The Energy Capital Podcast, Episode 1 with Former PUC Commissioner Will McAdams

For the inaugural episode of the Energy Capital Podcast, I spoke to Will McAdams, the former Commissioner of the Public Utility Commission of Texas (PUC) who left the Commission just a few weeks ago.

We spoke about his appointment to the PUC in the immediate aftermath of Winter Storm Uri and the challenges he faced during that tumultuous period. He told me what he was proudest of from his time on the Commission, including his efforts to wintererize power plants and “hold the line” to ensure a stringent standard was adopted, a stance that likely paid big dividends over the last few days during Winter Storm Heather.

We had a great conversation about distributed energy resources (DERs) and how they are likely a major part of the future of the grid. Commissioner McAdams led the effort to create a Virtual Power Plant pilot, allowing small customers to get paid for injecting storage to the grid and, eventually, for reducing their use.

He talked about the difficulties in the first few months on the job, after all three commissioners had resigned following Uri. He also reflected on his own possible responsibility for Uri, something I’ve rarely heard in the last three years.

We went in-depth into the evolution of energy markets and how they might need to change to provide higher reliability at lower cost. That discussion included his views on the energy-only market, the large volume of ancillary services in recent years, and the controversial Performance Credit Mechanism (PCM).

We also talked, of course, about energy efficiency, renewable energy, battery storage, demand response, and much, much more. (We discussed IRA incentives, if you’re interested in learning about which incentives you can access to upgrade your home, see this calculator. If you don’t qualify for tax credits, see this article for information on when additional incentives may become available, hopefully later this year.)

Time stamps and a transcript are below.

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I look forward to your feedback on the episode.

Time stamps:

2:30: McAdams’ background and path to being a Commissioner

6:00: The first days and months at the Commission after Winter Storm Uri

10:38: Diagnosing why Uri happened

14:50: What McAdams is most proud of from his time at the Commission: strong winterization standards for power plants

18:00: What he wishes he had more time to work on: cost allocation for distribution infrastructure costs

23:10: The need for distribution resource planning and the potential for a Distribution System Operator (DSO) model; discussion of the PUC’s award-winning virtual power plant (VPP) pilot

30:25 Deeper dive into the VPP pilot and the Aggregated Distributed Energy Resource (ADER) Task Force, and the potential for Texans to earn revenue for their DERs

36:00: Potential of demand reductions to contribute to VPPs

40:25: Are conservation calls inevitable?

45:15: The challenge of winter reliability and how energy efficiency can help

51:15: The potential of energy efficiency funds from the Inflation Reduction Act, and the need for better education and incentives for HVAC equipment

58:15 McAdams’ views on the evolution of energy markets

1:02:01: Are capacity markets the answer, and McAdams’ view on the Performance Credit Mechanism (PCM)

1:05:30: Do we need all the ancillary services we have? Will we need them if the PCM is implemented?

1:08:00 Comparison of PCM with McAdams’ idea for Dispatchable Energy Credits (DECs)

1:14:30: The criticality of load forecasting and how bad load forecasts were for Winter Storm Elliott

1:17:15: Is Texas a good destination for clean energy investors?

1:21:54: What are the 2-3 energy policies McAdams thinks will have the biggest impact on increasing reliability

1:25:20: What will the grid of the future look like for consumers?

Transcript

Doug Lewin

Will McAdams, welcome to Energy Capital.

Will McAdams

Hey, thanks, Doug. Glad to be here.

Doug Lewin

So excited to talk to you, obviously a whole lot to talk about, but let's just start with your background. What was your path to being a Public Utility Commissioner?

Will McAdams

Yeah, no, so I landed in Austin around 2009. I was fresh out of the U.S. Army, and I went to work as a sort of jack-of-all-trades legislative aid staffer, policy analyst to a state senator, and that senator happened to be Troy Frazier. And Troy Frazier was a pallet manufacturer from West Texas who was a long-serving legislator. And as a part of being a manufacturer, his number one cost of doing business was electricity. And so he always had a passion for energy, electricity, industrial policy, and was actually one of the co-authors of SB7. And so his policy focus was always in that area. Over two years of working for Frasier, he began to shift me into that policy area as his aid analyst designated to focus on energy, especially the Public Utility Commission. He eventually regained the chairmanship of the Committee of Jurisdiction over the Public Utility Commission and ERCOT, oversight of ERCOT. I was his legislative director and kind of his point staff person on grid related issues.

And I held that spot for both Frazier and several other members of the legislature for the next, oh, eight years. And so I worked for Frazier. I worked for Charles Schwartner, who authored Senate Bill 3 during the 2021 session. I also was the director for Senate Business and Commerce, the Senate Committee on Business and Commerce under Kelly Hancock, who authored Senate Bill 2 in 2021.

So I had a strange nexus in terms of the issues. I also worked for Speaker Dennis Bonham for a period where I was his advisor on regulated industries, for business in regulated industries. And then energy had burned me out in 2019 and I decided to step away and became president of a statewide trade association, Associated Builders and Contractors of Texas, and happily focused on employment and construction related policy for a year and a half. And then Winter Storm Uri happened in 2021, and I got a call. And that was after the recording of Arthur DeAndrea broke. Um, and the, the final resignation was announced at the PUC and, um, and the rest is history. I onboarded shortly thereafter.

Doug Lewin

So you were appointed on April 1st. There's a lot of jokes that could be told there. But I'm sure at many points you felt like that, what am I doing here? What have I taken on? What have I walked into, right? I mean, it was an extraordinary set of circumstances where I'm not sure it has, I'm pretty sure it doesn't have any precedent that all three commissioners were gone. There were no commissioners for a period of some weeks. You're appointed on April 1st. Can you talk a little bit about what those days and weeks and even the first couple of months were like? You know, clearly the dust had not settled from Winter Storm Uri. People were still processing it. There's all sorts of what's gonna happen next. What, it must have been some form of chaos. What was that like?

Will McAdams

Yeah, it was not an orderly transition of authority and responsibility, I'll say that. But we made the best of it. As you recall, the legislature was in session. I was over at the Capitol lot doing my job as president of ABC, and I remember sitting down in a legislative office watching the marathon hearings just on the telecast, watching the Q&A between the senators, the House members and the Commissioners at the time… it was painful to watch. And I was, it was tough to watch. And people would ask me what's wrong. And I'm like, look, I feel partially responsible for this. I mean, I had a hand in crafting policy over the last eight years, decade. And this collapse of the system was… it was personal to me and it was personal in trying to stabilize the system, recover, rebuild. So that's what I wanted to do. 

And when I got that call, I was like, yes, absolutely. Let's do this. Let's help. And so my history in the State Senate was very important in terms of that first nomination. Any of the Commissioners who were going to be on board at that time had to undergo Senate confirmation. And if the public was questioning the competence of the Commission, the State Senate certainly was. And you could even multiply the intensity of that skepticism on the part of the Senate. And so, you know, I had spent 10 years in the State Senate by the time I had left. And I knew all the senior senators. I knew all the senior staff.

The Lieutenant Governor and I had met before. I'm sure he kind of put the face with the name when we had our first meeting, which was an hour and a half meeting, before my name was even put forward on an appointment list. And that was a tense meeting. I will tell you, I've never been in a more high magnitude interview than with that meeting. Because he wanted to know somebody was gonna come in here and do their duty.

