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ERCOT IMM Opposes NPRR Which Would Create Program Paying Texas Retail Providers For Residential Demand Response
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The Independent Market Monitor for ERCOT has submitted comments opposing Nodal Protocol Revision Request (NPRR) 1296 which would create an ERCOT-funded program providing incentive payments to retail electric providers (via REPs' QSEs) for residential demand response (RDR program)
See background on the proposed program here
Among other things, the IMM said in comments that, "The administratively set cost of this program represents a reduction of revenue from generators across the arguably highest-revenue hours across each season, ultimately undermining resource adequacy."
As further discussed below, the IMM also said that the proposed program would compete with the Aggregated Distributed Energy Resource (ADER) program and, "could severely limit participation in the ADER program."
The IMM said that the proposed NPRR 1296 program, "compensates participants without reference to the market value of their demand reductions, creating payments that do not reflect the true contribution of the response to reliability or price formation."
"Peak net demand does not necessarily correspond to elevated energy prices, particularly in seasons that do not experience particularly tight system conditions. Compensating demand response according to CONE in the absence of elevated wholesale prices results in over-charging the load base through uplift while reducing revenue to generators by uneconomically reducing load and/or prices. The long-term effect of such a revenue reduction undermines resource adequacy," the IMM said
"Basing the program’s budget and compensation on CONE is unjustified, as CONE relates to generation investment and long-term resource adequacy, not to valuing demand response during seasonal net demand peaks that may be well below the existing load serving capacity of the system. Although both concepts aim to support reliability, there is no meaningful link that would justify using CONE as the foundation for this program’s design," the IMM said
In earlier comments, Reliant had, in response to concerns about the impact of the residential DR program on price formation, suggested incorporation of an ERS-style price adjustment mechanism, or transition of the new program into ERS, as a potential long-term solution for stakeholders to consider.
The IMM said that Reliant's suggestion, that the price formation impacts of the residential DR program could be muted through the RDPA in the same fashion as with ERS deployments, "isn’t likely to be effective[.]"
The IMM noted that the volume of residential demand response isn’t known in real time, and that the intervals over which demand response would be compensated through this new residential program are only known at the end of the season once the peak net demand intervals have been identified.
"ERS deployments, by contrast, are initiated by ERCOT operators during EEAs and are then accounted for in the reliability pricing run of SCED in a consistent, formulaic manner. Even granting that distinction, the remediation of the impact of ERS deployments on price formation through the RDPA is imperfect at best, and straightforward improvements to that methodology such as NPRR1006, Update Real-Time On-Line Reliability Deployment Price Adder Inputs to Match Actual Data, have been long delayed in their implementation. Thus, we are skeptical that the RDPA could effectively overcome the price formation impacts of this out of market demand response program," the IMM said
More generally, the IMM said that, "[t]reating demand reductions differently through above market payments is fundamentally flawed".
"Demand reduction is inherently about cost avoidance. While the trigger price for avoiding cost varies across demand sources, it is ultimately a financial decision to reduce consumption to avoid cost. The cost avoidance is the compensation for the reduction and there is no need to pay for demand reduction beyond the avoided cost. Paying for demand reductions separately and differently than energy production is a fundamentally flawed premise. This approach mirrors problems seen in FERC-regulated load response programs, where payments for estimated reductions have led to overcompensation, inaccurate baselines, and distorted price signals. Instead, a well-designed wholesale market for electricity will incentivize Load Serving Entities and their consumers to reduce their demand to reduce their exposure to elevated energy costs that result from higher prices in the energy market. ERCOT’s market is already well-suited to this kind of price response," the IMM said
The IMM said, "Compensating consumers for demand reductions promotes two problematic outcomes. First, it incentivizes load reductions at a lower price level than what would be strictly economical based on the customer’s VOLL. Second, demand reductions are measured against a counterfactual baseline, which introduces significant uncertainty. It is difficult to know what a customer’s load would have been without the program, making the calculated reductions prone to error. This structure also invites manipulation, as participants can inflate their baselines to exaggerate the size of their demand response and increase compensation."
The IMM also said that the NPRR 1296 program, "amounts to competition against the ADER program."
The IMM said, "The ADER program may face technical challenges to upgrade it from its current pilot phase to a fully incorporated market tool. We expect that the resources that will be sunk into the RDR [NPRR 1296 program] program will discourage ERCOT from making the necessary improvements and investments to expand the ADER program."
"[T]he proposed design of the RDR program offers an outsized revenue opportunity for current and potential participants of the ADER program, which is going to discourage participation in ADER and stall necessary investments to expand the ADER program," the IMM said
The IMM said that, for the ADER program to continue to grow, several technical challenges will need to be addressed, including but not limited to:
• Dispatching and settling ALRs on a nodal rather than zonal basis to achieve efficient dispatch solutions and prices that accurately reflect congestion.
• Modeling ALRs as ESRs so that they can be dispatched for net injections of energy in SCED.
The IMM said, "These changes would require significant effort and investment from ERCOT. Such investments only make sense if the ADER program is expected to grow substantially, and this residential DR program could severely limit participation in the ADER program. The tradeoff at hand is a more expensive, less effective, out of market demand response program versus a promising program for incorporating DERs directly into the wholesale market."
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November 3, 2025
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Copyright 2025 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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