Public Utilities Commission of Texas

AUSTIN — The Public Utility Commission of Texas unanimously approved a market redesign Thursday that it will submit as a recommendation to Texas lawmakers.

After nearly two years, energy leaders agreed the Performance Credit Mechanism, or PCM model, was the best option to address the long-term reliability needs of the state. The memo the commissioners approved Thursday outlines its recommendation.

“I think this reflects a deliberative process on the part of the commission,” said Commissioner Will McAdams. “I said a year and a half ago, I think our finest hour is to come, and I think this is part of it.”

The PUCT took on the task of studying market redesign options following Winter Storm Uri in 2021, where extreme winter weather nearly caused the state’s grid to collapse.

Through Senate Bill 3 passed in 2019, lawmakers directed the Electric Reliability Council of Texas and the PUCT, which oversees ERCOT, to develop new rules and eventually a potential market redesign that would shore up the state’s grid and ensure another similar event would not occur.

PUCT Chairman Peter Lake, who has been a vocal supporter of the PCM model from the onset, said he believed it offered the state everything it was looking for: an incentive for new generation while ensuring reliability.

PCM establishes an additional revenue stream for power operators by allowing them to earn “performance credits” for power available during peak hours.

This would be an added layer to the current grid system and not necessarily change current operations.

Grid leaders said they favored it because it provides an incentive for generation and innovation as companies compete to provide the most energy for the lowest cost. They also said they believe the model would reduce costs because by making the grid more reliable, it reduces the number of days where energy power prices skyrocket.

One of the criticisms of the redesign, however, is that it has not been done before. It is a unique market addition that some worry will be time consuming to set up and without previous implementation, there is no guarantee of its success.

Lake said that every piece of the model has been used in other energy markets around the world, it is only the combination of those pieces that is unique.

“All of these components are known,” he said. “There's no grand mystery out there. It's just a new combination of the best components of different products we've seen around the world.”

Critics are also concerned that PCM is simply a facade for a capacity market, which no stakeholders want.

A capacity market pays a resource to be available to meet peak electricity demand when it occurs, such as during extreme weather events. In this market design, the state typically foots the bill to ensure reliability and it has sent some states, like California and Connecticut, into debt.

“This PCM is a market mechanism that we're trying to thread a needle here, but if it doesn't work, I don't want the sloped demand curve to become a capacity market just plain and dry,” said Commissioner Jimmy Glotfelty.

Commissioners stated that since the commission agreed to remove any capacity market options from even consideration, it mitigates the risk that it could become part of the final PCM market redesign.

What’s next?

Under SB 3, PUCT is only required to offer a recommendation on a market redesign they support. With lawmakers currently in session, it is up to them to either accept it, make adjustments or send the PUCT down another path altogether.

Should lawmakers green light the PCM model, the PUCT and ERCOT will further develop details on market design and implementation, as well as a likely bridge component that will serve as short-term solution.

“We heard Texans loud and clear; they demand a reliable grid. Landmark reforms have proven effective in enhancing the reliability of the grid we have today by providing electricity during record heat and arctic blasts over the past year,” Lake said. “Today, we take another historic step toward building the grid of the future by adopting a new reliability service."

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