And so I passed muster. He said, I believe you'll do your best and I'm going to support you. Uh, everybody was relieved to hear that the governor's office was relieved to hear that and, uh, and then they put my name out, uh, within 24 hours. And, um, and then I began to lead the way. Uh, again, I wasn't going to be the chair. Um, Peter Lake followed two weeks later.

But I was going to onboard first assess the situation and then get confirmed ultimately which the Senate did in short order and start to rebuild at PUC. I remember walking over to the PUC two days before the vote and actually… no I didn't walk over it was it was the day after the vote when I was confirmed and I said look, I'm going to onboard and I met with Arthur and the place was dark. All the cubicles were empty because they were still on COVID staffing. Only the senior staff was present. It looked like an empty ship. Just cold, dark, and quiet. And met with Arthur and you could imagine a man under tremendous strain and he was. But he also looked like a weight was being lifted.

It was a tough time for them. But we just assessed the situation, got with Peter, and then we started putting things back together again.

Doug Lewin

So you said it was personal and you felt some responsibility. It's interesting, and I want your perspective on this too, how much of Uri do you think was, and I understand that sentiment because that's your character as a human being and your army background and probably the way you were raised and all that, and that's admirable and I appreciate that sentiment. That's the way I think we want public servants to think that, you know, um, I have some responsibility here and all that having been said, I still don't view Uri as a quote unquote market failure. It may be, I want, I want to know your view on this though. Forget mine for a minute. What, you know, you had other failures as well, right? Of gas supply of, um, you know, forecasting of load going as high as it was. So energy efficiency comes into this.

And then, and then the market maybe is a piece of that. What is your sort of diagnosis of Uri and where the sort of, what were the major problems and how does the market structure fit into that puzzle?

Will McAdams 

Yeah, no, it was a confluence of events. It was not a market failure. I can say that emphatically, clearly now. What happened in 2020, and I started alluding to this from my statements from the dais shortly after we had the new commission composed. I said, look, this was a confluence of events. It certainly appears that way. The last two years and eight months have only affirmed that in my mind.

And you got to remember what was happening at the time. The economy was coming back to life after Uri. And so what had been happening over that year and a half, um, between COVID forcing the dormancy of the economy, uh, load had stayed steady state. There was no load growth over that year period.

By 2021, everything was reopening again. All the industrial processes were reopening again. And what had happened between 2020 and 2021, and what had been building before that, was a crash course industrialization, electrification movement. And especially in Texas, because we are the, we are one of the manufacturing engines of the country.

What we didn't realize is how much gas-driven industrial processes over that two-year period were being converted to electrified systems. So they were, instead of burning gas-fed boilers or internal gas-fed systems, they were switching that over to a plug-and-play system where they could account for the carbon emissions that they were producing, where they could account for the energy costs associated with that, where it wasn't necessarily directly tied to the volatile natural gas system. And what we saw was a dramatic increase in load growth at the same time as this winter storm was bearing down on Texas. And that was a snapshot in time, but it hit us at a point where the PUC and ERCOT were not tracking the criticality of the electrons being diverted to those loads. And as a result, key systems failed. And that became a cascade of failures that rippled its way through the entire system. That's when curtailments occurred. That's when, and this followed wind generation freezing in place because of the magnitude and the moisture associated with that winter event. So it became this pancaking cascade of failures that took the system down and took it down for several days. So that's what I would say.

Doug Lewin

So let's, um, let's pivot a little bit. Um, and, and although it's, it's related to the last question. So you, you were there for, for nearly three years, obviously when, when we're talking, you've, you've left the commission. What, what are you most proud of when you look back at your tenure there? And what do you wish you had more time to focus on what, you know? Yeah. I'll just put it that way.

Will McAdams 

Yeah, well, I was most proud of we held our ground on weatherization. So we, and I would like to advertise this for the public, we have a winter event that appears to be headed our way this coming weekend. And preparations are underway. I'm fully confident that everybody's taking necessary steps to make sure that they're winterized and weatherized. I urge the public to do the same. However, at the time we were in this paradigm shift discussion about who bears the costs of these efforts. And at the time we dug our heels and said, no, statute has given us direction. These costs will be borne by the resources that support the system.

This is a part of their cost of doing business, just like any business has a natural regulatory cost of doing business. And we will establish a standard that will be very stringent that they will be a held account to. I had a part in establishing that stringent standard. I had a part in holding the line on ensuring that windchill was accounted for. And I think we're gonna find out how important that is this coming weekend because it's going to be windy and it's going to be cold. And the temperatures will be extremely low as a result. And they will feel extremely low. And so metal is going to perform in a certain way under those conditions. And we need to make sure that holds up. So we impose the weatherization standards that are absolutely the most conservative, quote unquote conservative, but stringent in the country. NERC is looking at those standards as an example.

I believe it'll play an important role in informing what their ultimate standards are for the nation. So Texas will have led the way. And then the second thing I'm most proud of is we stood up the aggregated distributed energy resource pilot program in a five month period, launched it to where it was live within nine months.

And at the year anniversary, we had the first electrons being dispatched into the system as a result, allowing everyday consumers to become a resource, a virtual power plant system to support system reliability. And I think one day we will be able to account for them in resiliency plans for the system. So I think we started building a road to the future, and I was a part of that, and I'm extremely proud.

Doug Lewin

And what do you think is sort of left undone? What do you wish there had been more time to focus on?

Will McAdams

I was so focused on just the day-to-day triaging of ERCOT at the time of this transition and Southwest Power Pool working on that. I wish we could have addressed cost allocation in terms of distribution infrastructure costs. And I believe that is one of the most profound things that the Commission can take up over the next three to five years, or frankly the legislature. I believe this issue is ripe for the legislature to begin arguing that will determine who pays for distribution costs. Because I believe what's coming is the distribution system is going to be upgraded in a dramatic way over the next 40 years. And the resources that we can begin aggregating and bringing in and dispatching into the system, not from the transmission system, but from the distribution system, will help support our grid from now, for 100 years from now. And if under the current policy, if those costs are completely borne by the consumers at distribution, that's your mom and pop businesses, that's your small to mid-level commercial consumers, that's your low-income residential consumers, they're paying the cost of that. And it could be a crushing cost. So I think ultimately the commission needs to, and this is what I had launched but didn't have the time to finish, needs to have the discussion and ultimately decide that those costs need to be borne by the system as a whole because ultimately that will help spread the cost across a greater pool of consumers to include our large industrial consumers.

Because ultimately all of them will benefit equally from the reliability and the increase in resources participating in the energy market, which will ultimately bring down wholesale energy costs and help support system reliability and resiliency while decreasing price volatility in the system, which eventually cost consumers.

Doug Lewin 

So I understand generally what you're saying, but I'm not sure I follow specifically on the distribution infrastructure costs. You're saying it should be spread across. Is it not currently done that way? No, okay, tell me more.

Will McAdams

No, it's so if you're a consumer, say in Houston, the costs for the distribution system are borne by those consumers in the CenterPoint Energy service territory. And so that's just basically Houston people paying for Houston wooden poles that are outside of their homes. But in an environment of huge electric load growth, the distribution system can do a lot more and become a lot more sophisticated to where it can handle two-way traffic of power, not just along radial systems, instead of just receiving power from the transmission grid to their home. And in so doing, you can start hooking up cars, you can start electrifying all this stuff that we're installing in our homes or putting on our businesses. It allows that neighborhood to be a lot more sophisticated and a lot more resilient than it currently is. But it requires a lot of upgrading. And we don't know the magnitude of the upgrade to the distribution system or the magnitude of the costs associated with that. But once that happens…

Doug Lewin

We don't know the magnitude, but we know it's gonna be big, right, because like you were talking, yeah, this crash. 

