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In State Of The Market Report, ERCOT IMM Notes Withholding Strategy Which Arose Out Of Frequent Use Of RUC, Recently Addressed In NPRR

ERCOT IMM Cites Classic "Hockey-Stick" Offers Experienced In 2021 As Supporting Elimination Of Small-Fish-Swim-Free Rule

ERCOT IMM Again Proposes "Uncertainty Product"

May 27, 2022

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Reporting by Paul Ring •

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In a 2021 state of the market report, ERCOT's independent market monitor proposed, among other things, implementing an "uncertainty product", eliminating the small-fish-swim-free rule, and also identified a withholding strategy that arose out of the frequent use of the RUC tool in the latter half of 2021, which was addressed in a recent NPRR

Implement an uncertainty product

In a recommendation included for the first time in an SOM report, but raised previously by the IMM in other proceedings, the IMM proposed an "uncertainty product"

The IMM said, "ERCOT regularly commits resources outside of the market through the RUC process to ensure sufficient generation will be available to satisfy ERCOT’s stated reliability margin of 6,500 MW of reserves plus an additional 1,000 MW of non-spinning reserve in uncertain hours. In addition, ERCOT has sought and obtained a change to the non-spinning reserve requirements to essentially make it a four-hour product (primarily impacting ESRs). If these requirements were reflected in a targeted market product, prices would more efficiently reflect these requirements. Additionally, the market would schedule resources to satisfy these requirements, reducing the need for out-of-market actions by ERCOT’s operators and the associated uplift costs that must be borne by Texas consumers."

"As the levels of renewable generation increase and ERCOT’s conservative operations continue, these operational needs and out-of-market costs are likely to rise substantially. Hence, we recommend that ERCOT develop a DAM capacity product to account for increasing uncertainty associated with intermittent generation output, load, and other factors. This would be a two- to four-hour ancillary service that could be deployed when uncertainty results in tight real-time conditions. Such a product should be co-optimized with the current energy and ancillary services products and could be deployed to bring online longer lead-time units when ERCOT detects operating conditions are departing from expected conditions," the IMM said

The IMM presented data showing the net capacity changes (load minus supply) that ERCOT faces on average and in the worst hours, both in the two-hour ahead and four-hour ahead timeframe, which the IMM said, "shows that the worst hours, the net capacity change from two to four hours ahead to the operating timeframe can be substantial."

"The markets should recognize and address this uncertainty, which can be accomplished by implementing a well-defined product that ERCOT can deploy to meet these needs. This product would: 1) be less costly than holding excessive amounts of 30-minute reserves; 2) allow co-optimized product prices to more fully reflect the value of managing uncertainty; and 3) reduce out-of-market actions and the costs associated with those actions. In the longer term, once an uncertainty product is implemented, ERCOT can return non-spinning reserve and ECRS to their previous duration requirements," the IMM said

Reevaluate net metering at certain sites

The IMM said, "The IMM agrees with the decision to implement nodal pricing for Controllable Load Resources (CLRs). However, we note that there has been a proliferation of proposed net metering schemes since adoption of NPRR945, Net Metering Requirements, that distorts the incentives provided by this directive. Loads that can be turned on and off quickly, such as data centers and cryptomines, should be incented to be dispatchable in real time through CLR participation rather reducing their consumption to avoid transmission cost allocation and other load charges. Net metering schemes should, at a minimum, only be allowed with affiliated entities. This would help support price formation and provide better congestion management."

"Therefore, the IMM recommends requiring CLRs to have their own meters, rather than allowing net metering schemes amongst unaffiliated entities with meters at the point of interconnection," the IMM said

Eliminate the "small fish" rule

Under the "small fish" rule, generators with less than 5% of the capacity installed in ERCOT are deemed not to have "ERCOT-wide market power."

The IMM said, "Since the introduction of the nodal market, with the Power Balance Penalty Curve and the Operating Reserve Demand Curve, economic withholding by small participants is not required for efficient shortage pricing. In fact, it has led to inefficient pricing in some cases."

"As an example from 2021, a particular thermal generation resource frequently submitted classic 'hockey-stick' offers into real-time, where a small portion of the top of the offer was economically withheld at high prices that are not reflective of that resource’s short-run marginal costs. Protected from market power abuse concerns by the small-fish market power rule, this resource nonetheless was occasionally pivotal and set the real-time price higher than $250 per MWh in 333 SCED intervals (approximately 28 hours) in 2021. Withholding should not be allowed by pivotal suppliers. Small entities can be pivotal when conditions are tight market-wide or when the entity is located in a constrained area where supply is tight. This is particularly important during ramp-constrained intervals in absence of RTC [real-time co-optimization]. In these intervals, the market’s ability to access competing resources can be extremely limited," the IMM said

"Therefore, the IMM recommends removing this market power presumption," the IMM said

IMM Report On Physical Withholding

The IMM said, "We did identify a withholding strategy that arose out of the frequent use of the RUC tool in the latter half of 2021. Given the predictability of the RUC instructions, the ability to opt out of RUC settlement during the operating hour if conditions changed, and the high RUC offer floor which economically withheld MWs under a RUC instruction, a disincentive to self-commit existed for large suppliers. One large supplier did in fact adjust its self-commitment behavior and was far more likely to run under RUC commitment than was seen in prior years."

"To address this incentive issue with the frequent use of RUCs and the high RUC offer floor, we filed NPRR1092, Reduce RUC Offer Floor and Limit RUC Opt-Out Provision. This rule change reduced the RUC offer floor to $250 per MWh and made the RUC opt-out provision limited in its applicability. The rule change was approved by the Board on April 27, 2022, and partially implemented on May 13, 2022," the IMM said

Overall, regarding potential physical withholding, the IMM found that both large and small market participants made more capacity available on average during periods of high demand in 2021 by minimizing planned outages and maximizing the generation offered from each resource.

"These results allow us to conclude that the ERCOT market performed competitively in 2021," the IMM said

See the SOM report here

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