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Texas PUC "Adopts" Performance Credit Mechanism, Obligation For REPs; Won't Implement Immediately, Will Defer To Legislature

PUC Chair: PCM May Help Separate The "Wheat From The Chaff" Among REPs, Calls Some REPs Fly-by-Night

January 19, 2023

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Copyright 2010-21
Reporting by Paul Ring •

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The Texas PUC voted to "adopt", without immediate implementation, a performance credit mechanism (PCM) for the retail market, which will require REPs to procure, through a centrally cleared mechanism, performance credits (PC)

See background on the PCM design here

Numerous REPs have expressed concern with PCM and said that it will negatively impact the retail market, especially for independent REPs (see story here)

The PUC will not immediately implement the PCM in order to permit the legislature to weigh in on the PCM. PUC Chairman Peter Lake said that adoption without implementation is a de facto recommendation to the legislature, but Lake said that formal adoption was required to fulfill the PUC's obligation under SB 3.

Numerous senators have expressed opposition to the PCM, while Gov. Abbott supported strong consideration of the PCM. While the composition of the chambers has changed, observers will recall last session, the Senate was seeking to address concerns about emergency wholesale pricing in the days after ERCOT exited EEA3 conditions, while the House declined to address the issue.

The PUC set forth design principles and decision points for the PSC in a memo adopted by the Commission

The memo states that, "Once implementation is launched at some point in the future subject to consideration and direction of the 88th Legislature, the Commission will develop an implementation plan with categories to determine which entity -- whether the Commission, ERCOT, the IMM or some combination thereof -- is responsible for the analysis related to each of the decision points [discussed in the memo and noted below].

Among other things, the PCM is to be centrally cleared, and, "Ensure entities with affiliated eligible resources and affiliated retail entities do not self-arrange commitments by requiring all transactions to be cleared through a centralized, transparent ERCOT administered market."

Although the term was not used in the adopted memo, Chairman Lake has previously said that the central clearing mechanism will prevent REPs affiliated with generators from engaging in bilateral transactions for PCs

The PUC said that the PCM must also, "Maintain and protect ERCOT's robust competitive wholesale market and retail electricity market that provides choice for consumers."

Furthermore, the PCM and market mitigation in the market, "Ensure competition and innovation will continue to thrive in the ERCOT market by mitigating market power concerns, especially regarding affiliated eligible resources and affiliated retail entities," the PUC said

During a discussion of the potential impact on the retail market, Chairman Lake reiterated his previously expressed view that the current market design does not impose any obligations on REPs

Lake again characterized certain REPs as fly-by-night operations, and said that the PCM can serve to separate the wheat from the chaff in the REP market

Commissioner Jimmy Glotfelty pushed back against Lake's characterization of REPs, which Glotfelty called not fair

Going forward, PCM decision points for the PUC include:

• Define eligible resources on both generation and load side, including evaluation of possibilities to incorporate energy efficiency, demand response, and DERs subject to SB 3 requirements

• Determine PCM compliance period

• Determine number of PCM hours per compliance period

• Determine how PCM hours are calculated

• Determine methodology for identifying hours of highest risk

• Determine reliability standard associated with each PCM compliance period

• Determine demand curve parameters for each PCM compliance period

• Determine requirements for earning a Performance Credit including forward offer requirements

• Determine forward market timing

• Determine if there should be geographic requirements for earning PCs

• Identify the appropriate combination of penalties, claw backs, and other financial consequences in cases of non-performance by performance credit recipients

• Evaluate and identify best practices to mitigate market manipulation through bidding behavior and evaluate ways to mitigate against self-dealing/market power abuse in the centrally cleared market using code of conduct, bidding behavior, and other appropriate limitations/standards

• Determine if modifications should be made to the ORDC based on implementation of PCM, if so, what?

• Determine if changes should be made to VOLL or SWOC based on implementation of PCM, if so, what?

• Determine ability of virtual parties to participate in the PCM market

• Determine the best mechanism to track and annually report percentage of performance credits for new builds versus existing generation facilities and new market entrants versus incumbent generators

• Determine the best type of KPI or success metric to measure the ultimate performance of the PCM

In addition, the Commission is directing ERCOT to evaluate bridging options to retain existing assets and build new generation until the PCM can be fully implemented.

The memo outlining the PUC's PCM is here

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