Will McAdams

We know it’s terrifying.

Doug Lewin

Yeah, yeah, yeah. The crash course you were talking about in industrialization and electrification prior to Uri is like a fraction of what we're about to see over the next 10, 20 years.

Will McAdams 

It's the tip of the iceberg. And I'm telling you, the iceberg's big. And so if you can socialize that beyond the distribution system to the transmission system, then that means all of the industrials who currently do not pay distribution system costs would bear a portion of the burden, because again, they're consuming large amounts of electricity. And they would be able to socialize those costs over a greater pool of payers and support the system which they're benefiting from.

Doug Lewin 

The industrial consumers pay transmission based on their four coincident peak, but they don't pay for distribution at all?

Will McAdams

Because they're not interconnected at the distribution level. They bypass that by building their own substations and interconnecting right there at transmission.

Doug Lewin

Because they're okay. Wow.

So does this, so that's obviously a huge issue, the who pays. I also wonder if sort of a first step to that is it's something like distribution resource planning, which we don't really do in any kind of a transparent way right now, obviously the utilities do their own distribution resource planning, but having some kind of a market signal to solar and storage and energy efficiency, forget the technology, there'll be all kinds of different technologies like “Hey, there is a need over here.” We think we need to invest tens of millions of dollars in distribution infrastructure. Is there a solution that can be met for millions of dollars instead of tens of millions?” But there's no market like that, right? Now there's no market signal, is that correct?

Will McAdams

That's right. The VPP was the first market signal that was introduced really at that small of a scale at distribution. And there’s starting to be market signals on that part, Doug, because, and this is for the more sophisticated listeners, because congestion costs at the transmission system, on the transmission system, are growing leaps and bounds. So people are starting to feel on a nodal basis. Okay, so, the nodal system are a series of price points that are based around your closest substation in your neighborhood. And the reason they do that is because that helps the system signal where scarcity is occurring. And at the transmission system, think of it just like traffic congestion. There's too many people or too many electrons trying to get on the system at one place, congestion builds up.

It backs up power beyond that point and starts backing down power resources, whereas scarcity is experienced on the other side because it's free highway and people are calling for more cars to be on the road, but they can't get through because of the bottleneck. So it creates a price formation problem on the system. 

Well that sends a signal that there needs to be more resources closer to the loads. And that's what these smaller resources can provide. They can start to spread out the cars coming onto the system. And as such, we don't have as many bottlenecks and the costs start to decline.

Doug Lewin

Yep. 

Will McAdams

Does this make sense? 

Doug Lewin

It does make sense. Does this inevitably lead to some kind of a distribution system operator model or DSO? This is talked about a lot at conferences and in white papers. And for those – we always want to make this podcast both accessible to a general audience and interesting to an in the weeds audience – but a distribution system operator would basically be somebody who's coordinating all of those small sources. 

If you start to think of all the batteries and the vehicles that are starting to come. A quarter a million electric vehicles on the roads of Texas already today, probably pretty quickly heading towards a half a million and then a million after that. And each of them have pretty good size batteries inside them. If nobody's coordinating all of that and they all plug in at six o'clock when people get home from work on a summer day as the sun is starting to set, we're gonna have major problems. The inverse is true, if they're all being coordinated and orchestrated in such a way that their power, at least we're not charging them and potentially even reversing flow to the home so that it's consuming less from the grid, we could alleviate a lot of the problems we have, but doesn't some entity need to coordinate all of that and who could that be?

Will McAdams

Well, so we had talked about that. I had talked about that with ERCOT system planners. And they said, well, look, we believe ultimately something like that is needed. We don't want to do it. And I'm like, understandable. But we need to start talking about that. But in terms of the distribution system build out, Doug, this is a 40-year play. This is the future. And that's why the conversation has started now.

It's going to be an evolving conversation because there's going to be some entities, namely the IOUTDUs, so like CenterPoint Energies and Oncors of the world; the electric cooperatives, so South Texas Electric Cooperative or Pedernales Electric Cooperative; the municipal systems, CPS, Austin Energy, who will need to consider ceding some of their current authority in terms of coordinating their distribution system to that operator, to that new system operator, distribution system operator, just like they have done or federal policy has required them to do toward ERCOT in terms of management of the bulk power system. So that's going to be an evolving conversation on how that could unfold.

Doug Lewin

Could the utilities themselves, the Austin Energy, the CenterPoints, the Co-Ops, play that DSO role, or do you think it needs to be something independent? Or have you not thought about it enough to say it?

Will McAdams

Now, I've thought about it…

Doug Lewin

I figured. 

Will McAdams

Because, look, one of the big things that I believe is underway, and this is frankly counter to broad-based federal policy, I think, right now, is I think we're on a long march around, for the last 100 years, the grid has been on a long march toward more broad-based integration as a system.

Okay, as for ERCOT that's been as an islanded system within the national grids. For the other grids like SVP, PJM, CERC, it's been integration with each other, you know, to make them more, be able to lean on each other. I believe right now with the type of load growth that we're seeing.

That everybody's gonna start to default back to a more islanded approach, just to sort of stabilize the system and manage their systems, and then begin another phase toward more integration. It starts and stops. But as a result, those regional entities, the CenterPoints of the world, or the Oncors of the world, will begin coordinating, possibly, with their neighboring cooperatives to better manage regionally the distribution system and what that could dispatch onto the bulk power system ultimately to move around the state. And I think that's not a bridge too far. I believe ultimately the market will signal that this is needed, but it's not ripe yet.

Doug Lewin

That's fascinating. So this is actually a good, I wanna make sure we take just a little step back and focus on the specifics of the VPP pilot and what the Aggregated Distributed Energy Resource Task Force, that is a mouthful, but there is this Task Force. They continue to meet in Texas and will continue going forward. It was just announced, I believe just last month, on December of 2023, that the Aggregated Distributed Energy Resources would be allowed to participate in this new ancillary service, the ERCOT contingency reserve service. So it's kind of growing in the ways that it can actually serve the state, serve the grid, um, serve Texans. And that pilot is very related to everything you're just talking about at a high level. But let's, let's bring it into the specifics. Can you just describe the pilot? What it's about? What

barriers it's trying to overcome, sort of what it is, what it's achieved so far, and where it's headed? I think we've already covered why it matters. I was gonna ask you why it matters. I think we've already covered that. You could say more about that, but what does it do? Where is it at now and where is it heading?

Will McAdams

Okay, well high level, the reason I pushed so hard for this is because again my mission was to stabilize the system and And I had to do that in an environment where I was trying to stabilize the system with a moving target meaning the demand kept on going up at the same time I was trying to find resources to satisfy the demand supply, find the supply and there was no supply getting built everybody was petrified of the volatility and the unknowns about the market and the market design. And a lot of that was PUC introduced. And we tried to sort that out over time. 

The bottom line is, I knew that the public's confidence had been shaken in the grid. And the reaction that I would have or anybody would have is like, I'm going to start to take care of myself. I'm going to take care of number one first. And then I'll worry about number two, which is the system. And people were investing under those under that motivation. And they were buying generators, they were buying PVs, or they had solar panels on their roofs already. They were like, at that point, all right, I'm gonna pop for the battery and pair that up with the battery, and I'm gonna make it through the next winter storm or hurricane or whatever's gonna come along. 

