Public Utilities and Co-ops Lead in Texas’ Competitive Solar Market

By Bob Gibson

If any doubts remain about the ability of renewable energy — wind and solar — to compete in energy markets purely on a bottom-line basis, Texas is now putting such uncertainty to rest.

The traditional home of Big Oil and Gas has an unregulated retail energy market, no state incentives, no net metering requirement, and it surpassed its own, very low renewable energy mandate — 10,000 megawatts (MW) by 2025 — six years ago. It now has more than 14 gigawatts (GW) of wind — 10.6 percent of all electricity consumed — on the statewide grid managed by the  Electricity Reliability Council of Texas (ERCOT).

Solar represents a sliver — 271 MW — of the state’s power supply as of 2014, when Texas scored the No.10 spot in the Solar Electric Power Association (SEPA) solar state rankings. But the state’s solar capacity is expected to soar to more than 14 GW by 2030, according to predictions from ERCOT, which provides power to about 24 million Texans — 90 percent of the state’s electricity load.

How, where and why that growth will take place has been the focus of a three-day fact-finding mission that this week brought a group of 20 electric utility and renewable energy executives to the Lone Star State. Led by the SEPA and consulting firm ScottMadden, the trip put the energy executives together with a cross section of Texas energy industry stakeholder for a packed schedule of  in-depth learning and firsthand site visits.

And what we’ve learned is that while the drivers of that potential solar boom may be unique to Texas at present, they have broad implications for electricity and solar markets in other states going forward.

Hear from participants in SEPA’s recent fact-finding mission to Hawaii at our Nov. 12 webinar. Sign up here.

To begin with, Texas is hungry for more electric power. A rarity in the United States, Texas’ energy demand is solidly on the rise, while long-term power supplies are, in the industry parlance, short. That imbalance is opening the door to solar development, specifically in West Texas, a region that has some of the best renewable energy resources in the nation

It also has some exceptionally low solar prices, at or below $40 per megawatt hour (MWh), compared to the astronomical peak charges off-takers in Texas can face during critical times when demand threatens to exceed supply.

In 2015, ERCOT capped peak demand costs at $9,000 per MWh, which as one Texas utility executive told the SEPA mission, “is a very effective incentive to build and buy solar.”

Solar’s low price also means that it can compete with wind and natural gas in ERCOT’s real-time market, in which lowest marginal cost resources are called on first.

Why solar is competitive in Texas

The Texas legislature deregulated the state’s retail electricity market in 1999, after which the state’s investor owned utilities spun off their generation assets and continued to operate as regulated “poles and wires” companies. As a result, Texas has one of the most competitive electricity markets in the country, including a generation market that all electricity providers participate in and a deregulated retail market that covers the territories of the investor-owned utilities.

“In Texas, if you show up and perform, you get rewarded for it,” observed one of the SEPA mission participants. “Most markets are not like that.”

At the same time, traditional, vertically integrated public power utilities operating outside the retail market are providing the investments that are driving solar growth and innovation in the state. CPS Energy of San Antonio and Austin Energy of Austin are the leaders here, followed other municipal utilities in the state, as well as a growing number of electric cooperatives.

These generation-owning utilities are expanding the solar market with long-term contracts for utility-scale solar at very competitive prices. In the past year, CPS and Austin have signed contracts for more than 400 MW of solar between them, while the City of Georgetown secured a power purchase agreement (PPA)  for more than 100 MW.

Not only can these public utilities bid their solar assets into the ERCOT market, they can also can buy power from the ERCOT pool at competitive prices.

The solar projects the municipals and co-ops procure procured under long-term contracts are seen as good investments by bankers because the business relationship between those utilities and their customers is long term and stable.

By contrast, the competitive retail electricity market, which includes more than 30 retail power providers, features short-term contracts between companies and customers. In the current market, such terms do not typically attract the favorable financing required for a competitive investment in solar.

Municipals and co-ops drive solar innovation

Even though they serve only 15 percent of Texas’ electricity customers, the municipals and co-ops are also leading the way in the state’s nascent distributed solar market. According to Mark Zion, executive director of the Texas Public Power Association, municipal customers have now installed about 8,000 rooftop solar systems, compared to the 5,300 installed by the much larger customer base in the investor-owned utilities’ service territories.

Municipals and co-ops are also breaking ground with innovative customer programs, In 2016 Pedernales Electric Cooperative will roll out an on-bill financing program that will service loans of up to $20,000 for residential and commercial customers.

Read the SEPA case study on solar innovation at a Delaware municipal utility here.

Austin Energy is planning its first community solar project — a 3.2 MW plant that will include 1.5 MW of batteries — with a target completion date of summer 2016. The second phase of this project will target commercial rooftops to provide added scale in the utility’s service territory, where land prices are high.

CPS is also working on a community solar project and recently launched a utility-managed rooftop solar program, Solar Host, designed with input from local installers.

Since most of San Antonio’s rooftop solar is concentrated in high-income neighborhoods, CPS is hoping to locate Solar Host installations in middle- and low-income areas. The program kick-off a month ago triggered an onslaught of applications — 4,000 so far, CPS officials report — a strong indication that customers are looking for new solar options.

While not operating in competitive markets, these companies are sharpening their competitive skills as they venture deeper into engaging customers with new solar and distributed energy products. Those skills — including customer and market research, and product and service marketing — will be increasingly critical for all utilities as solar markets continue to grow and transform energy systems across the country.

As rate and market reform efforts — such as New York’s Reforming the Energy Vision (REV) initiative — continue to grow, utilities across the country may face changes to historic regulatory compacts, which could mean operating in new competitive markets.

A key takeaway from the Texas mission is that adapting to these changes will mean utilities have to do more than understand and operate new technologies. They will also have to respond creatively and effectively to dynamic energy markets and customer demands for energy choice.

Bob Gibson is SEPA’s Vice President of Knowledge. He can be reached at [email protected].