"The Name of the Game is Flexibility," a Conversation with ERCOT's Pablo Vegas

In this episode of the Energy Capital Podcast, I had the opportunity to speak with Pablo Vegas, the President and CEO of ERCOT.

There was a time when very few Texans knew what ERCOT was or what it did. Those days are long gone. Texans pay close attention to the grid following Winter Storm Uri and the ensuing outages. And the 13 conservation calls over the last nine months or so have kept ERCOT very top of mind.

Vegas joined ERCOT in October 2022. Previously, he worked with NiSource, an electric and gas utility in Ohio, before returning back to Texas. From 2008 to 2010, Vegas headed AEP Texas, a regulated poles and wires utility serving Corpus Christi, Laredo, and large swaths of South and West Texas.

There are likely few jobs as complex and as difficult as leading ERCOT. The problems facing ERCOT are enormous and incredibly complicated. We dived into many of them. Without a doubt, Pablo is thoughtful and open-minded, two of the most important qualities in any leader. He shared his thoughts on a wide range of topics, the need for more flexible resources, the need for more transmission, the challenges and the benefits of renewable energy, and the role of storage, which he called one of the most innovative changes to energy since the invention of the electric grid.

Vegas sees a lot of distributed resources — sources of power located at homes and buildings — as one of the defining features of the grid of the future. He was particularly engaged and animated on the issue of the demand side, the need for energy efficiency and demand response, as well as distributed solar and storage. Vegas talked about the need to address inefficient heat and also the potential of what he calls “active energy efficiency,” the ability to “flex up and flex down” to use more power when there's an abundance and less when there's scarcity.

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If you like the episode, please don’t forget to like, share, and leave a review. Time stamps and a transcript are below. I look forward to hearing your thoughts on the episode in the comments section.

Timestamps

03:12 – How Vegas thinks distributed energy resources (DERs) will define and transform the grid of the future

7:46 – What will ERCOT’s role be in managing DERs?

10:48 – The role of a Distribution System Operator (DSO)

14:02 – Energy efficiency: tackling traditional the “low-hanging fruit” in Texas

15:03 – Expanding from passive energy efficiency to active energy efficiency

21:28 – Conservation calls vs demand response

26:46 – Ways to align retail market incentives with grid needs, including time-of-use rates

30:44 – The potential need to change four coincident peak (4CP) pricing

34:07 – How the environment, market, and economy determines energy supply and demand

41:20 – The need for more transmission, including discussion of the transmission issues on September 6, 2023?

46:45 – What are the solutions to transmission issues and how does system planning need to change given massive new loads like data centers?

52:11 – Is the Performance Credit Mechanism (PCM) necessary?

59:26 – The value of flexibility; achieving emissions reductions while maintaining reliability

1:02:44 – Would “firming” requirements potentially backfire by pulling resources out of the market and raise consumer costs?

1:06:55 – Should Texas interconnect ERCOT with other grids?

Show Notes

The Future is Distributed

Texas Grid Roundup, February 16, 2024

Why is the Smart Grid So Dumb? by Travis Kavulla

Transcript

Doug Lewin

Pablo Vegas, thank you so much for being on the Energy Capital Podcast. Really appreciate it.

Pablo Vegas

Great to be here with you, Doug. 

Doug Lewin

Why don't we start with something just kind of high level here? I'd like to just ask you, what is your vision for the grid? Not like in one year, two years, but a little long and then not, you know, a generation out, but let's say like a five to ten year window. And how do we increase both reliability and affordability kind of in that timeframe.

Pablo Vegas 

Yeah, I love that question because it's really where I try to spend as much time as I can keeping my horizon view on that five to ten year outlook. And I think most CEOs and companies are trying to make sure that while the business of the day is in hand, that they're guiding the business in a direction that makes sense for the organization and for the grid. And I think ERCOT, and you know, I don't know, ERCOT is very different from a lot of grids in the United States, but I think a lot of grid operators are seeing kind of similar opportunities on that five, ten year horizon. And it's a much more interactive electric grid than I think what people have been used to before. 

I think that there's a couple of characteristics of that grid of the future. One is I think that there's a lot more participants in the day-to-day operations of it.

And what I mean by that is not only do I think, of course, traditional resources, generators and customers will continue to grow and expand, but I think the role of what a customer does and how a resource, a generation resource performs is going to continue to change and get more and more granular over time. 