And so I knew that number, the number of those types of resources was growing out there. And I wanted to figure out a way, all right, how does our market begin to co-optimize that pool of resources within the system. And so that was the ADER pilot. That was the driving force behind allowing Virtual Power Plants or communities with aggregated resources to use technology that they had available to bid into the ERCOT energy markets, namely ancillary markets, which for you laymen out there, that's like our emergency service markets. So the backup power of the system. And sell that into the system at peak need. You know, when need determined that energy would be most valuable. And that's what the system does. It specifically targets not the big batteries or anything like that, but I'm talking about everything below one megawatt. 

And to put it in perspective, one megawatt is a Walmart, or it's a neighborhood of three to six hundred homes. Or it's a water treatment plant with a neighborhood around it. It's all kinds of stuff like that. It is as close as you can get to the ultimate end-use consumer and that's us. And so we did that we set up the system we created the market within a market and now they are selling in to the emergency services and people are making money and now other people are thinking about okay “Maybe this isn't a $70,000 out-of-pocket cost.” “Maybe I can build this or put it on my home and I can have it paid for in a certain amount of time under this market structure.” 

Now ECRS. You talk about ECRS. That is the most flexible emergency service that we have in the system. Okay, that was our newly created stealth fighter if you will of an emergency service. Um, that's the latest and greatest thing we have to deal with a system that is more variable in nature,. Meaning we have to manage a system that has more variable resources like wind and solar. But also higher load growth, and with the loads, meaning the consumers are doing more things that changes their patterns over time. So ECRS is designed to be there no matter what. And now that ECRS is open to the Virtual Power Plants they are perfect to meet that need because they can dispatch almost instantaneously. They are extremely flexible in an environment where flexibility is the watchword of the day and the thing that should be most valued. And ultimately, when we have a winter storm come through, these guys are going to be a valuable component in shoring up the system in the face of it.

Doug Lewin

Yeah, totally agree. So very related to that. And I'm interested in, you know, what you think the potential of demand response. So demand response can be storage, of course, but let's also talk about, storage is injecting power into the grid. What about actually removing the demand? So I think in my understanding, well, at this point in the pilot, there isn't any reductions, there's no like aggregation of thermostats or electric hot water heaters, is that correct or?

Will McAdams

So it is because we were first and foremost focused on because we hadn't done this before Doug in terms of injecting power into the system. So you had to learn because again, the whole point of the pilot and the reason we have it as a pilot is it's a sandbox for experimentation. But we wanted to see what the injection and dispatch looked like. But the pilot is an insert within a rarely used and not well-known program, which is the aggregated load response program inside of ERCOT. And so the ALR program can already pay loads to turn themselves off and all kinds of loads, like aggregations of small loads can start to reduce their demand at key times.

When the pilot continues to move forward, we can start to co-optimize both the dispatch of the resources in the pilot, and also to incentivize and send the market signal that the aggregations of these smaller demand response pools can be valued and compensated. So I think that is in the future phase of the pilot to send a more targeted market signal for the bundled demand response to be paid.

Doug Lewin

No, that makes a lot of sense. So the learnings that happen within this VPP pilot can help to kind of extend that ALR, which to my understanding is mostly used for the bigger stuff now: Bitcoin mines and steel mills, stuff like that. But there's nothing, there's, I was gonna say there's nothing stopping the smaller ones from getting in. What is stopping it is, lack of market signal, lack of experience, and the VPP pilot is bringing those things forward so that the ALR can be sort of expanded to include more of these smaller resources.

Will McAdams

Well, and I'll tell you what this pilot does, Doug, is it sends a value signal to create a business case for the retail electric providers to actually develop the technologies needed to telemetrically control both the dispatch of resources into the system and the demand response needed to turn consumption down into the system. And once that is certified by ERCOT, then they can back bundle the demand response together and actually provide a value stream to the end-use consumer. To date, we have not had that. With the pilot, we now have that signal.

Doug Lewin

So I wanna put a finer point on this just to make sure, cause this can get a little bit esoteric to those that maybe aren't involved in this, or even those that are involved in the market, but maybe don't work on these kinds of issues as much. What we're talking about here as customers getting paid, if they volunteer, if they want to, right? If they come forward and say, I want solar and storage, or I would like to participate in a program where my electric hot water heater, my pool pump, my refrigerator, my thermostat is reduced at certain times. I can actually get paid for that if I choose. So there's the affordability piece here, bringing down the cost of energy, bringing down the cost of new technologies. 

And there's the reliability piece, right? Which is if I'm somebody, I'm a Texan who says, I don't want any part of this. I don't want to deal with solar panels on my roof. I don't want anybody ever touching my thermostat. That's fine. If your neighbor or somebody down the street does. You're affordability gets better because the overall system cost is going down because we have more resources, more competition, and the reliability of the system is going up as well. 

I was struck by an exchange you had with Woody Rickerson, the COO of ERCOT. This is September 14th. It was just after we had been through 11 conservation calls over the summer, just eight days after there was an emergency alert and we were very close to having rolling outages.

Will McAdams 

Yeah.

Doug Lewin

Yeah, and September 6th and you asked him, you said, is this the future? Meaning all these conservation calls and emergencies. And he said, yes. And I thought that was particularly striking because I think it's a possible future. Yes, we could have every summer where we have a bunch of conservation calls and emergencies, there is another future that's possible, which is a whole lot of people have devices, they're being orchestrated in a, in a coherent way. People are being paid and they're getting the bill credits, but they aren't hearing conservation alerts and emergency alerts. Am I being too overly optimistic or is that a possible future?

Will McAdams

No, but I gotta tell you, so one thing the Army taught me to do is be a natural pessimist, and so to plan for the worst possible contingencies. And do you want me to scare you a little bit? So in my last briefing with the Speaker of the House before I left the state government, I said, I'm getting out of energy, I wanna go to construction, I'm sick of it.

It's too bare-knuckle of an industry. And he said, well, where's all this headed, Will? And I said, look, this is gonna get sorted out, this energy trajectory that we're on. But what's gonna sort it out is pure unmitigated volatility. And that's because we knew that the economy was taking off. We knew that load growth was there. We didn't know to what degree, and we still don't, because every system in the country is trying to figure that out. We knew that the resource mix was becoming more variable, but it was also bringing down costs, as you have pointed out, 90% of the time. It's just that 10% really gets you, because it comes at unpredictable moments. But ultimately, where I was going with the statement, and I said, ultimately, cost volatility will drive consumers and the market to answer this question and they will begin to actively engage in the market to provide solutions that will bring down these costs over the mid and long term. And we will have a more reliable and more resilient system as a result of it. But nobody's gonna get off their hind end and go and invest in that. On a hypothetical, frankly, they're gonna have to see it. And I think we're seeing that now.

And ERCOT is not the only system. I work with other systems and they and will continue to do so and they are experiencing the same thing. We are just on the leading edge and I will say it's because our load growth is that much more than theirs is right now. But they see the beginnings of their load growth beginning to take off and it's taking off during the winter season for which no system in the country is designed for including the northern systems and that's changing the planning calculations on the part of the grid administrators.

