Texas’ Transmission Troubles and CREZ II

May 21, 2024 | Txses Impact

Transmission towers and lines at sunset in East Texas (Credit: Matthew T Rader, MatthewTRader.com, License CC-BY-SA)

By Ethan Miller

Back in October, I wrote an article arguing that many of last summer’s electric reliability scares and energy price increases were not the fault of renewables (as ERCOT had claimed), but the fault of insufficient transmission capacity. As it turns out, that exact problem has been generating attention around the Capitol. On Tuesday, April 30th, PowerHouse Texas hosted an Energy Innovation Forum on “Transmission in Texas,” featuring UT Webber Institute Research Scientist Dr. Joshua Rhodes. In his presentation, Dr. Rhodes highlighted Competitive Renewable Energy Zones (CREZ) for their role in increasing Texas’ transmission capacity between 2005 and 2014. One of the main takeaways was the idea that policymakers in the legislature were interested in expanding transmission capacity by pursuing a sort-of “CREZ II;” but what exactly was CREZ, how did it work, was it effective, and why is it necessary now?

Overview of CREZ

First, an overview of electricity transmission and CREZ is in order. Transmission lines are the large, metal power lines that you see. They bring electricity from generators to substations (and sometimes large industrial consumers) via direct current. Distribution lines are the smaller power lines, which carry electricity from the substations to the home via alternating current. In Texas, transmission lines are owned and operated by entities known as Transmission Service Providers (TSPs). TSPs neither own the generators, nor are they the utility that sells you end-product electricity; they exclusively operate the power lines. TSPs are overseen by ERCOT, Texas’ electric grid operator, which serves 90% of the state. ERCOT and TSPs jointly oversee some 53,000 miles of transmission lines.

In 2005, in response to increasing costs associated with transmission, SB 20 was passed to direct the Public Utility Commission of Texas (PUCT), the government entity that oversees ERCOT, to identify zones with high wind-energy potential for the construction of new transmission lines between these regions and consumer markets. The general idea behind the plan was that increasing the generating capacity of wind energy (which is ranked early along merit order – meaning it is cheapest for consumers because of its low operational costs) while simultaneously increasing grid capacity and distributing costs among all ratepayers (PowerUp Texas notes that the typical ratepayer only paid 3% more on their electric bill for CREZ wire costs), would result in an effective and efficient buildout. It appears that they were largely right. The program started with initial studies in 2006, and eight years later in 2014, the last CREZ line went into operation. The completed project added some 23 GW of additional wind generation and built-out 23% of all US high-voltage transmission in the last 12 years. The project had been projected at $4.9B, but went $2B over-budget.

Second, we need to know how CREZ worked. In 2014, ERCOT and the Department of Energy produced an overview of the program. The process began with the PUCT opening a docket to which it invited TSPs and others to make recommendations for zones, show their investment capacity, and pitch transmission line designs. The PUCT then selected zones for further study on wind capacity potential to decide ultimately whether those transmission lines would be built. After that the PUCT assigned the zones and lines to the TSPs. Along the way, PUCT staff worked with TSPs and landowners living within the proposed route to offer testimony and studies on the feasibility, costs, and roadblocks to implementation, modifying routes as necessary.

Was CREZ Successful?

The third question is whether CREZ was successful. I turn to the findings of a recent study published in the Energies journal by Heesun Jang. The study points out that after CREZ’s competition, curtailment of wind fell from 17% to 1.2%, and wholesale electric prices fell to a historic low of $24.62/MWh in 2016. The study also found that prices converged across the state (meaning the cost of a MWh of electricity was roughly comparable whether in El Paso or, Houston, etc.). Using semi-parametric regressions, Jang verified that price convergence, and decreases in prices and pollutants (in Houston in particular) from the pre-period were partially attributable to CREZ. Jang concluded that “the results show that compared with the prices in the pre-period, the prices in the post-period are lower and less volatile, especially during the high demand hours.” Jang’s findings aren’t a one-off, and are corroborated by other studies (Du & Rubin’s 2018 study in The Energy Journal and Janovska & Cohn’s research paper for Rice’s Baker Institute). Interestingly, both Jang and Jankovska & Cohn find evidence against a common point of opposition to CREZ. Critics argue that CREZ’s insistence on increasing renewable generation results in greater price variance as a result of intermittency (it’s not always windy/sunny). Jang notes that this was not significantly observed in part because CREZ created associated mitigations in congestion pricing (which increased market competition, and reduced noncompetitive strategies that generators were previously engaging in).

Jankovska & Cohn note that while CREZ did not increase the capacity of battery storage (which would increase direct dispatchability of individual generators), by connecting various, geographically dispersed generators to customer markets, there was some de-risking to the market as a whole (similar to how virtual power plants and distributed energy resources work). For example, if there is less wind in West Texas (Jang points out that 89% of wind energy is produced there) at any point, that reduced supply could be offset with Gulf-Coast wind generation (where 11% of wind is produced). Jang also notes that while the focus of CREZ is on renewables, its benefit is not confined to renewables. While CREZ lines did result in a decrease in generation from coal plants, generation from natural gas production actually increased. CREZ lines themselves are also by definition open-access lines, meaning they don’t selectively serve wind generators.

Is a CREZ II Necessary?

Most obviously, congestion pricing is an increasing challenge. The reality is that generators are overproducing electricity, but there’s insufficient transmission capacity, which is resulting in curtailment as grid operators move to avoid frying lines. These curtailment periods result in economic losses for the generators, transmission and distribution utilities, and ratepayers (who have to pay a premium to start-up peaker plants—high-cost, high-emission power plants that can provide supplemental energy to a grid during high demand—to offset the reduction in load. In ERCOT and Potomac Economics’ 2022 State of the Market Report, they note that real-time congestion costs grew 37% from 2021 at a cost of $2.8B in 2022. Researchers at Grid Strategies (Richard Doying, Michael Goggin, Abby Sherman) also report that from 2016 to 2021, total congestion costs in ERCOT grew from $497M to $2.1B, a 322.54% increase in just five years. Beyond this, building out transmission is also a necessity to meet long-term demand, as the state’s energy demand is expected to grow over time. There’s also the “forgone benefits” argument. Dr. Rhodes estimates that even building out 2/3 of the amount of transmission that the original CREZ produced would save the state $20B between 2024 and 2040. He also estimates that investing in these zones would confer $20B in local taxes, and $20B in landowner payments for leasing over the duration of the generation sources’ lifetimes. PowerUp Texas notes that these revenues will particularly benefit rural areas of the state, which are in disproportionate need of economic investment.

It is thus clear that there is an imminent need for CREZ II. Curtailment is an increasing issue, and greater transmission will be needed to meet long-term demand. The original CREZ brought together various stakeholders (including regulators, TSPs, and landowners) to collaborate and build out one of the most successful transmission programs in the entire country. CREZ also increased the generating capacity of renewables, while reducing consumer costs. In the end, a CREZ II is a no-brainer. The only concern is that generators that benefit from scarcity pricing will oppose building out transmission capacity. We must ensure that our transmission system reflects the needs of customers and all Texans alike. Through CREZ II, we can.

Disclosure: Ethan Miller is an employee of both the Texas Solar Energy Society and the Texas Climate and Energy Caucus (PowerHouse Texas’ 501c4 sister organization).