And what I mean by, so to be specific, I see a future where there are distributed generation resources scattered throughout every community that we live in. And those resources will be electric vehicles. They will be the HVAC systems in your house that are connected to a smart internet connected grid thermostat that's connected to the internet. It could be the rooftop solar. It could be a Bloom Energy Bloom Box that's part of a community commercial development.

All of these assets are going to play a role in terms of distributing and utilizing electricity. But what's going to be different about the grid of the future is that the grid operator is going to be interacting with them too. Today, they're all present, but we don't interact with those resources very much today. It's typically kind of behind that distribution substation. And we don't see a lot of that on a day-to-day basis at the grid level. Most of what we can see sits up at that wholesale power, wholesale transmission level, that bulk electric system. And I think the grid of the future is going to get down to that premise level where these resources will be acting and participating in grid activities to the benefit of everybody. I think that's where we start to see improved resiliency and potentially improved reliability because of how we can leverage these resources. I think these resources start to change the economic thresholds or frontiers and the decision making around whether it makes more sense to build a large station kind of sized power plant versus leveraging a lot of distributed resources, those questions start to be analyzed a little bit more seriously. And so you start to get to different economic trajectories because of that. 

So to me, that's what the grid of five to ten years down the road looks like. It's more participative, it's more granular. It engages consumers and businesses in ways that they're not fully engaged today. And because of all of that, I see the opportunity for reliability, resiliency, and for the economics to get better over time.

Doug Lewin

So in that future, and I share that vision with you, I do think we're gonna see a lot more distributed resources. We're seeing them already, right? I mean, it's not like this is solely in the future. It's already starting to happen. In fact, I wrote one of my articles at the Texas Energy and Power Newsletter, I called “The Future is Distributed”, it's happening. The future is starting to be here now. 

The question I have for you on that, Pablo, what… So like you said, you guys work at the wholesale level. You're a transmission system operator. You're talking about very small devices. You're talking about thermostats or a sensor on an electric hot water heater or a pool pump or an electric vehicle, smart charging system in somebody's garage. Do you think that ERCOT will have, and none of us really know, but we're talking about vision, right? A little ways out. Do you see ERCOT actually having a role sort of connecting there or is there some other entity in between, whether the transmission distribution utility or something else altogether?

Pablo Vegas

Well, that's what's really, I think that's what's really cool about ERCOT is that that's probably the answer to that question is probably more of a market driven answer than necessarily a regulatory or policy driven answer. Now, not to say that it's not going to be important. There's not a lot of policy and regulatory considerations in this transition, but what we've seen in ERCOT develop and develop faster than in other grids in the US are competitive and innovative solutions to electric market problems. And that happens because we do have a very open market where virtually, you know, anybody who believes they can offer a great retail alternative or a great supply alternative has an opportunity to prove that and to put their money where their mouth is, invest in the, you know, in the assets and bring it to the market and where they're right, they succeed and they grow. Where they are wrong, they, you know, they pay the economic consequences. 

So I think it'll be largely an economically answered question. If I were to prognosticate today, is ERCOT best positioned to build the technology and the interfaces to get to that level of granularity? I'm not sure that we're wired and structured that way today to do that. And there could be, that could be a whole segmentation that develops in the ERCOT market around how to leverage these very distributed assets in such a way that it becomes simpler for the transmission operator, the distribution operator, and the grid operator to leverage and analyze and model and forecast and plan all of these assets without necessarily it having to be developed by ERCOT. And so I'm not saying that I'm not willing to invest and build the capability if that's the way that it makes the most sense to get there. But because we have such a competitive market I would be surprised if a market competitive player didn't come up with a better widget on how to do this and figure out how to plug it into our ERCOT market and be successful.

Doug Lewin

Yeah, that is really interesting. So yeah, I think ultimately the question there is: who is that distribution system operator? Maybe what I hear you saying is you guys might have a sort of a layer of ERCOT that is interacting with that without actually operating the asset. But there still needs to be, in my view, and a lot of people disagree with this, but I still think there needs to be something, some entity deploying, dispatching these tiny little sources, because otherwise you could get some really negative results, right? Where, like, too many batteries are charging all at once, or too many are deploying all at once. And I'm a big believer in markets. I think there should be some market function there, but there is a policy question as to who is that distribution system operator and what are their roles and responsibilities? So a lot to work out there.

