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What might new leadership at ERCOT mean for the troubled Texas power grid?

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The Texas flag flies in downtown Sweetwater on January 19, 2016 in Sweetwater, Texas.

Texas operates an energy-only electricity market, which means energy producers only get paid when they generate, and there’s usually not a lot of electricity on standby. Spencer Platt/Getty Images

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Do you remember the Electric Reliability Council of Texas? That’s Texas’ electricity grid operator that’s been in the news for the last year and a half or so since a winter storm left more than 200 people dead and millions without power.

ERCOT has a new CEO. Pablo Vegas comes to Texas from NiSource, a big utility company in the Midwest. And he’s going to have to work fairly quickly to restore Texans’ confidence in the electricity grid — and the ability to afford their utility bills.

The way electricity is generated, bought and sold in the Midwest is quite a bit different than it is in Texas.

“The fundamental difference in the Texas electricity market from other places in the country are that the only way generators in Texas get paid are when they generate,” said Beth Garza, who worked as the director of the ERCOT independent market monitor until 2019. 

It’s what’s called an energy-only market, and because energy producers only get paid when they generate, there’s not a whole lot of incentive to have electricity on standby in case it’s needed.

The alternative is a capacity market — like the one Vegas is coming from — where generators have an incentive to be able to produce more electricity than the market immediately dictates. 

Doug Lewin, president of Stoic Energy, said he wonders if Vegas’ hire, given his capacity market experience, was a coincidence.

“I think it would make the most sense if we ended up with something in between an energy-only and a capacity market, right? It’s a mistake to think of this as, like, an on-off switch or, you know, two-mode, like, that’s it — you’re one or the other,” he said.

Currently, when the supply of electricity gets tight in Texas, that triggers what’s called scarcity pricing. The idea is that the price of electricity spikes in the hope that it will signal to the market that more power plants need to be built to fill that market gap, according to Joshua Rhodes at the University of Texas at Austin. But those scarcity prices end up getting passed down.

“Because that is what power plants are being paid,” Rhodes said. “And if that’s what power plants are being paid, then someone has to pay them that money that comes from utilities, which then eventually gets filtered down to consumers, regular electricity users like you and I.”

More scarcity pricing will tend to push prices higher, he added — and customers will eventually end up paying for it

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