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Draft Brattle Report: Current ERCOT Market Design Will Support "More Than Sufficient" Reserve Margins From An Economic Perspective

Draft Finds Economically Optimal Reserve Margin To Be 9.0%

Draft Finds Market Equilibrium Reserve Margin As 10.25%

October 15, 2018

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Copyright 2010-17
Reporting by Paul Ring •

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The Electric Reliability Council of Texas, Inc. filed with the Texas PUC a draft report titled "Estimation of the Market Equilibrium and Economically Optimal Reserve Margins for the ERCOT Region." The report estimates the Market Equilibrium Reserve Margin (MERM) and Economically Optimal Reserve Margin (EORM) for ERCOT's wholesale electric market with projected system conditions for 2022.

The report was prepared on behalf of ERCOT by The Brattle Group (Brattle) and with assistance from Astrapé Consulting.

In the draft report, Brattle estimates a market equilibrium reserve margin of 10.25% under projected 2022 market conditions

In the draft report, Brattle estimates 9.0% as the economically optimal reserve margin, based on the risk-neutral, probability-weighted-average cost of 57,000 simulations. The draft report states that estimated societal costs are relatively flat with respect to reserve margin near the minimum, with only modest variation between reserve margins of 7% and 11%.

In the draft report, Brattle said the economic optimum occurs at the reserve margin that minimizes societal costs net of all supply costs and the lost value from any disruptions in electric service.

In the draft report, Brattle said that its analysis shows that the market equilibrium of 10.25% is greater than the economically optimal level of capacity by 1.25%.

"Based on these results, we conclude that the current market design will support more than sufficient reserve margins from an economic perspective," Brattle said in the draft

"The market equilibrium is higher than the economic optimum because the ORDC as currently designed sets prices higher than the marginal value of energy during scarcity conditions. This design intentionally creates additional incentives to invest that raise reserve margins somewhat above the economic optimum," Brattle said in the draft

"In terms of reliability, our probabilistic simulations indicate that at the market equilibrium reserve margin of 10.25%, the system could be expected to experience 0.5 events per year loss-of-load expectation (LOLE)," the draft said

The draft also lists Market Equilibrium and Economically Optimal Reserve Margins under various cases, as follows:

Market Equilibrium Reserve Margin (MERM)
Base Case                      10.25%
   Vary Gross CONE         9.25% -  10.50%
   Vary VOLL                   10.25%
   Vary Probability of 
       Weather Years        10.0% - 11.75%
   Vary Forward Years       9.25% - 10.25%
High Renewables Scenario        9.25%
Low Renewables Scenario        10.75%
High Gas Price                 11.25%

Economically Optimal Reserve Margin (EORM)
Base Case                        9.0%
   Vary Gross CONE           8.0% - 9.25%
   Vary VOLL                 8.25% - 10.5%
   Vary Probability of 
       Weather Years         8.75% - 10.5%
   Vary Forward Years         8.5% - 9.0%
High Renewables Scenario        8.25%
Low Renewables Scenario         9.50%
High Gas Price                 10.25%

"These estimates must not be interpreted as deterministic, since actual market conditions will fluctuate from year-to-year. In reality, the reserve margin will vary as plants enter and exit. Moreover, even at a given reserve margin, realized reliability and price outcomes can deviate far from the expected value, primarily due to weather and variations in wind generation. For example, with a projected market equilibrium reserve margin of 10.25%, we estimate that in the 90th percentile outcome—representing relatively hot weather and low generation availability -- energy prices would double, marginal units could have net energy revenues reaching $200/kWyear, with 1.2 load-shed events per year (compared to a mean of 0.5 across all conditions modeled)," the draft said

With respect to next steps, consistent with the Study Process and Methodology Manual for evaluating the MERM and EORM, ERCOT will issue a Market Notice and allow six weeks for stakeholder review and comment on the draft report. Stakeholders may submit any questions or comments to ERCOT by close of business Monday, November 26, 2018. Further, Brattle will present study results at the October 19, 2018 Supply Analysis Working Group (SAWG) meeting and possibly at the next Wholesale Market Subcommittee (WMS) meeting in November. Brattle and/or ERCOT may present at other stakeholder forums as necessary. After the review period and consideration of any stakeholder questions or comments, ERCOT will provide a subsequent Notice to stakeholders and update the Commission noting any changes to finalize the report.

At that time, ERCOT will respectfully request Commission feedback on potential changes to market rules related to reserve margin calculations.

The draft Brattle report can be found here

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