Pablo Vegas

Yeah, I agree with you, Doug. And I think, frankly, I do see it being important for ERCOT to get to a capability where they can see distribution level electric information. So load demand changes at a level below where we are today. I do think that's going to be important. And I think the question is, does that go all the way to the water heater in your house? Do I need to have that as a node on my grid, kind of on my control system where I'm taking direct signals from that? That's a different question, I think. But I do believe you're right. I believe you're right. There's a level of orchestration that happens at the distribution level. That's gonna become really important, especially as we start to get to the same, I'd say, circumstances, and we'll probably talk about this in this conversation, where when a grid starts to get tight, you start to see the seams of that grid in different ways, right? You start to see issues emerge that are challenges that you have to overcome and you have to plan through. And at the distribution level, that's absolutely going to happen as we see more proliferation of distributed resources, right? You're going to, as you start to see electric vehicles filling up garages in residential communities and rooftop solar, the distribution wires and transformers and substations and all of that, are gonna have to expand and grow to accommodate. And where they don't, there's gonna be stresses that are going to emerge and challenges are gonna have to be worked through. 

So I think it's really important to have a holistic view of a grid at the distribution level and the transmission level to try to get ahead of that and to try to be able to anticipate where those problems are going to emerge and then plan in advance so that you don't trip over them.

Doug Lewin

So very related to that because one of the distributed, if you think of it in terms of resources, a resource that can really benefit the grid, both from reliability, resiliency, and even affordability perspective is energy efficiency. And energy efficiency, I think, you've been talking about it a lot lately, which I have noticed and really appreciate. I obviously think it's very important, but I also think the definition of energy efficiency is kind of changing. In a world where there's a lot of hours, where there's a lot of abundant and cheap power, you start to get these curves. I don't think Texas is quite a duck curve, but you've got some kind of curve in the middle of the day where there's a lot of solar. And you want to charge, you want to electrify, right? It's a good thing to bring these cars onto the electric grid. It is more energy efficient to do that. There's not waste from burning gas in internal combustion engines. So all that's good, but how you charge it matters.

Can you talk a little bit about energy efficiency, both as it's traditionally thought about heating and cooling on the residential side, being a big, big driver of a lot of the system stress, but then also kind of, you know, this next evolution of energy efficiency, where it's really kind of, you could think of it as like demand flexibility, where we need to use more at certain times and then less at certain times.

Pablo Vegas

Yeah, yeah, I'd be happy to. And you're right, I am talking about it a lot more because, you know, there's always been, I'd say, you know, kind of three core elements to kind of the traditional grid construct. You've got your supply, you've got your interconnected transmission and distribution system, and then you've got your consumers. And those consumers are, you know, wide and varied, you know, in terms of what they, who they represent. And in order to plan a grid really fully, you have to anticipate and understand the needs of each of those segments over time and as things change. And so as resource mixes change on the supply side, what does that mean to the T&D system? As consumers have more sophistication and start to develop decentralized tools and products, what does that mean? 

And so starting with the kind of the traditional. There's a lot of low hanging fruit out there, Doug. I really believe that there's low hanging fruit in the energy efficiency space that I think we need to be just plucking. And that gets to, you know, resistance heat, resistance heat in there are areas throughout the United States, you know, in the southern hemisphere of the southern portion of the US that there's a massive energy efficiency opportunity around replacing resistance heat with more efficient air sourced type heat pumps. And that's something that I think we need to go after hard.

I believe that to capitalize on the investments around that, which I think will happen because effectively it's going to be more cost efficient and cost effective to replace all of these types of heating units when they fail with something much more efficient. 

But to harness that value, you've got to step into the other traditional part of energy efficiency, which is home insulation. If you don't have a well insulated home, you are still just throwing the dollars out the window, even if you have very efficient appliances. And so you have to couple those two together. They really are two sides of a coin. And I think we've got to invest on both sides of that to maximize the traditional efficiency opportunities at the commercial and at the residential level. And I think that's a big opportunity in Texas. Texas certainly is, they started out strong early on with energy efficiency programs and have recently lagged. And I think there's an opportunity to get back into a leadership position there and there's good value to be obtained in doing so. So that's something that I would look forward to doing. 

Go ahead Doug, this is a good place for you to jump in. I was gonna talk a little bit about the next evolution, but please interject here.

Doug Lewin

No, and I do want you to talk about that. I was just going to say, though, I think it just ties in, I think, perfectly to that next evolution. There's sort of a virtuous circle here, right, where you were just talking about insulation and air source heat pumps and these newer heat pumps that are all-climate… a lot of people are calling them cold-climate. They can heat your home down to zero or even below zero. But they're also, and this is very hard for people to understand because it's called a heat pump, it actually will make your house cool too, right? So it has benefits in the summertime too. 

