Texas PUC Staff Make Further Recommendations On Real-Time Co-optimization Parameters, Offer Cap Levels, VOLL

June 21, 2019

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Reporting by Paul Ring • ring@energychoicematters.com

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Staff of the Public Utility Commission of Texas filed a memo outlining further recommendations and issues to be considered with respect to real-time co-optimization in the ERCOT market (Project 48540)

Staff noted that since comments were last filed in the project in April 2019, discussions have continued among ERCOT staff, ERCOT stakeholders, the Independent Market Monitor, and Commission Staff regarding several issues raised in the questions and in the responsive comments.

Staff's memorandum summarizes the issues that have been discussed and presents key issues for the Commission's consideration.

Values of SWOC and VOLL

Staff noted that, in April, the majority of commenters recommended a set of parameters that would set the SWOC at $2,000 per MWh and the VOLL to $9,000 per MWh, with a cap on total energy price equal to the VOLL. This framework would have an implicit maximum value for the Ancillary Services Demand Curves (ASDCs) at $7,000 per MWh.

Citing an update provided by ERCOT Staff, Staff said that the result of this set of parameters would be that prices are unlikely to rise to the $9,000 per MWh VOLL, even if operating reserves are below 2,000 MW. Staff reported that prices could rise to this level only if there were large energy offers, on the order of thousands of megawatts, at the SWOC.

"This condition has never occurred in the ERCOT real-time market. Resulting pricing outcomes in resource scarcity will almost certainly be lower with RTC than under the current ORDC," Staff said

Staff said that if the Commission determines that RTC implementation should be designed to obtain similar pricing outcomes as the current ORDC mechanism in resource scarcity, Staff recommends adoption of the parameters laid out in the "second solution", which should most closely replicate the current ORDC:

• Set SWOC to $2,000 per MWh;

• Set the Maximum ASDC value to $9,000 per MWh;

• Set VOLL to $9,000 per MWh; and

• Direct that the total energy price will be capped at the VOLL, exclusive of congestion costs.

In a letter to PUC Staff, ERCOT Staff explained the issue further, noting that, from the filed comments, there appears to be an appeal to utilize the current VOLL of $9,000 and a SWOC of $2,000. Further, ERCOT Staff noted that some parties expressed the desire to maintain the current pricing relationship of reserves in the outcome of the Operating Reserve Demand Curve (ORDC) with the AS demand curves in Real-Time Co-Optimization (RTC).

"These two concepts are compatible with one exception noted below," ERCOT Staff said

"ERCOT has the ability to build AS demand curves (ASDCs) that, in aggregate, closely match the current ORDC," ERCOT Staff said

"Currently, when reserves are equal to or less than 2,000 MW, the pricing outcome is $9,000. Under RTC, ASDCs will create pricing outcomes similar to the ORDC during reserve scarcity conditions, with one notable exception -- i.e., when reserves are equal to or less than 2,000 MW. A $9,000 VOLL and a $2,000 SWOC will set the maximum value of ASDCs to $7,000 to ensure that energy prices do not exceed VOLL. Furthermore, the maximum value on ASDCs will cover the range of reserves from 0 to 2,000 MW. Under these parameters in RTC, the price will only clear at $9,000 when reserves are below 2,000 MW if there are large amounts of offers (likely more than 4,000 MW) dispatched at the SWOC because an ASDC can only add a maximum of $7,000 to the pricing outcome. Therefore, if reserves are below 2,000 MW and the marginal energy offer is $1,000, the energy price will only reach $8,000. Today, with the ORDC, and under the same circumstances, the energy price would be $9,000," ERCOT Staff said

If the Commission wants to align RTC outcomes with the ORDC outcomes when reserves are below 2,000 MW, ERCOT Staff said that the values for RTC should be set as follows:

• VOLL -- $9,000;

• SWOC -- $2,000;

• Maximum value of ASDCs -- $9,000; and

• System Lambda Cap -- $9,000.

Low System-Wide Offer Cap (LCAP)

Staff noted that the problem described above regarding the relationship of the SWOC, the VOLL, and the maximum ASDC is somewhat less likely to occur when the LCAP is in effect. This result occurs because the value of the LCAP, currently set by rule at $2,000 per MWh, is much lower than the VOLL and therefore closer to energy offers that are common in the real-time market. In addition, because the LCAP is effective only when scarcity prices during the year have created robust incentives for new investment in generation capacity, it may not be a concern if prices do not increase to the full value of the LCAP under scarcity conditions.

If, however, the Commission determines that some degree of scarcity pricing continues to be appropriate when the LCAP is in effect, a similar structure for the LCAP as recommended above for the SWOC could be adopted, Staff said. If the Commission decides to retain the LCAP under RTC and allow prices to rise to the LCAP in resource scarcity, Staff recommends that the Commission establish the following parameters: • Set the LCAP to $2,000 per MWh; • Set the maximum ASDC to $2,000 per MWh; and • Cap the total energy price (exclusive of congestion costs) at $2,000 per MWh when the LCAP is in effect.

Development of the Ancillary Service Demand Curves

Staff recommends that the design of the ASDCs replicate, as closely as possible, the pricing outcomes of the ORDC, in order to preserve the existing Market Equilibrium Reserve Margin, and that the set of ancillary services approved by the ERCOT Board of Directors in Nodal Protocol Revision Request 863 form the basis of the ASDC design. Staff noted that design of the ASDCs is a threshold issue in the implementation of RTC.

Financial-Only (Virtual) Day-Ahead Market

Staff said that further discussions with stakeholders and ERCOT staff have revealed a number of issues regarding the implementation of a financial-only DAM for ancillary services.

Staff recommends that the Commission defer a decision on this issue for now so that these issues can be more fully explored in the ERCOT stakeholder process. Staff proposes to bring this issue back to the Commission when implementation options have become more clearly defined and stakeholders have received more education from ERCOT on the issue.

Staff said that while a decision on this issue is not required for RTC implementation, the issue should be resolved prior to RTC go-live.

Day-Ahead Market (DAM) SWOC

In the DAM, the ASDCs will not contribute to the formation of the total energy price as they will in the Real-Time Market. Consequently, the value of SWOC in the DAM must be set to the highest total energy price that may be attained in the Real-Time Market; with the recommendations presented here, that value is $9,000 per MWh, Staff noted

The DAM SWOC is not currently addressed in the Commission's rules, and it may be beneficial to define the DAM SWOC in the Commission's rules so that all parameters for RTC and DAM are defined in the same rule, Staff said

A decision on this issue is not required immediately, and it may be prudent to wait until the structure of the DAM is more clearly defined before deciding this issue, Staff said

Market Rules for Ancillary Services

Staff recommends that the prohibition against withholding should be applied to the ancillary services market and that offer curves should be mandatory, and that the prohibition should apply only for online capacity that is physically capable of providing ancillary services.

Opposition to this requirement by the generator market segment was based primarily on the inability of some otherwise qualified resources to provide ancillary services over the full range of capacity under some circumstances. Staff said that, based on discussions with many members with the generator segment, it appears that this concern has been resolved, and that a must-offer requirement is not objectionable to the generator segment so long as it applies only to generation capacity that is capable of providing ancillary services.

Staff said that a decision on this issue is not required for RTC implementation, but the issue should be resolved prior to RTC go-live.

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