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September 01, 2020 1:20pm
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The state of the ERCOT market is… not good

The Independent Market Monitor report is a powerful call to action: to increase demand-side resources and storage; to create an uncertainty product to deal with the variable nature of thermal plants (at press time, thermal generation on outage is 50% higher than the grid operator expects) and renewable generation; to finally deal with transmission constraints.

The Independent Market Monitor for ERCOT came out swinging in the recent assessment of the health of Texas’ electric market.

The annual State of the Market report from the IMM showed how the winter storm outages in 2021 and subsequent regulatory actions have raised costs. The IMM also showed how many of the market changes made thus far have done little to increase reliability. Electricity costs are soaring in Texas and while some of that is attributable to high gas prices, much of it is a direct result of (a) the catastrophic outages in Texas during Winter Storm Uri and (b) actions taken by the PUCT and ERCOT since then.

The biggest takeaway straight from the IMM: “While we continue to believe that an energy-only market can be successful and adapt to changing system needs, it is not compatible with ERCOT’s current conservative operational posture.”

She left no ambiguity here. The actions taken by the PUCT and ERCOT leadership, if continued, effectively mean the end of Texas’ competitive energy-only market. 

At a press conference in July 2021, PUCT Chair Peter Lake was asked if a “capacity market was on the table.” He said it was not. “That was not addressed in legislation by the 87th legislature,” he noted at the time.

Yet the IMM report confirms what many people thought was happening in spite of assurances to the contrary: Texas’ energy-only market has been replaced by an unvetted, ill-conceived, half-baked capacity market.

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Lake and interim ERCOT CEO Brad Jones have been routinely describing the procurement of massive amounts of reserve capacity, even when they aren’t needed, as “conservative.”

The IMM is not a fan:

Although this additional procurement may increase reliability in some hours, the potential reliability benefits are difficult to justify based on the costs, particularly since the additional procurement is applied to all hours regardless of reliability need. The energy-only market design relies on efficient pricing that reflects the reliability needs of the system. This can increase risk for market participants if ERCOT over-commits the system and renders generation owner’s decisions uneconomic. [emphasis added]

The energy-only market has been undermined with little to show for it in terms of reliability, and according to the IMM, these actions actually “threaten resource adequacy” while significantly increasing costs.

Part of this additional procurement is a massive expansion of Non-Spin Reserve Service (NSRS); the PUCT and ERCOT have added $400 million in costs to customers’ bills in the last half of 2021 for this one program alone. 

More challenging to determine is the exact cost of RUCs (Reliability Unit Commitments, pronounced “rucks”). The PUCT used to procure RUCs only when desperately needed (i.e., when it looked like there was a good chance of outages in the next day or two). In 2019 there were 228 total RUC unit-hours and 224 in 2020. In 2021, the amount of RUCs increased by nearly 20 times to 4,052 unit-hours. RUCs are now procured routinely, to use the IMM’s phrase, “regardless of reliability need.” The cost is significant and “difficult to justify.” The IMM wrote that these “out of market actions and the associated uplift costs… must be borne by Texas consumers” 

The IMM recommended replacing these out-of-market procurements with an “uncertainty product” that could “augment the economic signals provided by the energy-only market and ensure the adequacy of ERCOT’s resources over the long term.” In other words, instead of making it up as they go along and improvising changes to a multi-billion dollar market, the PUCT and ERCOT should define the system’s needs and design an actual product to allow for market signals and economic efficiency.

It is unclear if the PUCT will consider this course of action. 

In addition to this uncertainty product, the IMM notes that “ERCOT will likely need to rely more heavily on demand-side resources [that] can respond to higher prices during the ramp by reducing their consumption”… and storage. These are two courses of action as yet unpursued by the Commission. There have been small increases in commercial demand response (DR) through the utility energy efficiency programs. Commercial DR in Emergency Response Service may actually end up lower even after the budget was modestly increased because the resources will be deployed earlier, driving up the price to procure the resource.

The Commission has actually made it harder for storage to participate in the market by limiting the Non-Spin Reserve Service (now worth $600-$800 million per year) to storage that can sustain for 4 hours. There was little justification for this longer duration; 1-2 hour storage can provide massive benefits, especially in the summer.

Transmission lines outside Houston, Texas (Courtesy: BFS Man/Flickr)

Increased out-of-market actions by the PUCT and ERCOT aren’t the only things driving customers’ bills higher. The IMM also determined real-time congestion cost Texas consumers a whopping $2.1 billion in 2021. Of that, “Generic Transmission Constraints” (the reduction in output mostly from wind and solar when there’s not enough transmission) cost Texas customers $400 million in 2021—twice the amount as incurred in 2020. Wrote the IMM: ”[T]hese GTCs increase transmission congestion and increase the total costs of serving customers in ERCOT by preventing low-cost power to be exported from these resources.” 

The PUCT is just now beginning to implement SB1281 passed by the Legislature in May 2021 which may, if implemented well, help alleviate GTCs. Last session’s HB1607, which would have addressed this problem in a much more comprehensive way, passed the Texas House with a supermajority but was not even referred to a committee in the Senate. 

The IMM report is a powerful call to action: to increase demand-side resources and storage; to create an uncertainty product to deal with the variable nature of thermal plants (at press time, thermal generation on outage is 70% higher than the grid operator expects) and renewable generation; and to finally deal with transmission constraints.

All of these would help lower costs, increase reliability, and preserve, or even enhance, the competitive nature of the energy-only market, with the Texas Legislature seems, by Chair Lake’s own admission, to want to preserve.

The results of the actions by the PUCT and ERCOT have raised costs and done little to help with reliability. It’s time for a course correction and the Independent Market Monitor points the way.

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