But with a well-insulated home with a high efficiency heat pump, most of those at this point, the high efficiency heat pumps have inverter compressors, right? So they have an inverter that can actually respond to a signal. So now you've not only brought down the overall use, you have the ability to say, oh, wow, it really looks like, for instance, does this sound familiar to you? 7:30 tonight's gonna look really dicey. Let's go ahead and make that house cooler at three, four, five o 'clock. A lot of solar power available. Power is generally pretty cheap. Let's go ahead and use more. That only works if you've got the insulation. It only works if you've got the HVAC that can take a signal. 

Pablo Vegas

And the way I think about it is it's kind of, it's going from passive energy efficiency to active energy efficiency. So it's the same. It's all energy efficiency, but there's one that's more active because it's actually utilizing real time information in order to help optimize the efficiency of whatever it is we're talking about: the building, the home. And so that's where the active opportunity is coming in because we now have access to data like we know it's going to be tight at seven o 'clock tonight because it's a very hot day and we're not going to have the availability of solar resources. So we know we'll have a scarcity period. So we can start to make decisions early on and it's about, you know, flexible demand. So I can flex up my demand in the hours leading up to that point in time to make sure that I'll be comfortable and then flex down significantly during a peak period, which both makes economic sense because when there's abundant solar in the middle of the day, power should cost less. And then when there's scarce power later when it's tight, power will cost more. And so there's natural economic incentives and we can work our way through that without really having to do a whole lot of things to make somebody uncomfortable. And that's the opportunity with active energy efficiency. And I think that's really exciting. 

And it applies to, like you said, vehicle charging. It can apply to hot water heaters. When does a hot water heater cycle and when does it run? There's all different kinds of applications to this that I think are really exciting. And we're just at the point where we can do this today, right? This is available today. Part of that five to ten year vision is these appliances and components will come with software embedded in them that will do it automatically. And that won't even need to be set up or have a person say, okay, I need to work and time this with my utility company or have my retailer, you know, do this on my  behalf. It will do it by itself. That's where we're headed. And it's really just about integrating all of these pieces and parts in such a way where you look at what the objective is, which is leveraging the resources we have cost effectively and leveraging where there's abundance, you know, flex up. And when there's scarcity, you flex down. And those principles can be coded so simply into appliances.

Doug Lewin

It's so fascinating and I think hopeful for the future of the grid. I mean, one of the things I'm hopeful for, Pablo, and I'm sure you are too, is that in the future, you know, conservation calls, they're not actually like what they are today. A conservation call is basically, you're basically calling for people to use more. Like, I say this all the time to people. I'm like, if I said to you, would you be a little colder inside your home in a Texas summer and get paid for it, right? So that you could use less during that net peak, right? At the time the sun's going down where the, just like we saw this last summer in August and September, that's when the conservation calls were going out, right? It was a 6 to 9 period and it was like 7:30. So a conservation call isn't really a conservation call anymore. It's people have already raised their hand and said, for this amount of money, I'll be colder inside my home earlier. I'll let it ride up to that set point, the highest I'm willing to let it go, it's my choice. Won't go any more than that. And there's a lot of Texans that won't want any part of that. And that's fine. As long as some people opt in, we all have a more reliable system and less of a chance of having conservation calls.

Pablo Vegas

Yeah, you're absolutely right. And that's something that, you know, today there are retailers and some of the non-opt-in entities, like the municipal power authorities and such that offer a lot of really flexible demand response type of offerings for their consumers, where, you know, some of them are, it's basic thermostat, you know, adjustments and they offer an incentive to allow that to happen and others, it's, you know, they just, you know, they just communicate directly with customers and say, Hey, this is how, you know, we're in a conservation period. Can you respond? 

What I'm thinking about is how can we put a framework around all of that? Maybe an umbrella service around all of it that allows consumers through whatever, whatever provider that they have to participate and be part of that economic incentive. To me, that's kind of the next frontier for Texas on the demand response. Because today, you're right, we are asking for a favor. We're asking people to change their behavior and to do something that they perceive today as a discomfort step in order to help alleviate a risk, a risk on the electric system for the good of the system. And to be perfectly honest, it's not something that we ever want to do. We recognize that it is perceived as an inconvenience for people. But I have to say, people have been responsive. It's really been incredible, the amount of response we have gotten when we do ask for it. And so there's wonderful people that really do help out. 

