due to extreme weather and the shifting mix of electricity generation.

If thermal plant downtime occurs at levels seen in June 2021—9,000 MW offline in the Texas grid—and renewable generation falls to 50 percent of its planned contribution, output would be short on days of the forecasted peak load, and reserve margins would fall below ERCOT’s 13.75 percent target for the next five years, increasing the likelihood of blackouts (Chart 3).

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Battery Storage, Demand-Response Programs Can Make a Difference

Texas is approaching the limits of the current generating mix, if it has not already reached them. The grid is increasingly reliant on intermittent renewable generation as questions arise about how much thermal capacity is actually available to cover unexpected shortfalls—all while electricity demand increases.

One improvement would be expanding utility-scale battery storage for wind and solar facilities. Only 853 MW of battery capacity exists in Texas today.

Such storage is designed to help meet demand for just one to two hours, usually during peak hours, when renewable resources are lacking.

Though 2,400 MW of capacity is scheduled by 2024—equivalent to one-quarter of ERCOT’s current reserve margin—more will be needed. Battery storage installation costs average of $1.5 million per megawatt.

Expanding demand-response programs could also help prevent blackouts. ERCOT already forecasts such programs will shave 2,900–4,700 MW off-peak demand over the next five years. Increased adoption, even on a limited scale, could make a major difference when every megawatt counts during an extreme weather event.

Is the Texas ‘Energy-Only’ Market Adequate?

Texas is the only state in the U.S. with an “energy-only” electricity market, where generators are paid only for the electricity they deliver.

This is based on the premise that higher electricity prices during heavier-demand periods incentivize power plant development within the Texas grid.

This contrasts with the more common “capacity market,” where generators are required to own certain levels of reserve capacity.

Renewable power’s growing presence generally decreases wholesale electricity prices on sunny and windy days and causes thermal power plants to experience more hours offline. This has reduced the economic incentive to build and properly maintain thermal power plants.

This trend will only intensify as renewable capacity grows. It is now an open question if this market structure will encourage enough investment in dispatchable capacity in the future, which will be critical for periods when solar and wind resources are unavailable.

Facing policymakers: adopting a capacity market or bolstering requirements within the energy-only market for additional reserve power capacity. Whatever the case, it appears likely that in the near future, more dispatchable power will be needed than what is currently planned.

Hard Decisions in an Age of Renewable Energy

Renewable energy proliferation in Texas increased natural gas use, and coal plant retirements reduced electricity sector carbon emissions by 13 percent over the previous decade even as consumption increased 20 percent, according to the U.S. Energy Information Administration.

Continuing this trend and providing reliable electricity are not incompatible goals with prudent planning and incentives.

Source: Federal Reserve Bank of Dallas. Golding is a business economist in the Research Department at the Federal Reserve Bank of Dallas.