PUCT's Anderson Expands on Issues for Resource Adequacy and Shortage Pricing

PUCT Commissioner Kenneth Anderson has expanded on the "comprehensive and holistic" approach that should be taken to resolve the resource adequacy and shortage pricing issues in the ERCOT market which includes measures beyond simply the recent floors for Non-Spin Reserve Service (NSRS).

As previously reported (10/27), Anderson suggested several of the measures last month when the Commission agreed on the Non-Spin price floors, but in a memo filed yesterday provided more detail on each issue.

Anderson separated issues into three categories: the first category consists of items upon which the Commission has reached consensus and merely await implementation through changes to ERCOT protocols or processes; the second category includes proposals that should be implemented, but merit additional, yet expeditious, study by ERCOT, Commission Staff, the Independent Market Monitor, and the stakeholders; and the final category is made up of other proposals that deserve consideration, but require further study, and are not as time-sensitive because they cannot be implemented before next summer.

The Commission deferred substantive discussion on the issues until the December 8 open meeting; however, especially with respect to the consensus items, Commissioners encouraged stakeholders to continue working and to not await further discussion from the Commission.

Starting with the second category (since consensus has largely been reached on issues in the first category, though they are listed below), Anderson said that the Commission should direct ERCOT to study and recommend: (1) the proper levels for expansion of responsive reserves (with a corresponding reduction in NSRS), (2) the proper magnitude and slope of the Power Balance Penalty Curve (PBPC) and (3) the proper price floor for capacity called by ERCOT through the Reliability Unit Commitment (RUC) process to meet capacity insufficiency.

"The combined effect of these additional actions should result in more accurate timing for scarcity signals and make those signals more accurate," Anderson said.

Anderson said that issues related to Low Sustained Limit (LSL) may be resolved through the proposed processes, but if not, should be addressed in the third category of issues.

More specifically on each Category Two issue, Anderson said the following:

• Amount of Responsive Reserves: "I believe the Commission should direct ERCOT to evaluate the appropriate amount of capacity and then move that amount from NSRS to responsive reserves, and further that, subject to the PBPC, these additional responsive reserves should be offered into SCED [Security Constrained Economic Dispatch] at the SWOC [System-Wide Offer Cap]. This change can be accomplished quickly because it does not require a rule change and it will have the benefit of signaling scarcity more quickly, ideally before ERCOT begins to release Emergency Alerts. Additionally, because responsive reserves are only deployed when there is system-wide scarcity, it would limit scarcity signals to true scarcity conditions. This proposal has the double benefit of improving reliability and sending more efficient price signals."

• PBPC: "The Commission should ask ERCOT and the stakeholders to study, and report back to the Commission, as soon as possible the merits of changes to the magnitude and shape of the PBPC. The Commission should be informed, and ultimately opine, about (1) where on the offer curve the PBPC should start, (2) how quickly prices should rise as the energy supply is depleted, and (3) the magnitude of the highest price on the PBPC (the PBPC cap). If the PBPC is properly shaped, I believe raising the PBPC cap will send stronger scarcity price signals to resources and load, particularly with the advent of Nodal 2.0.

"City Public Service of San Antonio d/b/a CPS Energy (CPS) has proposed raising the PBPC cap from $3,000 to $4,000. CPS states that calculations by the IMM show that simply raising the PBPC cap to $4,000 would have raised the Peaker Net Margin by $26,000 in 2011. Like the expansion of responsive reserves, changing the PBPC can be accomplished quickly because it does not require a rule or system change. It is important to remember that the $3,000 price used in the current PBPC cap was chosen because the Commission had already accepted prices up to $3,000 by setting the SWOC at that amount. I would like ERCOT, the IMM (and the stakeholders) to study and determine whether and how the PBPC should be shaped and whether and how much the PBPC cap should be raised.