That being said, this is one of the most competitive electric markets in the world. We can come up with a way to incentivize this that reflects the actual economic cost of these demand response opportunities and let everybody participate in that. And we do it today on a macro level for larger industrial customers. There is no reason we couldn't do that on a more granular level with residential consumers. And so that's something we have to spend some time on this year figuring out how to move in that direction.

Doug Lewin

And I'm wondering if you have any thoughts yet, and it sounds like you're in that kind of ideation phase of trying to figure it out, and that's fair. There's a lot of details to work out here, and it's certainly not simple. It's incredibly complicated. 

You know, I was actually reading recently and highly recommend to you and to all listeners, a great paper that Travis Kavula of NRG wrote for ESIG, the Energy Systems Integration Group, did a great series on aligning retail incentives with system needs. And his paper, I thought the title was great. “Why is the Smart Grid So Dumb,” he called it. And as great as the title is, I think the paper's even better. And one of the things he talks about is, a lot of times we try to use demand, as if it were supply. We compensated for the energy or for the ancillary services. And this is where I think we're going with the Virtual Power Plant pilot. And that's a good thing that it can work as supply, but he's making the point in this paper that we also need to let demand be demand. Almost every other market has two sides of it. There's supply and demand and people can decide, hey, the price for that is too high. I'm not willing to pay it. And so it's not just about putting into the ERCOT market, though I do think that is very important to be clear, but there's other value streams and other ways that demand can respond. 

So a couple of things that he recommended in there, one is there, you could have time varying T&D rates, transmission/distribution rates, right? That would be one way to send an additional signal to demand. Another one is, and you were referring to the municipals like Austin Energy and CPS Energy and co -ops, they to ERCOT look like one meter. So they have the 4CP, the Four Coincident Pricing on the transmission side. So what that means in effect, for those that are listening, I do try to make this, I think most people listening to this are kind of into energy policy, but I do want this to be accessible to the general public. So just really quickly, Four Coincident Peak is a large customer, a manufacturer or a big box store or something, or a municipal utility. Their transmission is gonna be set by how much they use during these four, 15 minute increments, June, July, August, September that coincide with the system peak. 

What Travis recommends in this paper is why not give that to all the load serving entities? He understands and he talks about this in the paper that like, you know, it doesn't make sense to expose small customers to those kinds of swings, but a load serving entity is already responsible with managing the use, right? To make sure that they're shielded, they're hedged against high prices, right? So how do we also then have that transmission signal and that value? So what do you think of those ideas and do you have others that not necessarily saying this is the way we're gonna go, but things that could be considered at this point?

Pablo Vegas 

Yeah, I think the T&D time-of-use type of rates based on the actual economic cost of the supply at that time, I think is really smart. I think especially today with such granular variability in the supply base, there are very significant swings. From a given day, you can have wholesale pricing go from $0 to $5,000 literally in the same day based on what's happening and who's supplying the power. And so I think it's very smart to think about that. And I think like what we talked about, there's now a lot more software and smart appliances that could easily leverage that information so that it wouldn't be a large burden on a consumer to take advantage of that. That they could essentially, their house could help manage that for them. And that's something that I think is really not that far -fetched of a concept even today.

So I like that. With the concept of 4CP, so I actually have been thinking a lot about how, is 4CP the right measure today given where the stresses on the grid are? And is it the coincident peak that really is the appropriate measure of how we wanna try to manage that? Or is it really the coincident net peak that we're really trying to think about at this point in time because of the change in nature of the resources providing power. And are the four months of the summer the only times that we're really going to be experiencing the stress and the need to invest? 

I think we're getting to a place where our peaking is going to start to, our winters and our summers are going to challenge each other for the most challenging times of the grid. So maybe we need seven or eight periods throughout the year to better reflect the changing nature of how the grid needs to be invested in and the overall supply chain around it. And we could start thinking about ways that match the true economic impact of utilization to the circumstances that it's realizing. So I think that's maybe some things we should start to think about. 

And I think you could, sorry, I meant to say, and yes, beyond industrial, beyond large consumers, there's, I think, the load serving entity concept. I think it's an interesting one because they are sophisticated participants in the grid and are already having to manage a portfolio of how to best serve their end-use consumers. So, no reason for them not to potentially be a part of that.

