How distributed energy can harden the Texas power grid

Texas may struggle mightily with a top-down approach to fixing what broke its power grid this February. But distributed energy resources could offer a bottom-up solution.

To James McGinniss, CEO and co-founder of David Energy, that makes for an intriguing business opportunity. In the coming months, the New York-based retail energy provider plans to enter the Texas retail market and launch a pilot offering for a few hundred Texas customers, one that combines monthly energy payments with distributed energy installations.

By bundling the upfront cost of behind-the-meter batteries or generators into a long-term energy contract, David Energy and its financing partner, PearlX Infrastructure, can offer customers the ​“insurance policy” of a system that can keep the lights on during outages.

“When you don’t need that asset for backup, we’re playing it in the market,” he said. ​“We’re generating a lot of value that otherwise wouldn’t be there.”

David Energy can then use that customer-side flexibility, along with load controls like smart thermostats, to hedge against the risk of being caught ​“short” on promises to deliver power during moments of high market prices — or, in the case of the February freeze, when power isn’t available at any price.

“When we price our supply deal, we’re looking out at what it will cost to procure that energy. We have this battery for times when it’s priciest, and we feel comfortable knowing it will be there to call on,” he said. ​“That will help us lower those costs” for customers, well beyond the savings available from traditional demand response programs, he said.

“I don’t think that resilience has to or should be cheaper than what customers are currently paying,” he said. But in a state where the risks of relying on the grid have been so drastically demonstrated, ​“How many outages before someone says, ​‘Enough is enough’?”

In a way, the February grid disaster established a ​“clearing price for reliability,” said Michael Huerta, managing partner at PearlX. Under Texas’ deregulated energy-only market structure, prices can go as high as $9,000 per megawatt-hour — a level they reached for days during the crisis.

Texas energy market participants are all keenly aware that they face the threat of buying power at that price to deliver it to their customers during a crisis — a situation that’s already led to the bankruptcy of upstart retailer Griddy and of the nonprofit Brazos Electric Power Cooperative, and put many more market players in dire financial straits.

In this sense, distributed energy is a hedging strategy against catastrophic risk, as well as a source of flexibility to manage costs during the majority of hours the grid remains up and running.

“We call it the ​‘flexibility and reliability premium,’” Huerta said. ​“I think smart companies like David and PearlX are going to harvest that premium for our customers. This is the future of energy retailing.”

Seeking distributed solutions to systemic problems

Concepts like these are being echoed by a range of Texas energy experts and distributed energy providers. They argue that the state needs to look to the edges of its grid to reduce the threat of another disaster like the February freeze, which caused more than 100 deaths, left millions without power for days and led to more than $100 billion in damages.

Unlike expensive and politically challenging systemwide improvements, distributed energy — fossil-fueled generators and solar-battery projects on the supply side, and energy efficiency and dispatchable, controllable loads on the demand side — can be built out at the customer and community level, incrementally reducing strain on large-scale electricity and natural-gas systems during future weather-driven crises, proponents say.

This can also help tackle what remains by far the most common cause of power outages: localized breakdowns in the distribution networks that carry electricity to end users.

Only about 10 percent of outages are caused by the kind of large-scale system breakdowns that Texas saw in February or that California experienced in a much milder fashion during last summer’s heat wave, according to Alison Silverstein, a former senior adviser at the Federal Energy Regulatory Commission and the Public Utility Commission of Texas.

Instead, 90 percent of outages in the U.S. are caused by distribution-level problems, she wrote in an email — power lines knocked out by high winds, ice buildup or flooding, or in California’s case, deliberately de-energized to reduce their risk of sparking wildfires.

“We cannot afford to spend the money to protect and harden everything,” Silverstein said at a February event hosted by Advanced Power Alliance and Conservative Texans for Energy Innovation. ​“There will always be more hurricanes and ice storms.”