Doug Lewin

So your contention is that there's going to be a lot of volatility going forward and it's the demand, tell me if I'm putting words in your mouth there, and the demand side resources that customers are bringing to the table themselves are gonna be a major solution.

Will McAdams 

It’s the near-term answer.

Doug Lewin

 Near term, is there a longer term or you're just not sure what the longer term is?

Will McAdams

And that's where the palette comes in. It's that more aggregated dispatch of power. Because again the sun's gonna set unequally over time because again, it's setting over the arc Those electric vehicles will begin their charging patterns at different times because of the setting of the sun or when they're getting off work. Because of time zones any number of permutations will change the load profile on a regional basis. 

And therefore the closer to the loads that you have enough disparate resources, dispatching will satisfy their needs. It'll be a more co-optimized system. And I know I'm using a lot of big words that are common speak in our world, but bottom line is the grid will manage itself better because we'll have more options. And the market will provide those options.

Doug Lewin 

Yeah, if there's a market, which we'll get to in a minute, what that market looks like and what that market structure is and if it's properly incentivized from these different resources. So we'll get there in a minute. But before we go there, you've talked often about the bigger challenge that is reflected in winter. You were just talking about it just a minute ago.

Will McAdams

Sure.

Doug Lewin

I wanna talk a little bit about one of the things that is driving the winter problems. This is something I talk about a lot. It won't be a surprise to you I'm bringing it up, but it is the sort of inefficiency that we have built into our system, particularly from resistance heat, from really inefficient heat, which according to the Department of Energy, we have resistance heat, which for those who don't know, and I've talked about this a lot and written about it a lot, but it's basically the technology of a toaster oven or a hairdryer, but sized for an entire home. We're still building homes that have resistance heat strip heating. It's called a lot of different things, baseboard strip heating, resistance heating, but it is very inefficient. It's in three and a half million homes in Texas. I just heard a presentation just last week, Will, it was at a symposium at the University of Texas.

Will McAdams

Terrific.

Doug Lewin

Some researchers there were doing some looking back at Uri. Of course, we don't know how much demand was during Winter Storm Uri. ERCOT estimates it was 77 gigawatts. I had heard an estimate from Texas A&M that was published that said 82 gigawatts. This team of researchers at UT believes it was 87 gigawatts during Uri driven by extremely inefficient heat and poorly insulated homes.

You talked about when you went to the Senate for a hearing in the summer of 2021, you talked about the need to look at energy efficiency programs and the like. We have done, there have been some increases in the energy efficiency programs to demand response. There's the VPP pilot. There's a lot of things to point to where progress has been made, but energy efficiency, as far as I can tell, and you may have a different view of things, we haven't made any progress on energy efficiency. The programs are still as they were three years ago. Why is that and what needs to be done there?

Will McAdams

So, all right, one of the conditions, and everybody needs to know about this, in PURA, the Public Utility Regulatory Act, the conditions upon which the PUC can set energy efficiency standards are pretty restrictive in terms of building an energy efficiency program that our regulated utilities manage. It's very stringent and prescriptive in the statute. 

This is one of the reasons, you know, when I first looked at this, you know, one of the virtues or features of being the first at the Commission, you kind of get to pick what you work on first, and that's why I focused on the VPP programs because, one, I saw the sense of urgency associated with it, and then, two, I had more flexibility to do things within the ERCOT market as a PUC commissioner, then I could as a PUC commissioner related to energy efficiency, and that's because the statute was so restrictive about what we could do and how we could do it. And so I would recommend that the legislature does need to look at the energy efficiency statutes, determine what actual powers the PUC has to create standards, what our targets for the standards are, where those costs to pay for those standards can be levied. 

But ultimately, absolutely, that is a midterm and long-term essential goal for the system because you have to smooth out the trajectory of demand growth and energy efficiency is that breaking mechanism because it's a difference between climbing a hill and climbing the altitude like an F35 fighter.

You do not want that steep of a curve. You want to flatten out that curve to make our infrastructure planning processes more achievable and orderly, and to prevent cost shock within the wholesale market to the rest of the system. That's what you're trying to prevent, and that's what energy efficiency provides you. We just didn't get to it over the last three years because again, we were trying to one, stabilize the ship, and then two, guide it around several icebergs within this ice field and keep moving forward.

Doug Lewin

Yeah, you guys obviously had a ton on your plate. I will point out the legislature during the 2023 session, there was a bill that passed the Senate. It did not pass the House, but that would have required a 5X increase in energy efficiency. So huge credit to the Senate for getting that done. And hopefully next time the House will push it through too. But there was a bill that did pass the House and the Senate, Senate Bill 1699. It was related to DERs.

Will McAdams

That's right.

Doug Lewin 

And it had a provision in there on energy efficiency and demand response. And I'm reading from it. “The commission by rule shall establish goals in the ERCOT power region to reduce the average total residential load.” So that is utilities code 39.919. So that's there that, and it does say shall. So hopefully, um, your successors and the current commission will, will take that up during this year, cause I think that's right. I think that's a good analogy, the difference between a climb of a you know, what did you say of an F35 or F15 or whatever it is versus a nice gradual, um, kind of a slope energy efficiency can provide that. Yeah. So, and we, look, we saw that during, go ahead…

Will McAdams

Yeah. It never ends. It's a- Well, so I have another recommendation on that front. One of the things that needs to be looked at is, look, the federal government just passed a, appropriated a lot of money in the Inflation Reduction Act. There is a lot of money out there for appliances that increase energy efficiency. That program is supposed to be administered by the State Energy Conservation Office. Okay, so they're supposed to find homes for this money to help people purchase appliances to bring down their energy costs and increases and manage their energy consumption. The PUC goal should be somewhat, somehow, tied to that effort, because you establish a goal, but you have to figure out how to meet the goal. Well, that is at least an existing mechanism with resources that allow you to try to meet that goal. So there needs to be a synchronized effort on the part of the state. It's not just the PUC, and that's what I'm saying, because we can be as much as of a toothless tiger as any other agency unless there's some type of way to operationalize to meet the goal.

Doug Lewin

Yeah, 1000% the funds that are coming to the state, it's $690 million over five years. There's two different programs, HOMES and HEEHRA, and those are designed for folks… so just so the public is aware, and I'll put some links in the show notes so people can find out about this. There are tax credits. This was an existing statute, but it was very limited. It was like a $500 limit tax credit for energy efficiency.

That's up to, and again, I'll put it in the show notes. So I'm not an accountant. Go to your accountant for tax advice, but it's something like $3,000 a year, and it can be repeated year after year. So you can actually continue to get this. That is part of it. What the 690 million for is for the roughly 40 to 50% of the population that does not have a tax liability, because those are tax credits. So if you don't have a liability, you can't get the credit.

This money is supposed to help folks that don't have a tax liability. So that is coming to the state. The state will have a lot of discretion and leeway over how to focus those funds. And if the state energy conservation office and the comptroller and the PUC all get together and focus this on HVAC and insulation, it could have not only a great impact for the people that use those funds and lower their energy bills, but also for everybody in the state to increase reliability to decrease the probability of outages.

