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Texas PUC Staff Seek Commission Guidance On Potential For Day-Ahead Prices To Be Capped At $2,000/MWh While Real-Time Prices Still Permitted To Reach $9,000/MWh

September 21, 2018

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Reporting by Paul Ring • ring@energychoicematters.com

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Staff of the Public Utility Commission of Texas sought Commission guidance on two issues: harmony in the scarcity pricing mechanism in day-ahead and real-time, and the use of the Houston Ship Channel Gas Price Index

Staff said that the Commission, "may wish to open a project to consider amending 16 TAC § 25.505(g) so that the scarcity pricing mechanism established by 16 TAC § 25.505(g) and the energy price in the Real-Time Market, through the operation of the operating reserves demand curve (ORDC), have the same cap."

Staff noted that the scarcity pricing mechanism applies to both the day-ahead and real-time markets and permits wholesale prices to rise to $9,000/MWh during periods of resource scarcity. However, the rule also provides that, under certain circumstances, wholesale prices must be capped at $2,000/MWh.

Staff noted that the Commission adopted the ORDC to ensure that prices rise to high levels when generation resources are scarce in real-time. When reserves have been depleted to the point that firm load shed is required to preserve system reliability, the ORDC is set such that the energy price is equal to the Value of Lost Load (VOLL), currently set at $9,000/MWh. The ORDC does not apply to offers made in the Day-Ahead Market, and is only applied in real-time operations.

Staff noted that the scarcity pricing mechanism established by 16 TAC § 25.505(g) may require the Day-Ahead Market price to be capped at $2,000/MWh while concurrently, the energy price in the Real-Time Market may rise to $9,000/MWh through the operation of the ORDC.

"This would result in a situation where the ERCOT Day-Ahead Market would be extremely and unreasonably constrained," Staff said

Specifically, Section 25.505(g) requires that, when the accumulated peaker net margin for any year reaches three times the cost of new entry of a generation plant (the cost of new entry is currently calculated to be $105,000/MW, making the threshold $315,000/MW), the system-wide offer cap must be reduced to the greater of $2,000/MWh or 50 times the Houston Ship Channel gas price index for the previous day. This parameter is referred to in the rule as the low system-wide offer cap, or LCAP.

Staff said that, "The implementation of the ORDC in light of the peaker net margin parameters could result in a problematic situation for the ERCOT Day-Ahead Market. If the peaker net margin threshold were exceeded in some year, the system-wide offer cap would be reduced from $9,000/MWh to $2,000/MWh (or 50 times the Houston Ship Channel gas price index for the previous day) pursuant to 16 TAC § 25.505(g). The LCAP would apply in both the day-ahead and real-time markets. However, prices in the Real-Time Market would still be able to rise to $9,000/MWh in periods of resource scarcity, as the ORDC adder would continue to be applied in real-time. However, as the ORDC does not apply in the Day-Ahead Market, prices in the day-ahead market would be limited to the LCAP, a maximum of $2,000/MWh or 50 times the Houston Ship Channel gas price index for the previous day. In a situation in which the peaker net margin threshold has been exceeded, market participants would rationally avoid offering energy in the Day-Ahead Market if they expected resource scarcity, in anticipation of collecting higher profits in the Real-Time Market. In certain anticipated load and capacity dynamics where the peaker net margin threshold was reached, offers made in the Day-Ahead Market may be extremely limited or non-existent. This could result in increased difficulty by the ERCOT operator to secure reliability and plan for real-time operations as there would be little to no incentive for generators to offer ancillary services. In addition, it is possible that this could result in higher prices in the Real-Time Market than would otherwise be experienced given a functional Day-Ahead Market, and could increase volatility in the Real-Time Market," Staff said

To prevent the interaction between the ORDC and the scarcity pricing mechanism from interfering with the operation of the day-ahead market, the potential for pricing differentials between the day-ahead market and the real-time market caused by the ORDC would need to be eliminated. At this time, Commission Staff have identified two potential solutions, either or both of which could be considered in a rulemaking proceeding:

(1) Eliminate the current scarcity pricing mechanism and set the system-wide offer cap to $9,000.

If the current scarcity pricing mechanism were eliminated, the system-wide offer cap would apply to both the day-ahead and real-time markets and there would be no need to calculate the peaker net margin and no need for the peaker net margin threshold. Under the current market design, the peaker net margin threshold has never been reached, even in the extreme weather year of 2011, when the peaker net margin amounted to slightly above $120,000 per MWh. Given that the threshold has never even been approached, it is reasonable to question whether it continues to add value, Staff said

(2) Retain the current scarcity pricing mechanism but require by rule that the ORDC cease to be applied in the Real-Time Market if the Peaker net margin threshold is achieved.

It also could be argued that if the peaker net margin threshold were ever to be reached, the market would have received a sufficient signal that new investment is needed, and that additional revenues to generators, including in the form of the ORDC, simply represent a transfer of wealth from loads to generators. As an alternative to the first proposed solution, this approach would be more consonant with the original rationale for adoption of the peaker net margin threshold, Staff said

Issue 2: Houston Ship Channel Gas Price Index

Staff also said that the Commission may wish to open a project to consider replacing references to the Houston Ship Channel in the rules with a broader, more general reference that would accommodate a recent evolution in natural gas trading patterns.

The ERCOT Protocols use the Houston Ship Channel as the Fuel Index Price (FIP) used to calculate a make-whole payment for units that are subject to an out-of-market instruction from ERCOT. In recent years, the Houston Ship Channel gas price index has decreased in liquidity and trading volume. On nine days in 2017, the hub did not post prices.

The Independent Market Monitor has raised concerns that the reduced liquidity and trading at the Houston Ship Channel could open opportunities for market manipulation and gaming behavior. There is some concern that any changes to the FIP adopted through the ERCOT stakeholder process could make the Protocols inconsistent with the Commission's rules because the Houston Ship Channel is also used in the peaker net margin calculation in 16 TAC § 25.505.1

Project 48551

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