Doug Lewin

I mean, if they're not doing it already, they're probably not going to be in business very long anyway, right? So I mean, I think most of them, yeah, most of them are doing that anyway. And I literally had on my list of questions to ask you about 4CP versus 4NCP. So you anticipated that question. We're thinking alike there. I did not have on my list to ask about like going to an eight. So, and again, for listeners that may not be as in the weeds on this, and you correct me if I get this wrong, but what I understand, Pablo, what would mean by that is that you would go to a four net coincident peak. So that's load minus wind and solar, although there could be different definitions. You could say minus wind and solar minus thermal outages or something. Beause even if you add those in,it's a little harder for entities to predict that you can see wind and solar a little better than you can anticipate a thermal outage. So there's a definitional question there that would be important. 

But the way it works right now with 4CP, you could have, and I don't know that this is happening. I don't know if you've seen evidence that this is happening, but you could have a situation where you're getting a lot of load reduced at 4:45/5 PM, which looks like the coincident peak. And then it comes back at 6:30 or 7:00 or 7:30, which is really the tighter timeframe. That was the time we were in emergency conditions on September 6th, for instance. Yeah.

Pablo Vegas

Yeah, you're right. And we actually have seen that happen because if a customer is not a price responsive customer, think of an industrial customer that is not price responsive, they have no incentive to curtail during that net peak when the grid is the tightest, when the load minus the wind and solar is at its highest point. But they have every economic incentive to curtail at the gross peak, which is at four or five in the afternoon when we have potentially plenty of solar and plenty of capacity. And so the grid isn't really at its tightest point. 

So the way the economic incentives are set up today, it may be misaligned with what we're trying to accomplish in terms of where investment will be needed in order to manage reliability. Because right now, the investment is already coming in the way that deals with the gross peak in the summer. We're getting strong, strong renewable development in solar facilities. We're seeing really strong partnerships with batteries in both standalone and with solar facilities that are coming online. And I believe that those are going to be very influential in helping the traditional peak periods in the summer. And eventually with enough batteries, also the net peaks, I think.  But for now, it's the gross peak period is becoming less worrisome in many ways than the net peak is. 

And then the winter, the gross peak and the net peak are almost the same because when we hit our highest demand in the winter, it's typically when we don't have solar and it's coldest in the early, early morning before we do have those additional renewable resources. And so the true peak then is still the true peak in the winter. And so it's a little bit different for that. 

And that's where I think the idea of expanding the 4CP into the winter period is because we're stressing the grid and the investments necessary to support reliability during those periods should be aligned with where those economic incentives are. And right now we don't measure that. It's only in the summer.

Doug Lewin

It’s only June, July, August, September. Yeah. So, and just to anticipate what I'll, I'm sure I'll get some comments to this podcast, people saying, you know, it's, just to be clear, I mean, this summer was the last one where, and I know you haven't been at ERCOT for that long, but you obviously study this stuff and talk to people and you've been in the industry, so you know this anyway. That as recently as 2019 when we had a really hot summer and things were tight, everybody was worried about four or five. So it's not a bad thing that we have the solar. It's just, it's a different challenge. It has moved the hours. But luckily, the demand is lower at seven or seven to eight. It's just still very high in a growing state with all this industrial load and all that. 

So I just want to be clear. It's not like and this is and this is part of this, but part of what I want to talk about as well. Right. I mean, I think the communication around all this, there's just been so much over the last few years from people on all different sides of this stuff about this thing's to blame, that thing's to blame. It's a system. We've all, we just got to make it work together. And this isn't like solar's causing problems. No, like the sun goes down. That just happens every night.

Pablo Vegas

You're absolutely right. And it's become a highly politicized topic on, through so many different lenses. And it doesn't need to be. I mean, there's a role and a need for the politics of it because of the policy side. So I don't want to, you know, I don't want to minimize the importance of that. 

But from a physical operation and to really say, look, we want to… The name of almost any business game is optimization. Optimize your resources to the benefit of consumers. If you have shareholders for shareholders, you're trying to optimize. And it's no different than the grid operation game. We want to optimize the resources that we have. What we don't have, like in Texas, we don't have a lot of control over what supply resources show up. So it's a truly open market. The economics of the market determine what supply resources show up. 

On the demand side, same thing. We don't get to pick the type of load that comes to Texas. It's really the environment and the economy in Texas that dictates who comes here and then does what. And right now, that's a lot of people coming. The economy is doing great. The policies in the state are very conducive to growth across almost every facet. 

So, what we're seeing is, that the market side, and this is what I've been trying to be clear on, I can point out a reality without it being a political statement. At least I intend to. That may be a very naive perspective to have, but that is my intention. To say that subsidies for certain resources help them economically, and because of that, their investment in those resources reflect whatever the economic circumstances they have. So if you have a benefit that one resource has and another one doesn't, well, you may see more of the one that gets the benefit. That's not a political statement. That's just a fact. 