Will McAdams

And Doug, let me pile on to that to an extent that heat pumps, you brought up heat pumps, all right? The term heat pump terrifies me as a regulator, and I'll tell you why. Because we talk about strip heating. I was talking with Jim Robb with NERC and TEPRI. And 90% of the heat pumps that you will find in Home Depot or Lowe's are not variable cycle heat pumps. They are not the efficient heat pumps that we need to get in people's hands. They are heat pumps that are essentially strip heaters. The exact heating system that we want to try to avoid on the system is what is being marketed out there as a heat pump. But that's the type of load that will cause a reliability crisis. That's the type of load that will keep us in rotating outages for days on end. And that's what every system around the country is seeing is load growth, demand growth during winter months. And it's because people are buying the wrong kind of equipment at these stores and installing them. And that's the kind of stuff that the SECO program could help assist with and get those appliances in the hands of lower income folks who need to be using that to normalize their consumption and reduce cost and help the system. But we have to have some type of coordinated strategy and you've been preaching on that for a while, but we need it.

Doug Lewin

Yeah, that really I think is the role where the energy efficiency programs that the PUC oversees through the utilities, the SECO programs that are coming from these federal funds, that's the role of the incentive. Because I get asked this a lot, why can't the market solve this? These are such great technologies. They save people so much money. Why can't the market take care of it? Because when you have something break at your home – which I've had happen in a Texas summer, not a pleasant experience – you take what they have. You take what they have, right? So the role of incentives is to bridge that gap. So a consumer that is in trouble and needs that solution quickly has actually the option. You make sure that the stores are carrying the higher efficiency stuff and you make sure that the difference in the cost is negligible or even zero.

So it's very easy for the customer, instead of putting in the very inefficient equipment that is gonna make the grid reliability problems worse, you bridge that gap so that they're putting in the higher efficiency equipment that's going to increase our reliability. 

So yeah, hopefully there's a lot more to come on that. I think you're exactly right that the coordination between SECO and the Comptroller's Office and the PUC is going to be incredibly important in 2024. 

All right, so let's shift gears just a little bit because I definitely, you know, you mentioned, we started this conversation by you saying your, I believe it was your first job at the Legislature was with Troy Frazier. Is that right in the Senate? So you were kind of, you know, you started off some of your formative experiences with a guy who was a big advocate for competitive markets, for the energy only market. Let's talk about different, and you obviously over the last 14, 15 years, Will, I admire you so much. I think you are a person that has, I don't know if this comes from military background or just your nature or whatever. I've listened to you talk a lot when you're on the dais. You question your own assumptions. You're obviously, somebody that tries to talk to a lot of different people, get a lot of different perspectives. You have looked at a lot of different markets. You've obviously been active in SPP at your time on the commission, but I've heard you talk eloquently about MISO and PJM. Even I've heard you bring up Australia a bunch of different times. Can you talk about markets and their evolution and where they're heading? We have an energy only market still mostly, though it's...

Will McAdams

Mm-hmm.

Doug Lewin

…a little bit in doubt if that's even what we actually have right now. What in your mind, I'm just going to, I could ask a question here, but I'm just going to just share your thoughts on markets and what you think the evolution of them is, where are they headed?

Will McAdams (56:16.33)

Yeah, so I had a role in killing capacity in Texas in 2013. I helped organize a hearing of the State Senate that questioned capacity in Texas. And this was when we were really debating, the Commission was debating whether to just unilaterally move from an energy only market design to a capacity market.

And in 2021, I was wondering, okay, did we really screw up? Did we not move quickly enough to capacity? Even though we have aspects of capacity in Texas, our ancillary services, our capacity, a form of it. The methodology that we produce for ancillary services determine forward capacity values in inside markets. And so in my experience as a Commissioner when I got to see the other systems around the country and I work with SPP, Southwest Power Pool, and to put in perspective, SPP, if you're looking for the most traditional power system in the world or in the country, that's Southwest Power Pool. That's made up of 16 vertically integrated utility monopolies that have all three tiers of the supply chain from the power production to the transmission and distribution delivery of the electrons to the servicing of the actual consumers, you know, so the retail end of it. Those are vertically integrated monopolie.s And so if there's any system that is regulated, fully regulated, in the world that can manage through this energy transition that's Southwest Power Pool and then on the other extreme you have ERCOT which is completely deregulated and everybody keeps wondering if we're gonna make this thing work. 

But over the last three years, two years, nine months, or eight months, so I looked at PJM, I looked at their capacity monitoring, and capacity is excellent for retaining generation. Okay, it is excellent for propping up previously installed plants. Now the question is, will it pay to install anything new? The replacement values, because eventually any piece of machinery, any piece of metal, is going to break off, shear off, rust, burst into flames, meltdown, it will go away. And the question is, is the capacity value enough to install something new? And in PJM, they did do it for a finite amount of time, and that was after the shale revolution. The Marcellus shale is a captive shale play in the heart of PJM. Much of the energy value is predicated, in electricity, is predicated upon the value of natural gas and when you have captive natural gas that is going to be rock bottom cheap, you're going to get new power generation built over top of that. Oh, and they might get a side payment of a capacity payment. And that's what happened for the last 10 years. They built some new power plants, but at the same time, they lost just as many power plants as they were building new. 

And at the same time, their load began to take off just like ERCOT’S did. So they're experiencing load growth and they are not building enough new to support the load growth. So it's the same problem that every other system in the country is facing. So is capacity the answer? My view is it's not the whole answer. It may be a component and that's why I had more of a nuanced view on the performance credit mechanism discussion at the commission. I wanna make it work, tried to make it work.

SPP is talking about how to make it work as well right now. But it isn't an all-in. In my view, it wasn't an all-in capacity construct. It was another adder that would actually pay people to perform or pay them if they in fact did perform during times of high risk and system need. And it was, again, a market-driven approach to entice you to dispatch an electron, to take the risk and dispatch an electron into the system.

The jury is still out on what the best market design is. And again, that's why I don't want to put my eggs all in the basket of big power resources that are being installed at transmission. I want to get down closer to the consumer because what I do know is that technology has vastly improved since the 1970s. The computational power of our country, of our world, has increased the ability to co-optimize the system in a truly co-optimized sense to be able to dispatch the appropriate resource at the appropriate time on a millisecond basis is right at our fingertips. And that means that we can have more smaller resources working together rather than a big fleet of huge power plants across the state that basically incentivize the overbuilding of the system, inefficiently committing capital on long-term projects. I believe that's not the way we need to go. I think I might get outvoted today, but I think I'll be proven right in the future.

Doug Lewin

You said you wanted to make the Performance Credit Mechanism work. It's obviously, it had some, famously, some guard rails put on it by the legislature, namely a $1 billion net cost cap. I don't know, in your view, can it work? Or, I mean, it's not going to happen in the next couple of years. It would have to be after RTC, right? Real-time co-optimization, which is for those that aren't following this, a big system-wide upgrade to ERCOT that will solve, by itself, solve a lot of the problems. There's no one thing that's gonna solve everything, but real-time co-optimization will solve a lot of the problems that are existing in the system now. But I think it's gotta wait that long. I don't know, is PCM, could it actually work?

Will McAdams

I think it could work in concert with the rest of the statutory framework that they put in. And I told the governor as such, I said that even with the cost cap, the cost cap constrains the PCM. However, it’s working in concert with the ancillary services, and I asked ERCOT point blank, if we had PCM tomorrow, would you still need that amount, or the suite, of ancillary services that we're developing? And would you need a fairly robust procurement of ancillary services such as we have today? And they said yes. And the reason they need that is because they need enough behind the house capability, behind the house resources, sitting on the sideline ready to go, when wind may drop off or to cope through the solar ramp or to account for the single largest contingency, which we always have, to be flexible about to meet that challenge.