"While I believe that raising the PBPC cap is probably necessary, I recognize that this action will also increase the risk to which generators are exposed in the ERCOT market. If generators do not hedge their risk properly and a scarcity event occurs such that prices go to the PBPC cap, generators stand to lose a great deal of money very quickly if they are unable to meet their schedule. This exact scenario occurred in February 2011. There is also the risk that generators might refrain from full participation in the Day Ahead Market in order to self-hedge their contractual obligations to load. Therefore, if it is determined that raising the PBPC cap is necessary or desirable, I would ask ERCOT and the Stakeholders also to address when such changes to the PBPC should become effective, so that generators and other parties have ample opportunity to evaluate and establish adequate hedging and other risk management safeguards."

• RUC for Capacity: "Finally, I would like for ERCOT (and the IMM and stakeholders) to study and recommend a price floor for units that are RUCed for capacity. Similar to the price reversal that has occurred in the past with the deployment of non-spin, energy produced by RUCed units below its LSL is priced as a price taker, which can temporarily drive the price curve down. ERCOT does not RUC a unit unless it is needed for local reliability or general capacity sufficiency. I believe the price floor for these units should be higher than that for non-spin because these units are not standing by ready to run, or already running. While initially the market participants believed RUC capacity should be priced at the SWOC, some concerns have been voiced about possible inefficient or even perverse incentives. I would ask ERCOT to evaluate whether a $500 or some higher price floor for these units is appropriate. As part of the evaluation, ERCOT, the IMM and the stakeholders should address the issue of whether and how the RUC clawback should be adjusted."

In the final category, Anderson said that there are a number of other proposals for structural adjustments to the ERCOT market, including (1) raising the SWOC, (2) the LSL problem noted above under the RUC for capacity issue, (3) the adequacy of compensation for RUCs made to provide local reliability and transmission relief, and (4) eliminating the "cap" on Peaker Net Margin (PNM) (actually an automatic reduction in the SWOC if the PNM reaches $175,000).

"I believe each of these proposals deserve further study by ERCOT and the stakeholders, but I doubt that a consensus recommendation can be made to the Commission in time for any proposal to be implemented before next summer," Anderson noted.

"With respect to the LSL issue, this is a problem that must be addressed long-term, not only because of price suppression occurring when a large number of units are RUCed for capacity, but also to deal with the effect on prices that may come from deploying a significant amount of SRUCed [Seasonal Reliability Unit Commitments, see below] generation in the future. After the Category TWO issues are addressed, this issue deserves immediate attention by ERCOT, the IMM and the stakeholders," Anderson said.

Returning to the first category of issues, Anderson summarized the previously reached consensus as follows:

• NSRS: On-line non-spin energy bids will have a price floor of $120/MWh and will be included in SCED. Energy bids for off-line non-spin and quick-start units will have a price floor of $180/MWh. These price floors will continue only until Nodal 2.0 is implemented. Periodically, the IMM and ERCOT should review these price floors to take into consideration then prevailing natural gas prices.

• Responsive Reserves and Up Regulation Service: Subject to the Power Balance Penalty Curve (PBPC), responsive reserve energy is to be priced at the system-wide offer cap (SWOC). Up Regulation Service energy also is to be priced at the SWOC.

• Substantive Rule 25.504(c): Staff has provided, and will continue to provide, its calculation of installed generation capacity in ERCOT for purposes of the "small fish swim free" market power exemption.

• Mothballed Units: ERCOT should move quickly to institutionalize a process for the involuntary recall of mothballed units for capacity (Seasonal Reliability Unit Commitments or SRUC) on terms similar to the use of Reliability Must Run (RMR) contracts during the summer of 2011. A recalled unit's energy above the unit's low sustained limit (LSL) should be submitted to SCED at the SWOC and the SRUC units should not be deployed to relieve local congestion. Furthermore, the protocol should provide that this tool is only to be used in extraordinary conditions to deal with clearly foreseeable and imminently forecasted seasonal capacity shortages.