Tenaska "Straw Man" Would Impose Four-Year Forward Capacity Obligation on ERCOT Retail Providers, LSEs

Tenaska, Inc. has filed a strawman proposal with the Public Utility Commission of Texas to address resource adequacy in ERCOT, under which load serving entities would be required to meet, on a four-year forward basis, "administratively-set reliability levels," with Tenaska stating that the mechanism is designed to "prime" a bilateral market to meet such levels.

Tenaska called the strawman a hybrid of Options 3 and 4 from the Brattle report, "requiring LSE's to be accountable for the resources their customers depend on."

Notably, the strawman includes a four-year forward obligation placed on LSEs, which is a horizon longer than seen in any RTO with a mandated capacity obligation.

"A forward-looking requirement is necessary to allow for the time to develop and construct permanent market resources," Tenaska said.

To summarize Tenaska's strawman:

• For every MW a Resource can "reliably produce," the Resource will be credited with one RAC. RACs from existing Resources shall be validated using an annual availability methodology; RACs from Resources which are planned or under construction shall be supported by an appropriate financial guarantee by the LSE utilizing such RACs.

• All Load Serving Entities (LSEs) shall annually demonstrate they have adequate energy generation or demand response resources plus an additional reserve margin in order to maintain the required system reliability.

• Annually, ERCOT will project resource adequacy shortfalls in its December CDR report, adjusted to remove all generation not then under construction, on a four year forward basis, beginning with the summer requirements for 2017 or the next peak period four years beyond implementation of the strawman.

• Six months after the time ERCOT calculates a projected shortfall in the reserve margin, each LSE must demonstrate to ERCOT that they have adequate Resource Adequacy Credits (RACs) to cover their most recent annual peak load plus the administratively set reserve margin for the period beginning with the shortfall. If a shortfall still exists ERCOT shall procure the adjusted shortfall through a "backstop" mechanism.

• When ERCOT forecasts a shortfall not covered by RACs controlled by LSEs, it shall procure additional generation or demand response resources. When ERCOT issues an RFP for resource adequacy, it will procure new Resources (generation not already under construction or demand response not currently being utilized as a load resource) under a contract for differences structure. The lowest cost "qualified" projects totaling the projected shortfall (a combination of lowest, projected firm all-in energy cost on an NPV basis, with defined minimum project attributes including project viability and RAC qualifications) will secure a contract or contracts with ERCOT.

• At the time ERCOT irrevocably commits to the additional Resource(s), it shall calculate the revenue required to pay for such Resource(s), the cost of procurement, credit, and "reasonable damages" for failure to procure RACs. These payments shall be borne ratably by LSEs who have 1) failed to procure adequate RACs by the time of ERCOT's Resource procurement and/or 2) LSEs whose resources failed to be available for the procurement period. ERCOT may adjust each such LSE's security and credit requirement to reflect such obligation.

• The new Resource(s) procured under this construct would be bid administratively by ERCOT into the real time energy market at a price equal to a sampling representative of bids for similar Resources, if such energy price is above the Resource's strike price specified in the backstop procurement bid. If procured projects are late or do not materialize, damages will accrue to project sponsors.

Tenaska said that, "penalties should be of a great enough magnitude to discourage gaming by LSEs."