Doug Lewin

Which is nuclear, which is nuclear. Yeah, which is nuclear by the way, right? And it's not that there's anything wrong with nuclear, it just happens, there's a lot right with nuclear, it just happens to be the largest one on the system. 

Will McAdams

Yeah. It's a lot of eggs in one basket. That's right. And so they need a big old suite of ancillary services to cope with that so when people were talking about PCM can do all of this… Yeah, they it's gonna be doing all of this plus you're gonna be carrying the ancillary services So a 1 billion dollar cap essentially makes PCM live with the ancillaries which it was gonna have to anyway.

And so you need to co-optimize the system. Real-time co-optimization does that. It hopefully will produce a more realistic picture of how much ancillaries we need to carry on a day-to-day basis to cope for contingencies and variability of the resource mix. And then a PCM adder is gonna be on top of that, along with on top of an ORDC adder that gives you that value signal that you need to be there.

You need to lay on that gas in advance. You need to deal with energy transfer or any other pipeline operator to have that gas contract. And you need to perform during that high risk hour because we don't necessarily know when that's gonna be. So we're gonna do this on a settlement basis and you make sure that you're performed and you're gonna get paid. And you're gonna do very well that year.

Doug Lewin

Yeah, we could do a whole hour on PCM, but I'll restrain myself. 

Will McAdams

I know.

Doug Lewin

So I do just wanna ask you, I don't wanna spend a lot of time on this, but I think it's important to ask you this question. And in 2021, yeah, when you were first appointed, you had an idea for dispatchable energy credits. I liked that idea at the time. And I actually think that PCM seems to be sort of morphing into something that sounded like dispatchable energy credits. Like the idea that, but for that to work, doesn't it have to be technology neutral? Doesn't it have to be if you are, no, it does not. Okay, go on.

Will McAdams

Oh. No, no, I didn't say no. I said, oh, so that's true. It can be either. A deck is proportioned, again, not to be the all-in capacity payment. So it can be targeted. But if you want it to not produce a competitive advantage, for any particular resource because that's what it does, it pumps money toward a subset of the market which will skew, and I conceded this when I laid it out, this may have the effect of skewing bids into the dispatch engine of the system. But I rationalize that and I'll admit, look, I've worked in politics long enough, I can rationalize anything if I try hard enough, that we already have production tax credits that are skewing the bids of wind generation and now solar generation, and frankly now batteries to some degree. 

But my point is we already have some skewing of the market because of subsidies. And so I figured, well, you might as well just subsidize the only one thing that doesn't have a direct subsidy from ERCOT. And I understand that there's arguments that gas is subsidized and so I won't get into that. But if you wanted to, PCM is a deck, ultimately, with a one billion dollar cap for all resources that perform.

So that's essentially what it does. And I said that at the time, and I thought that was the irony of where Chairman Lake kind of went, because the more it went toward establishing a clear resource adequacy equilibrium point, the more it went toward allowing demand response to be able to recover PCMs.

I'm like, man, this is starting to sound more like a deck every day. And, and I'm okay with that.

Doug Lewin

Yeah, yeah. It's gonna be really interesting to watch as that concept of PCM continues to evolve and be discussed. I think the trick here is, and I think you kind of alluded to this when you talk about ancillary services, we say energy only. It was probably a misnomer from the beginning. Of course, there is some amount of capacity that is procured. You can't have a system that doesn't have some of that. And the question, I talked about this a lot, the folks after Uri, it's like it's not binary. A hundred or zero, on/off, black/white, it's a, it's a dial. It's kind of a, you know, a dial that you're going to turn up or turn down. And I think the trick is to not turn the dial so far towards capacity that you lose that competitive market signal that you do let stuff that needs to retire because it's not reliable and it's old and let it go, but also have enough of a signal that brings in resources that are available at the times of highest need.

Will McAdams 

Absolutely.

Doug Lewin

So that's the trick. It may be easy to describe that problem. It's really hard to solve it. And that's, I think, what everybody in the market is kind of dealing with right now.

Will McAdams

Yeah, I mean, it requires a certain amount of faith in markets. And Sam Newell really got after me in the early days of our market design discussions, because he accused me of not having faith in markets. And I think it was around the debt conversation. And I'm like, oh, Sam, let's not get religious about this. You know, but I do believe in markets. And I believe they're the only way to solve this and to help us transition.

But I have it at a high level.

Doug Lewin

Well, here, yeah, yeah. I mean, here's the thing about this, because I'm certainly not religious about this. I believe that there are times, there are many things for which I think markets are not well-suited. That's my view of the world. I think for electricity, it happens to be really, really well-suited. I think markets work quite well here, but as with any market, you have to have the signal for the things that you need. And that's the question right now, is the signal getting.

Will McAdams

Well, especially with the degree of sophisticated technology that we have in the energy space. Since 1974, the world has been focused on one thing, and that has been solving for a sustainable supply of energy to meet our needs. And we have the capabilities. We have to allow a market to dictate where those capabilities are deployed and employed. And that's why deregulation happened in the late 90s. And it didn't just happen in Texas, it happened everywhere. And now everybody wants to try to talk about, okay, well how would we put the toothpaste inside of the bottle? I don't know how you'd do it. I don't know.

Doug Lewin

I mean, I guess you could, but it would be enormously expensive and it wouldn't get to the outcomes I think anybody's looking for. I think one of the key things that markets have going forward is if you do the flip side and you say, okay, what else are we gonna do? We're gonna completely regulate, it's gonna be command and control. Humans with all their problems are gonna decide this is what should happen. There's too much dynamism out there right now, right? There's too much happening. Technology is moving…

Will McAdams

Right.

Doug Lewin

…faster than humans can keep up with. So that's why you want markets to be able to kind of skate to where that puck is going, if you will, right? I don't think, yeah.

Will McAdams 

But an even scarier thought is like, okay, let's allow AI to do this. Let's turn it over to artificial intelligence. One of my points in coming on here is, so Winter Storm Elliott blew through the country last Christmas, not this last Christmas, Christmas before last. And Tennessee Valley Authority went into load shed for the first time in 60 years. And they did so because

of a number of things, but chief among them was they missed their load forecast. And so did PJM, and so did ERCOT, and so did SPP, and so did every other system in the country that was affected by that storm. And they missed their load forecast from anywhere from by a magnitude of 10% to 30 to 35%. Okay? There were huge misses all over the country. That's the kind of data that will be inputted into artificial intelligence if they were monolith of the electric grid of the future. Okay, so AI is only as good as the data being inputted into it and we're really bad at load forecasting. And so I recommend allowing the markets to gauge where we're at right now because like I said you're picking your way through an ice field and that iceberg is really big that's just below the surface so you better be careful.

Doug Lewin

And whatever kind of capacity market you have, you have to be able to do that. That load forecasting piece is huge. And yeah, right. And, and the ability for folks to get that right seems to your point to not be very great. That that was, that is, this is another thing I talk about a lot. That was a recommendation out of the FERC and NERC report was that the balancing authorities like, you know, for example, ERCOT need to get better at forecasting demand that miss in ERCOT was 23%.

Will McAdams

It's critical.

Doug Lewin

So you've mentioned that range of 10 to 30. It was on the higher end of that range in ERCOT. And it'll be interesting to see what happens in the coming weeks we're recording on January the 9th, but in the next week or two as this cold front moves through. I think that those demand forecast misses are happening because of resistance heat. They still don't understand. Yeah, yeah. 