The problems at the heart of Texas’s systemwide breakdown — lack of winterization of power plants and natural gas wells and pipelines, and a mutually reinforcing collapse of electricity and gas supply — may take years of time and billions of dollars to correct. And with extreme weather events so costly to protect against, power generators and gas suppliers may balk at making investments in hardening their systems against them.

But diversifying the mix of distributed resources that can guarantee reliable power during emergencies can also provide broader benefits, Silverstein said.

“The best way to do that is very aggressive energy efficiency, clean energy, photovoltaics, distributed energy,” she said. ​“We need aggressive investment in things like community solar and storage. That will help all of us be resilient at the individual and community levels.”

Why natural-gas microgrids continued running when gas-fired power plants didn’t

Another solution is to turn to natural-gas-powered microgrids. That’s how Enchanted Rock managed to cover 97.3 percent of the outage-hours of its 200-plus Texas commercial and industrial customers over the course of February’s disaster, according to Allan Schurr, the company’s chief commercial officer.

Enchanted Rock started running its microgrids days before the crisis, not to back up customers but to bid their power reduction into the wholesale energy market of Texas grid operator ERCOT, he said. When ERCOT started to call on the state’s distribution utilities to black out portions of its grid to prevent a systemwide collapse, it switched over to emergency backup power operations.

Unlike many of the gas-fired power plants unable to secure constrained fuel supplies, ​“we are a firm, no-notice gas customer” served by local gas distribution companies under monthly contracts, he explained. With the exception of a few customers connected to pipelines that were short on gas and needed compressed natural gas to be trucked in, ​“we didn’t see a drop” in supply.

And while some of Enchanted Rock’s reciprocating engine generators did struggle with the unusually cold temperatures, ​“we pushed out an upgrade to our software” to adapt to them, he said — a different outcome than the freeze-up of instrumentation or cooling pipes that forced some coal, nuclear and natural-gas power plants to halt operations.

Solar and batteries as a resiliency asset

Solar panels and batteries aren’t a suitable replacement for Enchanted Rock’s customer reliability needs, Schurr said. Solar generation is relatively low in winter, and battery capacity of two to four hours wouldn’t have helped during an outage that persisted for more than eight days, he noted.

But individual homes can expect solar-battery systems to provide a reasonable cushion for blackouts, said John Berger, CEO of Houston-based solar provider Sunnova. During the week of statewide rolling outages, ​“I can tell you that my solar system was pumping on Monday and Tuesday” when skies cleared, he said, although ​“not so much on Wednesday” when cloudy skies returned.

Berger also said that he ​“was powering a good portion of [his] block with solar power” beyond what his own home was consuming, he said. That’s not to say that CenterPoint, the utility serving Houston and environs, was aware of that fact, or that it was able to tap that excess power when it blacked out the circuits serving his neighborhood.

“They’re not incorporating that into their planning. All of this has got to change,” he said. ​“We’ve got to have people sign up for service providers, to aggregate value into their communities, and service providers like us have to be required to report this information” to utilities. Sunnova is looking at ways to integrate neighborhood solar-battery systems as part of its recent acquisition of SunStreet, the solar platform of nationwide homebuilder Lennar, he said.

To be clear, utilities will need to make significant investments in sensors and controls to integrate behind-the-meter assets to support the grid. And utilities aren’t necessarily incentivized to invest in systems that enable customer-sited DERs, which can erode their own rate-based investments.

Barriers to distributed energy resource development

Texas’ competitive energy regime also pits transmission and distribution utilities like CenterPoint against generators in terms of investing in utility-owned batteries on the distribution grid, Berger noted.

A long-running effort by ​“wires” utilities to win regulator approval to rate-base distribution-grid-connected batteries have been fought back by generator groups that see them as unfair competition. A bill seeking to change that faltered in the Texas legislature in 2019, although advocates plan to push for its passage this legislative session.

