Draft Report Estimates ERCOT Market Equilibrium Reserve Margin As 12.25%; Higher Than 11% Economically Optimal Level
December 2, 2020 Email This Story Copyright 2010-20 EnergyChoiceMatters.com
Reporting by Paul Ring • email@example.com
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A draft report prepared by a consultant for ERCOT estimates a market equilibrium reserve margin of 12.25% under projected 2024 market conditions
The draft notes that, "This estimate should not be interpreted as a precise forecast for 2024 or any other particular year, but as a reasonable expectation around which actual reserve margins may vary as market conditions fluctuate. To expect a persistently lower reserve margin would be to assume investors will forego profitable opportunities to add additional supply, and to expect a persistently higher reserve margin would be to assume investors will over-invest."
This is higher than the consultant's market equilibrium reserve margin (MERM) projection of 10.25% from a 2018 study; however, the projections of system reliability are nearly identical at 0.5 Loss of Load Expectation (LOLE).
"In terms of reliability, our probabilistic simulations indicate that under base case assumptions with a market equilibrium reserve margin of 12.25%, the system is expected to experience 0.5 days per year Loss of Load Expection [sic] (LOLE) ... It is also important to note that this LOLE is the same value reported in the 2018 study at the MERM of 10.25%. Intuitively, the higher MERM in this study would supply higher reliability. However, the higher Equivalent Forced Outage Rate (EFOR) assumptions, combined with a discrepancy between the renewable credit (or reliability contribution) estimated for CDR reserve margin reporting and the actual reliability value provided by these resources, increase the MERM without an improvement to reliability," the draft states
"Input and reserve margin accounting changes with both upward and downward effects have been introduced since 2018. An increase in renewable penetration put downward pressure on MERM, while the changes in resource accounting increased the MERM. The PUCT administered changes to the ORDC which put upward pressure on MERM, and higher forced outage rates also put upward pressure on MERM. The change in marginal resource composition put slight downward pressure on MERM," the draft states
The draft also calculated the economically optimal reserve margin (EORM)
"We estimate 11.00% as the EORM, based on the risk-neutral, probability-weighted-average cost of 80,000 simulations. However, the estimated societal costs are relatively flat with respect to reserve margin near the minimum, with only modest variation between reserve margins of 10.00% and 12.00%," the draft states
"Our analysis shows that the market equilibrium of 12.25% is greater than the economically optimal level of capacity by 1.25 percentage points. 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. The size of the gap is lower than suggested by current ORDC values and the gaps identified in previous studies because of the presence of more energy-limited resources. In certain reliability-constrained hours in the simulation, additional capacity can provide more value than its nameplate. This is because in addition to being available during the peak hour, the incremental resource can preserve the energy from the energy limited resources such as battery and demand response for availability during peak conditions. This means that the production cost savings in some extreme hours will be larger than the market price benefit the marginal CT realizes," the draft states
The draft also examined a high renewables case in addition to a base case. Results under various changes can be seen in the chart below:
"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 12.25%, we estimate that in the 90th percentile outcome—representing relatively hot weather and low generation availability -- energy prices would more than double, marginal units could have net energy revenues reaching $246/kW-year, with 1.2 load-shed events per year (compared to a mean of 0.5 across all conditions modeled)," the draft states