ERCOT IMM Proposes Mandatory Forward Shortage Energy Hedge Procurement

October 18, 2021

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Copyright 2010-21 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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Potomac Economics (Potomac), the Independent Market Monitor ("IMM") for the wholesale market in the Electric Reliability Council of Texas, Inc. ("ERCOT") region, proposed in comments to the Texas PUC the following modifications to the ERCOT market design, which were also discussed at a PUC work session last week.

1. "Forward Shortage Energy Hedge: a forward hedging mechanism where ERCOT would facilitate mandatory forward procurement of a seasonal hedging product on its shortage adder settlements, ensuring nearly complete hedging and smooth year-to-year changes in revenues, reducing volatility, and improving incentives to invest in ERCOT. Load serving entities could self-supply in lieu of purchasing the hedging product through ERCOT."

2. "Changes to the Operating Reserve Demand Curve and the System-Wide Offer Cap: decrease the SWCAP and cap the total system price at a lower value in the range of $5,000/MWh; decrease the Minimum Contingency Level (MCL) to 1,430 MW; and increase the Value of Lost Load (VOLL) to a higher value in the range of $20,000/MWh."

3. "A New Uncertainty Ancillary Services Product: a 2- to 4-hour Ancillary Service that can be deployed when uncertainty results in tight real-time conditions."

Discussing further the proposed mandatory forward shortage energy hedge, the IMM said, "ERCOT [would] facilitate a mandatory forward procurement of a product that would provide a hedge on the Operating Reserve Demand Curve (ORDC) and Reliability Deployment Price Adder (RDPA)-based shortage settlements. Under such an approach, ERCOT could conduct a seasonal or annual procurement of such a forward shortage product, buying on behalf of its load serving entities (LSEs). LSEs that own generation or have contracted for supply that would cover this forward product could self-supply in the ERCOT procurement and not have to settle with ERCOT."

As the IMM discussed further during the work session, the IMM said that the key considerations in designing this Forward Shortage Energy Hedge product would include:

• Developing rules governing generators' offers to sell the hedge. "Such rules must balance mitigating market power with not compelling suppliers to sell the hedge below its value," the IMM said

• Establishing the quantity of hedges to be procured (or self-supplied), and managing imbalances from a financial perspective;

• A mechanism to address changes in loads served by competitive retailers; and

• Determining effect on credit/collateral needed to be held by ERCOT.

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