This Energy Market Insight was provided by FactSet’s Utilities and Regulatory Team using BTU Analytics data.
Texas voters have officially approved Proposition 7, the Creation of State Energy Fund Amendment, with early returns showing approximately 65% of voters supporting the measure. According to the bill, the passage of Proposition 7 will result in the creation of the Texas Energy Fund (TEF), a ~$10 billion resource to be administered by the Public Utility Commission of Texas (PUC) to issue low interest loans and grants to the developers of a targeted subset of generation and backup resources. More specifically, the amendment is designed to incentivize the building of dispatchable electric infrastructure to balance the effects of the Inflation Reduction Act (IRA) and alleviate the reliability concerns that have plagued the state in recent years. However, before we dive into how the TEF’s funds will be allocated, let’s first take a look at the impetus for the Fund’s creation.
On February 13–17, 2021, the Texas electric grid experienced controlled outages during Winter Storm Uri. During the storm, increased loads and widespread generation resource failures led to outages affecting more than two-thirds of the state’s population. According to the Texas Comptroller’s report on the storm’s effects, these conditions contributed to the deaths of at least 210 individuals in the state, along with an estimated $80–130 billion in economic losses.
While the Texas electric grid has since managed to avoid any outages approaching the magnitude of that seen in the aftermath of Uri, a lack of sufficient generation capacity, rising loads, and transmission constraints have continued to cause significant problems, including numerous system emergency declarations in both the winter and summer. These continuing struggles come even though ~24 GW of resources have been added in ERCOT since the storm, as detailed in Figure 1 below.
Figure 1: ERCOT Resource Additions After February 2021
As illustrated in Figure 1, the vast majority (~75%) of resource additions since Uri have been solar or wind generation projects with only ~3 GW of dispatchable gas generation added over this period. Additionally, the gap between the pace of construction of new renewable resources and that of new thermal resources seems poised to increase further in the wake of the August 2022 passage of the Inflation Reduction Act, which heavily incentivizes renewable energy construction and production. The IRA seems likely to have a particularly significant impact in states with abundant wind and solar resource potential, like Texas. The mechanisms enacted with the passage of Proposition 7 are primarily designed to incent dispatchable resource construction to address concerns about a disproportionate reliance on intermittent renewable resources.
While grid reliability is clearly the main impetus for the establishment of the TEF, it is also worth noting that there has been an erosion of utility affordability in Texas in recent years, as illustrated in Figure 2 below.
Figure 2: FactSet Utility Expense Index in TX
As illustrated above, the FactSet Utility Expense Index, which measures the proportion of per capita disposable income required to pay average electric and gas expenses for residential customers, saw a sizable year-over-year increase in 2022. While resource constraints were likely not the primary factor in this increase (most states saw some increase in the index due to high natural gas prices related to geopolitical concerns), persistent blowout pricing during grid emergencies contributed to this dynamic.
The TEF’s Funds Allocations are Narrowly and Carefully Targeted
The ~$10 billion in funds available to the PUC through the TEF are earmarked for use as detailed in Figure 3 below.
Figure 3: TEF Funds and Eligibility Criteria
As indicated above, the vast majority (>70%) of the TEF’s available funds will be earmarked for new thermal generation capacity in ERCOT. All projects receiving funds from the TEF will be required to interconnect by June 1, 2029, and the legislation specifies that selected projects are to be moved to the front of the interconnection queue to accommodate this deadline. Outside of ERCOT, funds are targeted to address transmission and distribution constraints and to provide backup power resources to critical facilities, such as hospitals.
With the passage of Proposition 7, and the resulting creation of the TEF, a new mechanism has been created to incentivize the development of thermal generation and associated infrastructure in an attempt to relieve pressure on the Texas electric grid. The ultimate success or failure of this effort may come into focus relatively quickly, as the PUC is now scheduled to begin considering applications for these funds in Summer 2024.
Trevor Fugita also contributed to this article.