One other question, a little bit of a pivot here, but I wanted to ask you about this too. I was going back in preparation for this interview and looking back on, obviously, as I've quoted you a few times, looking back on that first year as you were sort of getting adjusted to the commission and in this sort of post-Uuri reality, you said in November, 2021, you were referring to the conference of parties, the climate conference that...

that was meeting at that time, that there were gonna be trillions of dollars of global capital deployed. And you said, Texas will be a great destination for that capital. At the time, you said, we might see, this is really amazing, November, 2021, you said, we might see 20 to 30 gigawatts of solar eventually. Two years later, we've already crossed about 22 gigawatts, according to the number from ERCOT just a couple days ago. So will you talk a little bit about…

Will McAdams

That's right.

Doug Lewin

…Texas and what the opportunity in whatever this thing that's happening right now, some call it an energy transition, some call it an energy expansion. There's lots of different words that can go on, but something is happening. There is a lot, a lot, a lot of global capital right now going into, speaking of markets and market dynamism, a lot going into, quote unquote, clean energy. In your opinion, is Texas still set up?

Is it better or worse than a couple years ago? What's the trend line? Is Texas a destination for that kind of economic growth?

Will McAdams

Texas, just like my ADER pilot program, is the best sandbox on the planet to test whether this energy transition is gonna work for the betterment of our people or not. And that's a great question right now. That's a historic question. But as a result, we will have capital deployed on both the load side and the resource side.

And so at the same time, we saw 20 gigawatts of solar deployed in the system, or certainly another 11, and then we'll have 20 by the end of, or probably going in the next summer. So that total of 30. 

We've doubled our battery capacity. We will double it again very soon. And batteries are right at home in what's going on right now. It has been an invaluable resource and will be a critical resource managing through the seasons that we're soon to see with the amount of load growth patterns that we have today. And so every energy company in the world is either looking at Texas or has invested capital in Texas to some degree. And it's all in how we co-optimize the system. I'm not talking about real-time co-optimization. I'm talking about how the market co-optimizes the system. 

And we're proving out a lot of lessons that everybody else is learning from. This PCM concept is being analyzed in SPP. It's being looked at by other systems, but it's again more in the deck fashion than the forward long-term LSCRO or forward capacity market fashion And so we're cracking the code on some innovative stuff. We've done it on weatherization. We're gonna do it on other approaches. 

Now, ERCOT staff may be uncomfortable with that from time to time. PUC staff may be uncomfortable with that from time to time. Because again, it's a matter of faith. You're letting other people sort of control what happens to you. And that's an uncomfortable situation.

But that's the only way we're gonna make it through this. And the market will solve for it.

Doug Lewin 

It is uncomfortable. But I think that the alternative again, will get much more uncomfortable for Texans. Because otherwise it's an illusion of control, right? 

Will McAdams

That's right.

Doug Lewin

I'm all for focusing on what you can control in life. I named my company Stoic Energy. I love the Stoics and focus on what you could control. But you have to be clear-eyed about what you can actually control. And as a government agency, it's really hard to steer billions of dollars in global capital. They're, you know.

Will McAdams

Efficiently? Absolutely not. I mean, and then you create a crony capitalist apparatus that will produce undesirable outcomes. Matter of fact, you will bumble into the outcome that you most wanted to avoid, and it'll happen to you sooner than it otherwise would have. And that's what we've got to avoid with our policymaking.

Doug Lewin 

Yeah, it’s gotta be like shaping, guiding, steering, not commanding and controlling, right? 

Will McAdams

That's right.

Doug Lewin

Yeah. All right. Well, I want to just end with these couple questions I sent you in advance to think about. None of those other questions I sent you in advance, but a couple of these I did because I wanted to get your thoughts on these. Let's start with this one. What are the two to three energy policies you think would have the biggest impact to increase reliability, lower costs, and/or reduce pollution?

Will McAdams

This will be fast. I covered a couple of these in our exchanges, but one allow broad-based and large-scale bidding of Virtual Power Plants into the current suite of ancillary services, especially ECRF since it is so well suited for that specific service and allow them to carry a larger percentage of what, as I said, is being kept behind the house. Okay, those electrons that we know are there, they can be dispatched. But eventually, what I hope to see and what that policy would allow is an overbuilding and scaling of the amount of EPPs that are out there that eventually will start to engage with our energy markets. And if they engage with our energy markets, then the ancillaries will not nearly be as necessary.

And that will accomplish greater reliability and, as a secondary approach, it'll accomplish greater resiliency. And it'll ultimately bring down wholesale costs and I would point out that it would behave very similarly for the system just like wind did. Okay when we went from two gigawatts of wind at the beginning of the last decade to five gigawatts of wind and like I said for ninety percent of the hours of the year that keeps prices rock bottom. If you have enough Virtual Power Plants out there that are engaging with the system, it would reduce costs for the rest of the system. It would make our manufacturers and industrials that much more competitive on a global scale, causing business to continue to grow in Texas. So I think that's, we're at first base of a long run around the field, and that's something that could be done immediately.

Second, again, I think we should consider socializing distribution costs throughout the system. Again, normalizing the standard between transmission cost allocation and distribution cost allocation because the technology has evolved to a point to where it provides the same benefits, the resources, the capabilities at distribution, especially after transportation electrification does continue to materialize on the system.

The capabilities of distribution will support the entire system, not just the Houston area and not just the city of Austin. In that way, the entire system can lean on itself and not compartmentalize the cost along the consumer classes of our least fortunate. And so I think that should be taken up in the next three years.

And ultimately, the industrials, who will pay more of the costs associated with that normalization of allocation ,will experience the benefit and continue to grow for the reasons I said in regards to Virtual Power Plants. It's a fairness issue.

Doug Lewin 

Yep, yep, that's a huge one. Those are both huge ones. What, so I think you've talked about this a lot, so you don't need to go deep on this one, because I think most of the conversation is kind of focused on this, but what will the grid look like in 10 years, and how is it different for consumers? A lot of VPPs, a lot of participation, a lot of chance to earn, all that. Is there anything else you wanna say about that particular question?

Will McAdams 

Yeah, now there's a lot more chance for them to engage, and I think they will have every reason to engage, because in the near term, costs will go up. They will go up just like they did when deregulation happened, costs went up, because you had to pay for stranded costs, you had to normalize the way the market was behaving within itself. But ultimately, I think what the systems start to look like over the next 10 and 20 years, is again, I think the grid planners start behaving more on an islanded basis. Islands connected by large-scale infrastructure like CREZ, large-scale transmission highways carrying power from more remote regions where renewables are plentiful to the load centers, to the Port of Houston industrial heavy areas like that. But ultimately, those regions closest to the loads would be self-supported through a more disparate and aggregated system of smaller resources like small modular reactors, or VPPs, or DGRs, distributed generation resources, or SODG, standalone distributed generation resources. And so it's a more co-optimized system, but it's more islanded for grid planning purposes. And that's the way everybody sort of will start building themselves back out.

And ultimately we get to a point where we can start Interconnecting those zones just like we did, you know in the last century, but it's going to take a while to get

Doug Lewin

Yeah, it's a really compelling vision for the future of the grid. I think if it's right with you, we'll leave it there. Will McAdams, thank you very much for being on the Energy Capital Podcast.

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