ERCOT State of the Market: CT and CC Revenue Sufficient to Support New Entry

Estimated net revenues for new combustion turbines and combined cycle units in ERCOT were sufficient to support new entry during 2011, finds the Independent Market Monitor in the annual State of the Market report.

These results were notably achieved at a high price cap of $3,000/MWh. The price cap has since been raised to $4,500/MWh, effective August 1, 2012.

For a new natural gas fueled combustion turbine, the estimated net revenue requirement is approximately $80 to $105 per kW-year. The estimated net revenue in 2011 for a new gas turbine ranged from $107 per kW-year in the North zone to $113 per kW-year in the Houston zone, indicating that for the first time since 2008, net revenues were sufficient to support new gas turbine generation.

For a new natural gas fueled combined cycle unit, the estimated net revenue requirement is approximately $105 to $135 per kW-year. The estimated net revenue in 2011 for a new combined cycle unit ranged from $133 per kW-year in the North to $140 per kW-year in Houston, again indicating that 2011 was the first time since 2008 that net revenues have been sufficient to support new combined cycle generation in ERCOT.

The IMM noted that the 2008 Houston and South zone net revenues were inflated by inefficient transmission congestion management. Discounting the effect that the 2008 results would have had on forward price signals, the IMM said that 2011 was the first time in five years that net revenues have been sufficient to support either new gas turbine or combined cycle generation.

The IMM also said that the Peaker Net Margin reached the level sufficient for new entry in 2011, at over $120,000 per MW.

For a new nuclear unit, the estimated net revenue requirement is approximately $280 to $390 per kW-year. The estimated net revenue in 2011 for a new nuclear unit was approximately $270 per kW-year.

For a new coal unit, the estimated net revenue requirement is approximately $210 to $270 per kW-year. The estimated net revenue in 2011 for a new coal unit was less than $160 per kW-year.

The total number of dispatch intervals with system-wide energy prices at the offer cap amounted to 28.5 hours in 2011.

"Although net revenues were sufficient for new gas generation, they were not overly so. Even with the improvements discussed, pricing during shortage intervals may need to be even higher to ensure that investments in new supply and/or demand resources result in maintaining the minimum required installed reserve margin," the IMM said.

To improve real-time energy price formation, the IMM continues to recommend that ERCOT develop a mechanism that will rationally commit generation and load resources that can start or curtail within 30 minutes.

The IMM further recommends implementing a "look ahead" dispatch functionality for the real-time market to produce an energy and ancillary services commitment and dispatch results that are co-optimized and recognize anticipated changes in system demands.

"An effective look ahead dispatch functionality should also reduce the price dampening effects of energy produced by units operating below their low sustainable operating limit. Although alternatives have been suggested to address this issue in a standalone manner, we believe the better approach will be to develop a comprehensive look ahead dispatch solution," the IMM said.

Examining various competitive performance metrics, the IMM found that the ERCOT nodal wholesale market performed competitively in 2011.

Link to State of the Market report