And so I'm not saying whether that's right or wrong. I don't really have an opinion on that because that's not a policy issue that I can really do anything with. All I can do is explain why it's happening. So to say that because we're seeing more development of solar, more development of batteries, more development of wind than we are of traditional thermal generation. That some would say that that is a reflection of a failure in planning or policy. It's really just the result of an economic construct is all it is. And that's why it happens the way it happens in Texas. And so then, well, what's the implication of that? Well, the implication of that is we need to think about how to manage all the variables of the different resources that are showing up. And that's our challenge is to help to explain how to best manage and optimize that. And that's where I've been trying to be very consistent to say, look, we benefit tremendously from the renewables, the solar and the wind. We are benefiting hugely from the batteries. They are bringing something to the table that is so different and unique than any other resource. It's probably one of the most complex and innovative things that has happened to the electric grid since the invention of the electric grid. And then, you know, and so we leverage and value those resources, but they don't bring certain facets, certain characteristics. In the case of batteries, today they don't bring a lot of duration. In the case of renewables, they don't bring consistency. And so what we have to do is offset that then. We have to offset the duration. We have to offset the consistency. And there are other resources that do do that. And so that's been the story in terms of the supply side discussion, the same, everything brings its own set of characteristics. We're getting a little out of balance on some of them. And because of that, it's getting harder to manage the grid in certain circumstances. So that's why we advocate for bringing more balance back so that we have more resources on the supply side to manage some of those circumstances. 

And I know you're thinking this, so I'm going to say it. And we get lost in these supply discussions, right? It's kind of so we get, it becomes the whole conversation and we forget that, hey, there's also energy efficiency and smart demand response and flexible demand considerations. There absolutely is. We got to keep that in the conversation. And then there's transmission. You can do amazing things with transmission to alleviate some of the issues around kind of where generation shows up and where load shows up. So we have to keep all of those three legs of the stool always in the conversation and not get lost in any one of them.

Doug Lewin

Let's talk a little bit more about transmission. I mean, there's a lot on the transmission side, right? We've had over the last two years, I think somewhere on the order of $5 to $6 billion worth of transmission congestion. There is more transmission being built at the South Texas project, more in the Permian. So I guess, let me ask a couple of questions here. One, how big a problem is that and what is being done to deal with it? And then I do also want to ask you about, I mean, September 6th was a really, so there's this sort of two-part question. You got the general, like, you know, do we need more transmission? How are we going to get it? Can we build it fast enough? Then there's a specific question around September 6th, right? So on September 6th, there was a manual curtailment, right, of a line that came from South Texas and up into sort of the populations, the main population centers

Pablo Vegas

The San Antonio area, yep.

Doug Lewin

Right, okay. And on that one, it's a double line, right? You got a tower, you got two lines strung, but you're operating it as a single contingency, as if there's not two lines. And I heard Dan Woodfin say to the ERCOT Board when he was asked, should you have been doing that? He said, there's risks on both sides. And I want to explore that a little bit, because if you don't operate it that way, there's a risk there potentially overloading the line but if you do operate it that way, you're not getting as much. And on that particular day, which is the only day we've had emergency conditions since Uri, there was additional generation behind that wind, yes. But I think there might've been some thermal plants or batteries behind there too. 

So I think my question here is heading into the next summer where there's at least a decent chance we'll see another day like September 6th. Are you looking at that and how you might operate it differently? Are there any? And I don't ask this, Pablo, I hope… we don't know each other super well, but I hope you know me well enough. I don't mean it as any kind of a gotcha question. This stuff is super, super important. And I feel like particularly September 6th isn't talked about enough because frequency dropped… we got down to like 59.77. So I'm not saying ERCOT's to blame. ERCOT did things wrong. I'm saying, that was a really interesting event. We really ought to make sure we're learning from it. And it just seems to me like everybody just kind of moved on like it didn't happen. And hopefully internally there's a lot, but I'm wondering if there's a different operating posture as you're heading into the next summer.

Pablo Vegas

Yeah, so let's talk about it in the sequence. And so I'll start with your first question, because I think it's a relatively simple answer. So we need a lot more transmission, and we have to come up with, I'd say, a different way to plan, because the speed at which both load and supply can come onto the grid has fundamentally changed the name of the game. We're seeing data centers that can be built that are 500, 700 megawatt data centers in a year. That's unheard of in terms of grid planning time scales. And historically, you've always been able to have years to contemplate a massive manufacturing facility coming online and the potential supply then being able to be built to support that and then the transmission to support it. Today, it's a whole different paradigm. 

