Dallas Fed says 'margin for error is shrinking' for Texas power grid

Texas will need to increase its use of battery storage and demand-response programs as well as build new natural gas power plants to maintain the reliability of electricity, the Federal Reserve Bank of Dallas said in an Aug. 17 report.

Referring to Texas' energy-only market in which generators are paid for the electricity they deliver, the report said there is "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."

The Electric Reliability Council Of Texas Inc., which manages roughly 90% of the state's electric load, in recent years has successfully increased the availability of power above peak demand, known as the reserve margin, which as recently as 2019 fell to record lows of below 8%. This year's summer reserve margin exceeds 15%, and the grid operator forecasts that it could exceed 30% between 2023 and 2026, well above ERCOT's target minimum of 13.75%.

In the years ahead, ERCOT's reliability dilemma centers not on the quantity of power capacity but rather how to balance the explosive growth of intermittent renewable energy generation with aging thermal power plants. This is especially important during extreme weather — heat waves, hurricanes and prolonged winter storms such as February's deadly Arctic blast — according to the Dallas Fed.

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

Solar power capacity in ERCOT's grid, currently 7,800 MW, could quadruple by 2024, the report noted. Texas has 853 MW of battery storage capacity available on the grid. While 2,400 MW of additional battery storage capacity is scheduled for installation by 2024, an amount that represents about one-quarter of ERCOT's reserve margin, "more will be needed," the report said.

The legislature passed a series of laws during its spring session designed to firm up the power grid, but many market observers said the state's politicians missed an opportunity to create a more robust set of incentives in demand-response programs that pay customers to curtail energy usage during power shortages. ERCOT already forecasts that such programs will "shave 2,900-4,700 MW of peak demand over the next five years," the report said.

"Increased adoption, even on a limited scale, could make a major difference when every megawatt counts during an extreme weather event," the report said.

Lawmakers also directed the Texas Public Utility Commission to review the ancillary services market, and Gov. Greg Abbott has said he wants renewable energy resources to pay more into the market for more reserve power capacity.

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