How is Texas’ energy policy evolving?
Accelerating energy demand, population growth, and extreme weather events have placed increasing stress on the Texas grid, leading policymakers and regulators to seek new solutions for a resilient and flexible power system.
Following winter storm “Uri” in February 2021, the Texas Legislature unanimously passed Senate Bill 3 (SB 3), and Governor Greg Abbott signed it into law in June 2021. This initiated the first redesign of the Electric Reliability Council of Texas (ERCOT) market since 1995 – 2001, when the state implemented a sweeping restructuring of its wholesale and retail energy markets.
A critical aspect of the Legislature’s directive to the Public Utility Commission of Texas (PUCT) was to incentivize more dispatchable generation. To achieve this objective, SB 3 instructed the PUCT to establish a reliability standard for the ERCOT market and use this standard to develop a new ancillary or reliability product designed to incentivize enough dispatchable generation to support the grid during high demand.
In January 2023, the PUCT recommended to the Texas Legislature that a novel wholesale market mechanism, referred to as the Performance Credit Mechanism (PCM), be added to the existing energy-based, competitive wholesale market structure. If implemented, the PCM would:
- Establish a reliability standard and corresponding amount of performance credits (PCs) that must be produced by dispatchable generators, which could include battery storage, during the hours of highest reliability risk.
- Require load serving entities, such as retail electric providers, to purchase PCs based on load served during those hours of highest reliability risk.
The Texas Legislature is currently in session through May of this year and will consider whether more changes are needed in addition to the 2021 legislation. Once the legislative session concludes, if there are no changes in policy direction, the PUCT and ERCOT are expected to move forward together to begin setting the detailed market rules for the PCM. This regulatory process could take a couple of years, followed by additional time for ERCOT’s implementation.
In addition to the overarching market redesign under consideration, the PUCT has recently opened two new rulemakings focused on energy storage resources connected to the distribution system. The PUCT is expected to clarify policy on these topics in 2023:
- Cost allocation issues and compensation for battery storage: issues related to battery storage costs and cost allocation are being considered in PUCT Project No. 54224.
- Interconnection of Distributed Energy Resources (DERs): PUCT Project No. 54233 has been opened as a rulemaking to update technical requirements and interconnection processes for DERs, some of which have not been changed since 1999.
What are the implications for energy storage development?
Stem is participating in these regulatory proceedings given their importance for our partners and customers in shaping the future of the ERCOT market. In December 2022, Stem announced a $400M portfolio of energy storage projects in Texas with REX Storage Holdings, a joint venture between Regis Energy Partners and Excelsior Energy Capital. Our first four 9.9MW projects are under construction now and expected to come online later this year.
While we cannot yet know the ultimate regulatory outcomes, below are some preliminary takeaways based on our experience:
- We believe energy storage will play an increasingly vital role in a power system dominated by renewables. As Texas redesigns its wholesale market, the pace of renewables adoption remains strong and continues to grow. Observers expect that by May 2023, Texas will have outpaced California, traditionally the leading solar adopter, in utility-scale solar. According to Canary Media, Texas had 14,806MW of utility-scale solar capacity at the start of 2023—only slightly behind California’s 15,967MW.
- As energy storage scales and ERCOT adopts a new wholesale market mechanism, the value of energy optimization software for these storage assets is also expected to increase. As new energy storage projects become operational, developers and IPPs will seek to take advantage of all revenue streams available to their projects. The complexity of these transactions requires sophisticated, automated solutions such as Stem’s Athena® platform to digitize minute-by-minute decisions to operate effectively, support grid resiliency, and optimize project returns for asset owners and operators.
- Alongside Texas’ policy and market evolution, the Federal Inflation Reduction Act’s (IRA) Standalone Storage Investment Tax Credit (ITC) came into effect on January 1, 2023. As a result, new energy storage no longer must be tethered to solar and charged directly from solar to receive an ITC. We believe that this new tax policy, in effect until at least 2032, will create greater investment certainty, improve the economics of energy storage, and open more site opportunities to wherever energy storage is most needed on the grid. We anticipate the IRA will spur increased adoption of energy storage both in terms of new deployments and geographic footprint. Click here for Stem’s IRA eBook
No matter how the ERCOT market redesign and other regulatory processes unfold, the well-recognized benefits of energy storage to dispatch power to the grid, reduce cost by storing energy during low prices and discharging when there is high demand, and supporting grid reliability and flexibility, will be a – if not the – critical enabling technology to support Texas’ core policy goal to improve grid reliability. As policymakers continue to refine their strategies, various stakeholders are participating in the policy and regulatory process. At Stem, we will remain engaged with our partners and customers and support the continued development of Texas’ modern, flexible, and reliable grid.
