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Generators Press To Implement Changes To Increase ERCOT Prices Prior To Summer 2018; Retail Providers Urge Longer Transition, Review Of 2018 Summer Prices Prior To Changes

TEAM: PUCT Must Ensure Market Liquidity To Allow REPs To Contractually Hedge Without Need For Generator-Owning Affiliate

REPs, TIEC Note Forward Already Moving Upward, TIEC Notes Potential For REP Defaults, POLR Drops From Tight Summers, High Prices

December 4, 2017

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Copyright 2010-17 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

Texas generators have pressed the Public Utility Commission of Texas to implement various changes meant to increase prices in the ERCOT energy-only market prior to the summer of 2018, but retail providers urged a longer transition for any changes, and industrials cautioned against changes in market design, noting the energy-only market is working

Texas Competitive Power Advocates (TCPA) requested that the Commission direct ERCOT to implement two of the Hogan-Pope Proposals regarding the ORDC before the beginning of next summer -- the proposal 1) to shift the Loss of Load Probability ("LOLP") component of the Operating Reserve Demand Curve (ORDC) mechanism (the "LOLP Shift") and 2) to decrease Operating Reserves used in the ORDC calculation by the amount of capacity associated with ERCOT out-of-market commitments (i.e., Reliability Unit Commitment (RUC) and Reliability Must Run (RMR) agreements).

Likewise, Exelon Corporation, in addition to advocating for other changes, said that, "The Commission should consider two immediate changes to improve price formation in ERCOT: increasing the LOLP used to set the ORDC and removing RUC and RMR units from the calculation of available operating reserves. These changes cannot be deferred. The chance of a continued decline in actual available reserves is too great. The imminent retirements in 2018 require immediate action to ensure minimally adequate price formation for those units remaining in the market and create incentives for new units to enter."

However, retail providers and end users urged caution on any changes, and particularly sought to provide market participants with greater notice of any market design changes so that the market can reflect such changes in contracts

Texas Energy Association for Marketers said that, "TEAM is very concerned that if any changes are adopted that change the rules governing price-formation, there should be sufficient lead time allowed for those changes to be incorporated into contracts in the future."

"Any such changes should not be adopted in a manner that would not disrupt existing contracts between REPs and the end-use customers or between REPs and their wholesale power suppliers. The REPS [sic] request that any material change to market design be given a minimum of one-year phase-in period and possibly longer depending on the nature of the regulatory change," TEAM said

TEAM said that, "The recent retirements are reflective of the competitive market forces at work. It would improperly disrupt the market to take action before the summer of 2018. The market performance during the summer of 2018 should inform the Commission and market participants to see if price formation is reflective of market conditions. The forward pricing curves for wholesale power in the Summer of 2018 are already reflecting the changes in market conditions."

The Direct Energy companies said, in separately filed comments, that, "the timing of any changes may be as critical as the change itself. Longer lead times allow market participants to adjust and adapt. Should the commission determine that any market changes are needed, the implementation of that change should occur no earlier than 12 months following the final decision. Direct and other retail electric providers need ample time to incorporate changes into future contracts and minimize impacts to current contracts and customers."

"REPs offer a variety of products with different pricing mechanisms, including fixed (often a year), variable, and indexed products on the residential side, and more complex, often multi-year contracts for commercial and industrial customers. Market design changes can have a significant impact on these longer-term contracts resulting in unforeseen losses or gains for the supplier or customer. Candidly, REPs frown upon the use of 'change in laws' or 'regulatory out' provisions in contracts because these shift the loss from one party to the other. A better outcome is a more deliberate, predictable change that allows contract terms to run their course before the changes take effect. The consequences of market design changes are evident; both customers and REPs shoulder additional risks to enter into longer term contracts that are otherwise preferred by customers. Thus, an appropriate amount of time should be required to implement any market design changes," Direct Energy said

Direct Energy also favored deferring final consideration of the proposed changes until after the summer of 2018

"Now that the reserve margin is slated to fall below the reserve margin target of 13.75 percent, the PUC should wait to review the energy-only market construct and the Operating Reserve Demand Curve (ORDC). It is possible that the combination of the lower prices of the past few years and the potential for scarcity will soon result in innovative and perhaps yet-unseen ways to meet reliability and capacity needs," Direct Energy said

TEAM further stressed that, "Any changes adopted should maintain market liquidity and allow market particpants [sic] to contractually hedge the market risk without the need for an offsetting physical generation facility owned by an affiliate."

