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TEAM Tells Texas Senate That REPs Won't Know PCM Costs When Entering Into Contracts With Customers

IMM Says PUC Consultant's Report Overstates Retirements Under Energy-Only (.03 LOLE Without These Retirements)

November 17, 2022

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Copyright 2010-21
Reporting by Paul Ring •

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During a Texas Senate committee hearing, Catherine J. Webking, representing the Texas Energy Association for Marketers, alluded to retail pricing challenges REPs will face under a proposed Performance Credit Mechanism (PCM) for the ERCOT market, which would allocate costs of newly created Performance Credits (PC) to LSEs through a retroactive settlement, with a residual centralized auction determining a clearing price

See more background on the PCM here

Webking said that the "capacity" costs under the proposed PCM would not be known at the time the retail electric provider enters into a fixed contract with a residential customer, noting that the quantity and price of the PCM credits would not be known, nor would there be any assurance that there would be any availability in the voluntary bilateral forward market

Webking further said that policymakers' focus should be on ERCOT's operational uncertainty, as opposed to a capacity or similar focus. Webking cited the firm fuel service which was recently adopted, and suggested that there may be additional similar mechanisms that ERCOT can pursue to address operational uncertainty

During the hearing, Senator Donna Campbell expressed concern with any form of capacity market, including the PCM

Campbell said that the PCM has a convoluted and long timeline for implementation with no guarantee of new build

Campbell said that PCM is costly for LSEs, with end-users being the "loser" in the design

Campbell also said that she is not convinced that the PUC's consultant report was a great study

The committee heard concerns from various stakeholders about the forecasts and other assumptions used in the report

Chief among these, cited by the ERCOT IMM and others, is that the report assumes 11 GW of coal and gas retirements under an energy only design, under what the report terms an "equilibrium portfolio."

The IMM said that this overstatement of forecast retirements causes problems for analysis used throughout the report, including the amount of new build required, since the report's energy-only LOLE is higher than it should be

Specifically, in addressing how the report arrived at its equilibrium portfolio retirement assumption, the IMM noted that the report assumes that if a unit's revenues above its variable costs (e.g. fixed cost recovery) do not equal cost of new entry, then the generator would retire. However, the IMM noted that the ERCOT market has hit CONE only twice in the past 10 years, but hasn't seen retirements such as those forecast in the report. The IMM said that resources will make their decisions based on their own ongoing fixed costs, unique to each resource, and expectations of future market revenues

Various stakeholders noted that the report states that, absent these forecast retirements, the results showed that the current (energy only) system achieves a loss of load expectation (LOLE) of 0.03 days/year, exceeding the common industry benchmark of 0.1 days/year or 'one day in ten years'.

During testimony, the IMM again favored its previously reported "uncertainty product".


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