ERCOT and the Future of Electric Reliability in Texas

Executive Summary

Electricity reliability and resource adequacy in the Electric Reliability Council of Texas (ERCOT) have been top legislative, regulatory, and commercial priorities in Texas for the past few years. This stems from strong electricity demand (load) growth due to an expanding population and robust economic activity. Moreover, load is likely to continue to expand for the foreseeable future. Texas’ population is expected to continue to grow, and the economy is on solid footing, with added vectors for demand growth from electric vehicle (EV) penetration, cryptocurrency mining, carbon capture and storage (CCS) and hydrogen market expansion, and general trends toward increased electrification. There has even been a push toward electrification of oil and gas operations, which has manifested in very strong regional load growth in high oil and gas producing regions.

While the evolution of demand in ERCOT is, by itself, enough to raise concerns about the future of resource adequacy, there has also been inadequate investment in dispatchable sources of generation in ERCOT — leading to greater overall system instability. In fact, ERCOT loads have been increasingly in excess of dispatchable generation capacity in both frequency and quantity since 2018. In 2023 alone, load exceeded dispatchable generation capacity for over 1,000 hours. This raises the risk of resource inadequacy and has coincided with an increase in ERCOT conservation notices and energy emergency alerts.

There is also a general geographic inconsistency between load growth and generation capacity investment across ERCOT. This is not likely to self-correct, given that the drivers of load growth are centered around new industrial activity and population growth in high-load areas in the Texas Triangle — the urban megaregion consisting of the Houston, Dallas-Fort Worth, Austin, and San Antonio metropolitan areas.

Analysis of locational marginal prices (LMPs) reveals that the market is already signaling that there are binding constraints related to patterns of generation, capacity investment, load growth, and transmission. Proper accounting and subsequent internalization of these signals is important for informing the optimal configuration of generation capacity, transmission, and storage with respect to load.

How ERCOT Can Enhance Reliability

Reliability can be enhanced with proper “insurance,” and ERCOT has a portfolio of options available. But policy will ultimately influence which options can be profitably exercised. These include:

• Investment in dispatchable forms of generation that can be called upon when intermittent resources are not available while load is high.
• Investment in storage capacity in utility areas and/or alongside industrial consumers to facilitate a reduction of purchases from the grid during periods of high demand.
• Investment in production area storage capacity alongside wind and solar generation to allow a “smoothing” of sales from intermittent resources and promote a more efficient use of transmission capacity.
• Expansion of transmission capacity to alleviate existing constraints, fully recognizing that the frequency and severity of constraints matter for the economic feasibility of the transmission capacity investment.
• Siting future generation capacity closer to load centers to avoid grid-level bottlenecks.

No market structure can be void of risk because there will always be unexpected incidents and low-probability events that can compromise any system. But allowing structural risks to reliability that can be avoided at a reasonable cost is unacceptable. Therefore, appropriate market design and sufficient regulatory oversight are critical. This opens the door for policy discussions that include, but are not limited to, implementing market structures and/or incentives that ensure sufficient backup capacity and imposing adequate penalties for underperformance by generators under specific obligations. In the end, resource adequacy and reliability are in the best interests of producers and consumers alike, as they establish a platform for long-term growth. Identifying opportunities to provide reliability is paramount, and ERCOT has a substantial portfolio of options.

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The authors thank Blackrock for providing funding to support this research. The research was conducted independently without input from Blackrock and has been reviewed by two anonymous referees. All findings and conclusions are the responsibilities of the authors.

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.