Texas Industrial Energy Consumers (TIEC) said, "Despite constant calls for reforms from generators seeking to increase their revenues, the ERCOT market has worked exceptionally well and continues to work as intended. ERCOT has had surplus reserves for the last several years—far in excess of the 10.2% level previously identified as economically optimal by the Brattle Group. When this oversupply of capacity is combined with low natural gas prices and a proliferation of renewable generation, market prices have been predictably low. This should not be surprising or alarming. The natural cycle of a market is that low prices and oversupply will eventually cause older, less economic units to retire, which will rebalance supply and demand and boost prices. Predictably, Luminant recently announced the retirement of approximately 4,000 MW of legacy coal units. With the prospect of much tighter reserves next summer, and correspondingly higher prices for consumers, now is the time to let the market work. The Commission should test the results of the changes it has made over the last few years during tighter reserve conditions, rather than continuing to 'tinker' with the market design and make additional adjustments."

TIEC noted that the ERCOT market has not seen a summer with tight reserve margins since significant changes in market design were approved -- the $9,000/MWh price cap, and the ORDC

"The Commission should see how the market performs under tighter conditions before further enhancing or increasing the existing scarcity pricing mechanisms. Constantly reexamining ERCOT's market design creates uncertainty and instability, which can adversely impact both the wholesale market and overall economic activity. A stable, predictable market design is critical to allowing businesses to effectively understand and manage their energy costs. It is also essential to long-term contracting for all wholesale market participants, which fosters investment and development," TIEC said

TIEC said, "the Commission should defer all proposals aimed at further increasing prices -- under either system-wide or localized scarcity conditions -- until the results of next summer can be evaluated. In particular, changes to the ORDC or adoption of a 'local' ORDC should be deferred. As discussed above, ERCOT has had surplus reserves for the past several years and the vast majority of the market reforms adopted since 2012 have never been tested under tight conditions."

"Summer on-peak energy price futures in ERCOT for 2018 and 2019 are already significantly higher," TIEC noted

With the potential for greater scarcity pricing this summer even without the sought changes, TIEC said, " Appropriate scarcity pricing is critical to the long-term health of the ERCOT market, and the Commission should allow the scarcity pricing regime that has been put in place to work. The Commission should anticipate higher prices with tighter reserves, and should allow such prices to incentivize additional investment. However, the Commission should be mindful of the risks and consequences that often come with tight summers and high prices, such as Retail Electric Provider (REP) defaults and resulting mass transitions of retail customers to Providers of Last Resort (POLR). Due to low gas prices and excessive reserves, the Commission has erred on the side of adopting aggressive scarcity pricing, and it is quite possible that a summer with lower reserves will produce substantial, sustained high prices. Given that the results of the Commission's market reforms will likely be tested this summer, it would not be prudent to make further changes until the results of the current system have been evaluated."

However, NRG Texas Power LLC, NRG Power Marketing LLC, Reliant Energy Retail Services LLC, Green Mountain Energy Company, US Retailers LLC, and NRG Curtailment Solutions LLC, all wholly owned subsidiaries of NRG Energy, Inc., said, "the exit of uneconomic capacity increases the chances of scarcity prices and makes the proposed reforms even more important, by providing the incentive for existing resources to ensure they are available and encouraging new resources that can come to market quickly such as demand response to do so."

Calpine said, "Ultimately, given the lead times required to bring new generation online that can support system reliability, the Commission should implement needed market design changes now to clearly signal investors that the Commission fully supports the energy-only market and will strive to employ the most efficient and effective market rules possible."

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