TIEC Says "Compromise" Non-Spin Price Floors Would Have Raised Average Prices by $50/MWh

Imposing Non-Spinning Reserve Service (NSRS) price floors in ERCOT under the "compromise" proposal would have increased average prices by $46.49/MWh in 2011, if the low system offer cap [LCAP] were not applied, the Texas Industrial Energy Consumers said in comments to the PUCT.

The compromise proposal, which TIEC refers to as the Luminant/NRG proposal, would establish a NSRS offer floor of $250/MWh to $1,000/MWh for online NSRS and $1,000/MWh to $3,000/MWh for offline NSRS (see 8/19 for discussion)

According to TIEC, "[e]stimated impacts of the Luminant/NRG price floors presented at the Reliability Deployments Task Force (RDTF) have ranged from a total additional Peaker Net Margin of $5,000 to $320,000."

"This extraordinarily broad range of cost impacts demonstrates that (1) the impacts of Luminant/NRG's proposal are still so poorly understood such that ERCOT has been unable to adequately model how it would work, and (2) Luminant/NRG's proposal will produce radically different costs to consumers depending on the circumstances of a particular year. This is why the Commission should make market design changes that are based on principles and sound methodologies, rather than trying to 'pick a price,'" TIEC said.

"TIEC estimates that the Luminant/NRG proposal would have increased average prices by $46.49/MWh in 2011 --approximately a 93% increase in average prices -- if the LCAP were not applied. If the LCAP remained in place, the cost impact would still have been approximately $17/MWh, nearly a 35% increase in prices," TIEC said.

"These cost impacts are extreme and unjustified, and demonstrate that the Luminant/NRG proposal will result in great harm to the market," TIEC warned

TIEC said that the energy price suppression which accompanies NSRS deployments would be eliminated if the NSRS energy were simply offered into Security Constrained Economic Dispatch (SCED), which TIEC concedes may not be a viable option until look-ahead SCED is implemented.

In the meantime, however, TIEC said that, "two simple changes provide a near-term solution: (a) online NSRS energy should always be available to SCED to avoid prices rising and then falling once cheaper NSRS energy is released, and (b) the NSRS offer curves should be adjusted to offset the potential impact of the day ahead capacity payments. This means increasing the NSRS offers to a level that approximates how that energy would have been offered into SCED if NSRS did not exist, which should primarily be based on start-up costs (note that since on-line units have already incurred start-up costs as part of a competitive decision to operate, any increase for on-line units should be minimal). This is the extent of the measures that are appropriate to address the issues related to NSRS," TIEC recommended

"However, certain generators have proposed to resolve the NSRS pricing issues in a manner that is actually aimed at creating out-of-market wealth transfers from load to generation in the name of addressing resource adequacy concerns. Under their proposal, NSRS prices would be administratively increased far beyond what the offer curves would look like if that energy were offered into SCED," TIEC said.

"The NSRS pricing proposal supported by Luminant and NRG bears no relationship to how NSRS providers would offer their energy into SCED. In fact, supporters of that proposal do not pretend that this is their intent. Instead, the goal behind this proposal is to funnel additional revenues to generators through a mechanism that does not correlate with scarcity in order to avoid openly and transparently debating whether the Commission's current rules on resource adequacy should be changed. In contrast, the floors proposed by CPS and the IMM are more than adequate to approximate the actual costs of units in the online and offline NSRS bid stacks to offset any potential effects of the day-ahead capacity payment," TIEC continued.

TIEC also countered the focus on reaching Peaker Net Margin, noting that the level ($175,000) contained in the Substantive Rules was intentionally designed as, "far in excess of what it would actually cost to build new generation" -- specifically, twice the annualized fixed costs of a new gas-fired peaking unit.

TIEC cited IMM data showing that the current net revenue required to satisfy the annual fixed costs (including capital carrying costs) of a new gas turbine unit is approximately $80,000-$105,000 per MW-year. The actual Peaker Net Margin to date in 2011 exceeds this value by approximately 10-40%, TIEC added.

Additionally, "Peaker Net Margin in ERCOT has never hit $175,000, and yet more generation has been built in ERCOT than in any other market in the country," TIEC reminded.

"What is clear ... is that the Peaker Net Margin has borne little relation to overall investment decisions in the ERCOT market," the Steering Committee of Cities Served by Oncor agreed, which urged caution on any market design changes.

"[W]hat if a mechanism is put in place to increase wholesale prices to ensure resource adequacy, but does not work? If this occurs, consumers will have simply paid more to existing generation owners, with no additional value received in return," Cities noted.

For this reason, Cities urged rejection of the offer floors in the "compromise" proposal,

"The correlation between those very high figures [in the compromise proposal] and the likely actual costs of on-line and off-line NSRS energy is unclear; indeed, the proponents of the Compromise Solution do not appear to even purport that these price floors correlate in any way with generators' costs," Cities said.

The Texas Energy Association for Marketers supported the "original" CPS Energy proposal of offer floors of: 18 times Heat Rate (HR) for on-line and Quick Start Generation Resources (QSGR); $120/MWh + 15HR for off-line NSRS; and $3000/MWh for Responsive Reserve Service (RRS) capacity.

"TEAM suggests that it may be more prudent to start with this approach and gain some market experience regarding its effects. If there is still concern with price signals, further adjustments to that floor could be made," TEAM said.

As discussed below, CPS has revised its proposal to marginally increase the proposed offer floors.

In contrast, the Alliance for Retail Markets reiterated support for the higher offer floors in the compromise proposal, versus the CPS proposal. "If NSRS offer floors substantially lower than those in the Compromise Proposal are adopted, ARM asserts that the Commission will need to expeditiously take additional steps to fully address scarcity pricing and resource adequacy issues identified in this project," ARM said.

CPS has amended its original proposal to include the following:

1. Increasing and expanding the Power Balance Penalty Curve by:

a. Covering 400 MW; and
b. Increasing to $4000 MWh.

2. Recognizing the discussed need for additional Responsive Reserves at ERCOT reliability groups by:

a. Pricing Responsive Reserve energy in SCED at the offer cap (Currently $3000);

b. Increasing Responsive Reserve requirements by 500 MW; and

c. Decreasing Non-spin requirements by 500 MW.

3. Creating Non-spin offer floors from Low Sustainable Limit (LSL) to High Sustainable Limit (HSL) energy with the following offer floors that may be adjusted periodically to reflect changes in gas prices:

a. $100/MWh for online and quick start resources; and

b. $150/MWh for offline resources.

4. Pricing Reliability Unit Commitment (RUC) at $500 when it is used for Capacity

5. Pricing Up Regulation Service (URS) at the cap ($3000) when it is released to SCED.