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PUCT Identifies Two Near-Term Actions to Address Energy-Market Pricing Effects from Ancillary Deployment
July 1, 2011
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The PUCT has focused attention on two relatively near-term solutions to reduce the pricing effects that various ancillary service deployments have on energy market prices in ERCOT. Specifically, such deployments tend to depress energy prices, reducing scarcity prices needed to incent new investment.
Based on recommendations from the Independent Market Monitor, PUCT Chairman Barry Smitherman noted that there appear to be two, related, near-term solutions to address the depressing effect that various actions taken by ERCOT (use of Reliability Unit Commitment, Non-Spin) have on energy prices.
First, as noted during day one of the workshop (6/30), one solution is to place a greater reliance on Non-Spin Reserve Service (NSRS) instead of Reliability Unit Commitment (RUC).
The IMM noted that ERCOT has frequently used RUC for capacity purposes rather than deploying the approximately 2,000 MW of NSRS capacity that it normally procures.
The market monitor recommended increasing NSRS capacity procurements by 500-1,000 MW in the 4-6 hours surrounding the peak hour(s) to provide a market-based mechanism for meeting ERCOT's reliability objectives, thereby minimizing the use of RUC for system capacity purposes.
This change could be implemented the quickest among various proposals.
However, this step alone, while an improvement, still includes a distorting impact on energy prices due to the current mechanism for Non-Spin. Although recognizing this solution alone would leave problems unresolved, Smitherman encouraged the Commission to move forward with evaluating this solution even on a stand-alone basis in the interim, since it is superior to the status quo and additional solutions could be addressed as they are developed and ready for implementation.
The IMM further suggested an interim solution to resolve the NSRS pricing problem, initially presented at the Wholesale Market Subcommittee, which would use the energy offers from offline NSRS in the selection of resources for deployment. This would include costs associated with the uncertain run-time and start-up in the offer, and appropriately reflect a higher marginal cost.
This change would take longer, but is still achievable in the near-term compared to other solutions (such as look-ahead Security Constrained Economic Dispatch, which the IMM said is three years away).
ERCOT and the IMM said that they would need to further examine the proposals before recommending whether they could be implemented without a Protocols change. Both are to examine these issues and report to the Commission for a discussion at the July 8 open meeting.
As the Commission considers various alternatives, Smitherman said that the Commission must be cognizant of both the existing small fish swim free provision, as well as recently enacted HB 2133, in addressing energy prices in the market, as such provisions should allow generators to bid at or near the offer cap, which then creates revenues needed for new investment.
The small fish swim free provision embedded in the Substantive Rules provides that market participants with less than 5% of installed capacity in ERCOT are deemed not to have market power in the ERCOT-wide market, allowing them to bid at the offer cap.
Furthermore, Smitherman noted that even for market participants with greater than 5% installed capacity (who are not automatically deemed to have market power), the definition of market power in the rules makes it difficult for an entity to be deemed to have market power, which further allows them to freely bid as market conditions warrant.
Additionally, recently enacted HB 2133 provides a mechanism for generators to enter into a voluntary mitigation plan with the PUCT, which then serves as an absolute defense to an allegation of market power abuse, thereby giving generators comfort to bid at or near the cap, without fear of regulatory action. (see 5/30).
Also regarding perspective, Philip Oldham of the Texas Industrial Energy Consumers said that there is a big disagreement of whether peaker net margin is the correct measure of whether or not capacity will be brought online. Although generators have cited insufficient peaker net margin throughout the workshop as compelling market design changes, Oldham noted that the market has rarely -- if ever -- produced peaker net margin, yet new resources have continued to be built to meet demand.
Jim Hempstead, Senior Vice President at Moody's Investors Service, broadly said that the, "Texas market is working," and said that Moody's does not see a big problem raising capital, especially for critical infrastructure assets. "If your asset is having a lot of difficulty raising capital, it might not be that critical," Hempstead said. However, Hempstead also said that developers with offtake agreements are ratings stable, while more "merchant" developers have a negative ratings outlook.
Vanus Priestley, Vice President at Macquarie Energy LLC, agreed that there is capital out there for developers with good projects. However, Priestley stressed that financing decisions are based on forward price curves, and cited the depressing impacts that the deployment of various ancillary services, noted above and yesterday, has on those forward energy prices.
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