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ERCOT Proposes Capping Ancillary Service Prices, Effective In July

Also Proposes Setting Energy Prices At Offer Cap When Load Being Shed Due To ERCOT's Direction

June 3, 2021

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Copyright 2010-21
Reporting by Paul Ring •

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During a Texas PUC open meeting work session, ERCOT's Vice President of Commercial Operations Kenan Ögelman said that ERCOT would be proposing two urgent protocol revisions as follows

Ögelman stated during the open meeting that, "The first change to the market design would cap ancillary service prices at $9,000."

However, language for the nodal protocol revision request (NPRR 1080) more specifically states that Day-Ahead Market Clearing Prices for Capacity (MCPCs) shall not exceed the system-wide offer cap (SWCAP), which may be lower than $9,000, such as when peaker net margin has been met and the low SWCAP has been triggered

A narrative description of the NPRR filed by ERCOT further states that the NPRR would, "limit Ancillary Service prices to the effective System-Wide Offer Cap (SWCAP)"

Ögelman also said during the open meeting that the penalty factors used in ancillary service pricing would be, "capped at the system-wide offer cap."

"So, if the system-wide offer cap was $2,000, it would not let prices go above $2,000. If the system-wide offer cap was at $9,000, it would not let prices go above $9,000," Ögelman said

This change is proposed to be effective in July.

This change would conform to the emergency pricing changes that would be required if SB 3 is signed by the governor, but ERCOT is proposing it independently regardless of whether SB 3 becomes law.

Ögelman said that the second change would be to set energy prices at the "system-wide offer cap" when ERCOT is in EEA3 and is shedding firm load. Pricing at the cap would end (and revert to market prices) if there is no load shed being instructed by ERCOT

In a narrative, the NPRR for this change (NPRR 1081) specifically states that it would modify the calculation of the Real-Time On-Line Reliability Deployment Price Adder, "so that the combination of System Lambda, the Real-Time On-Line Reserve Price Adder, and the Real-Time On-Line Reliability Deployment Price Adder will be equal to the Value of Lost Load (VOLL) when ERCOT is directing firm Load shed during Energy Emergency Alert (EEA) Level 3."

Ögelman said that both changes address recommendations contained in the Independent Market Monitor's recent state of the market report

In the IMM's recent state of the market report, the IMM's recommendations had included the following:

Cap Ancillary Services Prices In The Day-Ahead Market

The IMM said, "ERCOT operates its day-ahead market in manner [sic] that may incur extremely high costs attempting to procure all available ancillary services up to its ancillary services requirement. During the 2021 arctic event, this resulted in day-ahead market prices for ancillary services as high as over $25,000 per MW. Ancillary service prices more than VOLL violate fundamental economic principles and generate inefficient market outcomes. Since reserves are procured to reduce the probability of losing load, the value of reserves should not exceed the cost of actually losing load -- VOLL."

This economic inconsistency will be resolved with the implementation of real-time co-optimization in 2025, the IMM said

"In the meantime, we recommend that ERCOT address this issue by: a) utilizing a penalty price for ancillary services that is equal to or less than VOLL, and b) capping the ancillary service MCPCs at VOLL. This will prevent future irrational ancillary services pricing until 2025," the IMM said

Include Firm Load Shed In The Calculation Of The Reliability Adder

The IMM stated that, "Real-time energy prices should reflect that shedding firm load is an out-of-market action with a cost equal to the Value of Lost Load (VOLL), a number usually equal to the system-wide high offer cap of $9,000 per megawatt-hour. This is clear because one additional MW of energy under these conditions would allow ERCOT to serve an additional MW of load, so the value of this energy must equal VOLL. Efficient pricing during these extreme shortages is essential in an energy-only market because it provides necessary economic signals to increase the electric generation needed to restore the load in the short term and service it reliably over the long term."

"We recommend that the protocols be modified to designate that firm load shedding directed by ERCOT be included in the calculation of the reliability deployment price adder, and specify that load reductions that are not directed by ERCOT not be included in this calculation," the IMM said

Implement A Point-to-Point Obligation Bid Fee

The IMM stated, "Recently, there have been numerous delays in running and posting the results of the day ahead market. These delays are disruptive to the market and create unnecessary risk for market participants. ERCOT analysis of the cause points to a significant increase in bids for point-to-point obligations, a financial transaction cleared in the day-ahead market used to manage congestion cost risk. This is not a surprise because substantial increases in PTP transactions significantly increase the complexity of the optimization and the time required to find a solution."

"Charging no fee for PTP bids, as ERCOT currently does, allows participants to submit very large quantities of bids that are unlikely to clear and provide very little value to the market. Applying a small bid fee to the PTP bids is consistent with cost causation principles and would incent participants to submit smaller quantities of bids that are more valuable and more likely clear. Because even a small fee would likely reduce or eliminate the bids that are very unlikely to clear, this should substantially eliminate the delays in the day-ahead market process. Hence, the IMM recommends that a small bid fee be applied to DAM PTP Obligation bids to more efficiently allocate scarce DAM software capabilities," the IMM said

Implement Smaller Load Zones That Recognize Key Transmission Constraints

The IMM said, "The four competitive load zones contain a large amount of load, particularly the North and South zones. This zonal configuration has not changed even through many years of load growth and changing congestion patterns. Consequently, the highly aggregated load zones and inability to price demand more granularly negatively impacts congestion management by distorting the incentives of both price-responsive demand and active demand response. This is particularly noticeable in the South load zone where there is significant congestion inside the zone, not just between it and other zones. Incenting demand to respond to the load zone price often makes the local congestion worse."

"As active demand response grows in the future (i.e., load that can be controlled by the real-time market), transitioning to nodal pricing for those active loads may become beneficial for ERCOT and the market participants. Beyond the active demand response participants, longer-term demand decisions may be influenced by the zonal prices. Such decisions may relieve or aggravate congestion patterns, but are unfortunately not informed by the wholesale power prices. Therefore, the IMM recommends that the load zone boundaries be re-evaluated and redetermined in future years (after the required four-year waiting period), based on prevailing congestion patterns. In particular, the new zones should avoid intra-zonal congestion," the IMM said

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