So we need to be able to plan and invest in transmission based on reasonable and prudent forecasts of where load is going to grow. And it doesn't take a rocket scientist to see that we've got very rapidly growing load centers in Texas that are continuing to grow. And we need to just, we need to get in front of that. We need to get in front of that with more transmission. So the answer is yes. But we do have to adjust our planning cycle in order to reflect the different pace at which supply and demand is coming onto the grid. Does that make sense? So I think, and it's a key part of the answer, a key part of the answer.

The line between San Antonio and South Texas. So, that line was pretty overloaded on that day that it operated on September 6th. And you're absolutely correct. There was generation that was available in the South Texas area that, because we had reached an overloading status, that it forced us to curtail some of that generation, which then got us to a place where the frequency ended up dropping. We had to jump to EEA2 immediately to leverage some of the load side ancillary services we have available, the rapid response load service, in order to alleviate some of that pressure on the system. And the control room, just to be perfectly blunt, did an amazing job anticipating and recognizing what was going to happen because of this transmission constraint that started to become an issue. 

So then the debate as to whether or not it should have been operated double or single, you know, it's a, I think we can debate that all day long. I think in the end, the control room did what they felt was the best thing to do given all of the circumstances available to them and the other tools they knew they had in the toolbox, like demand response, rapid response, available to be able to deal if they got to a place where they saw us getting into a frequency and a scarcity issue. And that's what they did. They felt that it would have been better to use those resources than potentially compromise losing a line, that if we lost that line, it could have had catastrophic effects and a separation of the grid if something had gone really wrong with the loss of that line. 

Going forward, you know, we just published a market notice that talks about that line becoming a new GTC in the system. And effectively, we're going to have to operate it as an IROL, which is an Interregional Operating Limit, has an operating limit on it. And the reason is because it's such a critical line that carries load across the system. And if one of those lines fails, then what the risk is and what the team was dealing with back in September, and has been working through to today is if that line fails, it could cause a cascading effect of outages.

Doug Lewin 

Thus the risks on both sides, as Dan put it. So there's both. You could curtail it and cause a problem, but if you don't curtail it, it could cause a problem as well. So…

Pablo Vegas

A bigger problem. 

Doug Lewin

A bigger problem. So can you also, you said GTC, that's a generic transmission constraint. Can you describe if it's possible in plain language what that is?

Pablo Vegas

It's basically when there's a stability risk if you on one side of a on one side or another of a transmission connection that's based on the … essentially the flow of electricity and the and the potential imbalance that gets created because of either having too much, an example could be there's a ton of Wind coming out of the West. There's not enough demand in the West to consume all of that and so it's trying to push its way through the transmission system to where the demand is. And you get to places where you have, you reach limits on what the transmission system can do in a stable way and maintain a stable grid. And so that's called a… and so you have to limit the flow that can go in order to not create a stability risk on the transmission system. That's the simplest way I can think of describing it.

Doug Lewin

Are there, you know, there's a lot more talk these days of grid enhancing technologies, right? There's a whole bucket of these. Can those solve some of these problems? And also storage sometimes gets talked about as a solution to some of the transmission problems, because you might put storage there, soak up some of that extra generation when it's there, and then deploy it on the other side. Are those solutions to that, or is it really just we need more transmission or all of those things. What are the solutions to those problems?

Pablo Vegas

Yeah, I think it's a little bit of all of those things, Doug. I think, you know, certainly some of the smart, smart bulk electric system grid components that are being developed can certainly help with optimizing. What they really help to do in a lot of cases is help to optimize the flow of power in real time. So rather than, you know, having to kind of manage that at a grid level, it actually gets managed at a component level. And so that can certainly be part of the solution.

But it gets back to what I was saying earlier when we started this conversation. We're getting to a place where we're reaching scarcity points on a regular basis. And, you know, in multiple seasons, we're getting it, you know, in the summer, we're seeing it in the winter, where when you get to scarcity points, potential weaknesses in the grid will get exposed. And that's what we're starting to see, that there are potentially weakness areas that when you're at a very tight, tight, level of operation that those weaknesses end up getting exposed and you have to then manage and deal with that and mitigate those risks. And so I think we're going to see more of this happen over time. A