Meanwhile, ERCOT’s wholesale energy market rules are tough on would-be aggregators of distributed energy assets, and stakeholder efforts to expand market access to distributed energy resources (DERs) in smaller aggregations or across disparate sites have failed to move forward in recent years. The vast majority of the roughly 1,300 megawatts of ​“registered” DER participants in Texas are natural-gas- and diesel-fired generators.

According to a 2019 report commissioned by the Texas Advanced Energy Business Alliance, the lack of policy support for distributed energy is preventing growth that could reduce the need for grid investments and mitigate price spikes during periods of high demand.

Silverstein, who has done extensive research on the value of energy efficiency, demand response and distributed energy in Texas’ energy-only wholesale market, told me last year that stakeholders ​“should be working as a matter of public policy to facilitate and foster demand-side resources with the same enthusiasm and rigor we’ve used for the past two decades to foster the supply side.”

Improving Texas’ weak energy-efficiency standards could yield huge benefits in managing demand, Silverstein said. Residential efficiency efforts, including replacing older resistance electric furnaces with modern heat pumps, could significantly decrease peak heating electricity demand on the Texas grid, a recent RMI study found.

Moving ahead on their own

Amid the financial fallout of February’s record-breaking energy market costs, estimated at as much as $55 billion, the post-disaster debates between Texas lawmakers have been heavy on blame-casting between regulators of the state’s utilities, natural-gas networks and transmission-grid-level energy markets.

But the debates have provided little clarity on how Texas might take up problems at the root of the crisis, such as flaws in how the state’s deregulated energy market incentivizes power plant operators to harden their systems for severe yet rare winter weather, or its lack of transmission interconnections to the rest of the country’s power grids.

Bills being proposed by the Texas Senate and House that would set more stringent weather-proofing requirements at power plants may lack effective enforcement mechanisms, critics warn. And the Public Utility Commission of Texas, which would be tasked with enforcing them, has seen all three of its members resign in the weeks after February’s disaster, and only one replacement commissioner has been nominated thus far.

Given this absence of leadership at the state level, ​“there will be the city mayors [and] the public utility officials who have aggregate responsibility for citizens and geographic areas that will say, ​‘I’m just not counting on those people; I’m going to do something,’” said Karl Rábago, a consultant and former PUCT commissioner, U.S. Energy Department official and executive at Texas utilities AES Corp. and Austin Energy.

He cited the example of Houston Mayor Sylvester Turner, a vocal critic of the state’s lack of action to combat climate change or prepare for extreme weather. ​“I know Sylvester Turner a fair bit from back in the day, and I can tell you, he’s not going to take the heat and not try to do something to not let it happen again,” Rábago said. ​“Local officials are accountable in a way the elite politicians in Austin are not.”

As part of its climate action plan, Houston last year inked a 492 MW solar power-purchase agreement with NRG Energy, the single biggest municipal clean energy contract in the country, which has allowed it to claim 100 percent renewable power for its municipal operations. But it still saw fire and police stations lose power during the February blackouts, Lara Cottingham, the city’s chief sustainability officer, said in an RMI-World Resources Institute webinar last week.

“We’ve seen a catastrophic infrastructure fail, and no one wants that to happen,” she said. While Houston can’t own its own generation or sell power to offtakers, it is exploring the possibility for developing local microgrids with partners.

Beyond new approaches that allow retail energy providers to work with cities and private customers, municipal utilities like Austin Energy and San Antonio’s CPS Energy are eager to invest in local resilience to avoid the massive price spikes they were forced to bear during the February crisis, Rábago said.

“It’s diversity that gives you more robustness, more reliability, more resiliency,” he said. And with the Texas regulatory structure favoring established generators on the wholesale side of the market, ​“the only way to diversify is by going to the small side.”

Despite the lack of regulatory support for DER development, the market signals delivered by February’s disaster are indicators of a ​“break-even price beyond which it’s no longer cost-effective to stay with ERCOT,” he said. ​“That break-away price is going down for DERs.”