Texas Load: Capacity Market Will "Substantially Harm Retail Customers"

Contrary to the spin offered by capacity owners, the Brattle report regarding ERCOT resource adequacy, "does not reject energy-only markets," the Texas Industrial Energy Consumers said in comments to the Public Utility Commission of Texas (40268), as TIEC also cautioned that transitioning to a capacity-based market design, "will substantially harm retail customers."

TIEC noted that, "[s]everal commenters incorrectly imply that the ultimate conclusion to be drawn from the Brattle Report is that an energy-only market will not maintain adequate reliability. Some, like Topaz and Exelon, are even more direct in suggesting a capacity market. These commenters are incorrect as to the Brattle Report's conclusions and analysis. The Brattle Report does not conclude that an energy-only market design cannot succeed. To the contrary, the Brattle Report lays out a specific set of changes that, if made, would allow an energy-only market to meet desired reliability and resource objectives."

"The Brattle Report provides a comprehensive package of market design recommendations that would facilitate a successful, reliable energy-only market under 'Option 1.' This package includes setting a price cap that approximates the average VOLL [Value of Lost Load] but would only be reached when actual firm load shed is occurring, and creating a gradual, administrative scarcity pricing curve up to that level. It also includes removing a number of inefficient market features that have been added over the past year. According to the Brattle Group, a substantial increase in market-based demand response would also be required. As the Brattle Report notes, '[i]f several thousand megawatts (MW) of price-responsive demand were added, those resources could prevent involuntary load shedding and set prices at customers' willingness to pay, thereby increasing reliability and softening (but not eliminating) price spikes.' In other words, rather than imposing random, involuntary firm load-shedding during extreme scarcity, customers would be able to curtail voluntarily based on their individual values of lost load, and this activity would contribute to price formation. As Brattle notes, '[w]ith this much demand response ERCOT'S energy only market design could support the current bulk power reliability target under a $9,000 price cap,'" TIEC said [emphasis by TIEC].

"Attempting to transition to a capacity-based market design at this time will not help the current resource adequacy concerns, and will substantially harm retail customers in ERCOT," TIEC continued.

"Experience demonstrates that this type of major market design change will create substantial costs for consumers and will take many years to complete ... Implementing a market design that is based partially or wholly on centralized capacity procurement would require revamping the entire market, and is not a feature that can simply be tacked on to the current design. Such a 'belt-and-suspenders' approach would be unduly harmful to Texas businesses and other retail customers. For example, if the capacity necessary to meet a target reserve margin is obtained through a centralized forward capacity market, then the scarcity pricing mechanisms in the current market design would be redundant, and would need be greatly reduced or eliminated," TIEC noted.

"Further, given that predictability and certainty are among the most important factors in an investment decision, the Commission should avoid embarking on a major market redesign if it is hoping to attract generation now. As the Brattle report notes, generation owners 'may be reluctant to announce investment plans while the PUCT is actively considering whether to increase price parameters in response to an expected capacity shortfall.' Speculation that the Commission might adopt a completely different market would have an even greater chilling effect on generation development," TIEC said.

"Instead, the Commission should focus on correcting inefficiencies in the current market energy-only market design, both in this project and in Project No. 40480. Under Option 1, as presented in the Brattle Report, the Commission could make the majority of the recommended changes within a relatively short time period (a few months). The Commission should pursue this course rather than creating additional costs and market uncertainty by attempting to overhaul the existing market design," TIEC said.