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Texas Generators Propose Eliminating Low System-Wide Offer Cap From ERCOT Market

February 12, 2019

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Reporting by Paul Ring • ring@energychoicematters.com

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In comments on a Texas PUC rulemaking, Texas Competitive Power Advocates (TCPA) have proposed, as a "preferred" recommendation, eliminating the Low System-Wide Offer Cap (LCAP) in ERCOT

The LCAP is only applicable if the peaker net margin [PNM] threshold has been exceeded during an annual resource adequacy schedule. In such case, the system-wide offer cap shall be reset at the LCAP for the remainder of that annual resource adequacy cycle

Currently, the low system-wide offer cap (LCAP) shall be set on a daily basis at the higher of: (i) $2,000 per MWh and $2,000 per MW per hour; or (ii) 50 times the daily Houston Ship Channel gas price index of the previous business day, expressed in dollars per MWh and dollars per MW per hour

In its comments, TCPA stated, "TCPA recommends the Commission eliminate the LCAP. In an energy-only market, energy pricing signals are the sole incentive for both new entry and continued operation of existing resources. Thus, as a matter of principle, even in the face of persistent scarcity conditions in a given year, an energy-only market should not artificially lower scarcity prices, but, instead, should continue to allow prices to appropriately reflect those conditions."

TCPA stated, "As is evidenced by the perpetual debate about resource adequacy in ERCOT, when prices are too low to incent additional resources to come to market or even to retain existing resources, it can take years of substantial discourse before solutions are implemented that adequately correct for that failure. Given this reality, the ERCOT market design should not include mechanisms that are facially inconsistent with the goal of promoting resource adequacy in an energy-only market. The LCAP represents a fundamental asymmetry of the ERCOT energy-only market structure -- one in which persistent low wholesale power prices can push the market to the brink of resource inadequacy, but high wholesale power prices driven by resource shortages would be capped, potentially handicapping the ability of the market to fully signal the investment that is needed. TCPA understands and appreciates that a former Commission instituted the LCAP to balance the need to 'protect [unhedged] loads from persistent high prices, while providing sufficient high-price signals to entice new generation into the market.' However, the ensuing nearly 13 years of market outcomes—including extreme spikes in the price of natural gas (2008), record-breaking extreme temperatures (2011), and rapidly contracting reserve margins (2018)—have yet to demonstrate a practical need for the LCAP mechanism, as PNM has never exceeded the LCAP threshold, and in most years, has never even reached the half-way point[.]"

TCPA stated, "From a market incentives standpoint, it is worth noting that even if scarcity pricing were to be sustained for long enough to reach the PNM trigger for the LCAP, most end-use customers should be protected from that exposure due to their contracting with retail electric providers (REPs) that should have hedged their customers load to limit their financial risk. And while it is impossible to predict the precise market signals that would give rise to such a scenario, it is fair to assume that sustained scarcity pricing at that level would quickly draw increased investment into the wholesale market; prompt planned resources to accelerate their commercial operation date if possible; and incentivize existing resources to perform upgrades and expansions and mothballed resources to return to service as quickly as possible, naturally limiting the duration of sustained scarcity pricing.

To the extent the PUC wishes to retain the LCAP, TCPA offered the alternative recommendations:

    (i) increase the LCAP to $4,500/MWh

    (ii) if the LCAP is triggered, reset the VOLL to the LCAP for purposes of administrative pricing mechanisms like the ORDC and RDPA [Reliability Deployment Price Adder], and

    (iii) refrain from stating that prices will never exceed the LCAP if it is triggered.

In contrast, the Texas Energy Association for Marketers (TEAM) and Direct Energy, jointly filing as the name REP Group, supported the retention of the Low System-Wide Offer Cap

"The LCAP is important to the implementation of the price protections in paragraphs (C) and (D) [of the rule]. The formula invoking the implementation of the LCAP is one of extremes. If it were ever invoked, it would be to allow customers the ability to avoid continued market calamity if there were an unanticipated series of extreme events. The peaker net margin ('PNM') mechanism, set at three (3) times the cost of new entry ('CONE'), is not likely to be reached when the market is functioning properly. The PNM was designed as a measure to protect consumers from sustained high prices by providing a 'circuit breaker' effect and resetting the HCAP to the LCAP if the market is distorted," the REP Group said

"There is a concern as to whether the PNM calculation properly relies solely on the real-time energy price ('RTEP') or whether the PNM calculation should include day-ahead market prices as well as ancillary services costs. As seen in 2018, many consumers were exposed to higher prices because of high day-ahead prices even when the RTSPP remained low. Further, the CONE is calculated based on combined-cycle base load units which may not be the next technology that will be built to meet potential demand in the future," the REP Group said

"Using the market experience of 2018 as an example, there were five days where the real-time settlement point price ranged from $1000 to $4000 with the average being $2100/MW per day. The PNM contribution for those five events yielded $10,000 total. Under these calculations, the market would have needed to experience comparable pricing for 166 days or 45% of the days in a year in order to reach the PNM as currently set by ERCOT under the parameters of the rule. Even then, the LCAP would still allow pricing up to $2000/MW," the REP Group said

Texas Industrial Energy Consumers (TIEC) also ultimately said that the LCAP and should be retained at this time.

TIEC said in its comments that, "TIEC has stated in the past that it does not view the LCAP as particularly useful or meaningful.

The pricing that would be required to trigger the LCAP is extreme and customers would receive little meaningful protection from instituting the LCAP if Real-Time Market revenues have exceed the PNM estimate by three times in a single year. This would almost certainly demonstrate that current scarcity pricing mechanisms are far too aggressive, and the Commission should initiate a more holistic reassessment of these administrative features based on first principles and proven economics. In addition, TIEC has previously expressed concerns about practical effect of suppressing scarcity pricing signals in the Real-Time Market and dramatically changing market dynamics mid-year. This could create incentives for market participants to behave in ways that are detrimental to reliability even when reliability issues still exist. As a result, TIEC does not believe the LCAP is a very useful protection. Simply put, the LCAP is no substitute for good market design."

"While TIEC does not believe the LCAP is the optimal customer protection against sustained, potentially unjustified high prices, it is still the only "circuit breaker" in the scarcity pricing rule. All other markets have some similar feature to suspend scarcity pricing under extreme conditions. While imperfect, the LCAP is better than no protection at all and should be retained at this time," TIEC said

TIEC also said, concerning the PNM, that, "As TIEC has stated in numerous forums over the years, Peaker Net Margin (PNM) is not a meaningful indicator of generator revenues. Specifically, PNM fails to account for revenues from the Day Ahead Market (DAM) or other forward bilateral contracts. The risk of high prices causes retail electric providers, generators, and end-use customers to contract forward at elevated prices. This behavior is probably the most meaningful contributor to generator revenues and is not reflected in Real-Time Market pricing or, correspondingly, PNM calculations. For these reasons, relying on PNM to assess the health of the market is a flawed approach."

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