GDF SUEZ Files Hogan Paper on Operating Reserve Demand Curve in ERCOT

Adopting an operating reserve demand curve in ERCOT would improve reliability, support adequate scarcity pricing, and would be fully compatible with other market-oriented policies, the existing Texas "energy only" market design, and the proposed options for long-term resource adequacy, a new paper by Professor William Hogan finds.

The paper was commissioned by IPR-GDF SUEZ Energy North America. Hogan serves as the Raymond Plank Professor of Global Energy Policy at the John F. Kennedy School of Government, Harvard University.

GDF SUEZ said that the creation of an operating reserve demand curve, "can provide a high degree of immediate, real-time reliability and longer-term resource adequacy through proper price signals in the efficient energy-only market."

Hogan's analysis finds that: "Texas has a window of opportunity to complement its resource adequacy initiatives with an accelerated program to adopt an operating reserve demand curve. Suppressed prices in real-time markets provide inadequate incentives for both generation investment and active participation by demand bidding. An operating reserved demand curve developed from first principles would improve reliability, support adequate scarcity pricing, and be straightforward to implement within the framework of economic dispatch. This approach would be fully compatible with other market-oriented policies, the existing Texas 'energy only' market design, and the proposed options for long-term resource adequacy.

Of centralized capacity markets, Hogan's paper finds:

"It is difficult to properly define the capacity product, determine the amount and location of capacity needed many years ahead, and integrate diverse products that blend capacity and energy in a variety of configurations. Experience has shown that forward capacity markets, with their preset procurements, are subject to manipulation by generators and loads. For example, in PJM the independent market monitor regularly finds that aggregate energy markets are workably competitive and capacity market structures are not competitive. This leads to requirements for capacity market regulations on offers and performance, bid mitigation, and other complications. The problems are fundamental. It is not easy to build a good forward capacity market model based on first principles."

Moreover, "whatever the choice of whether to have a capacity market and what design to choose, the focus on the forward market produces at best weak connections with real time operations. The socialization of capacity payments does not send the right scarcity signals to generators or loads in real-time operations. Capacity markets may provide additional capacity that could be available in real-time. But capacity markets themselves do not create the correct incentives to operate capacity or change load in response to short-run scarcity conditions," Hogan said [emphasis added].

Link to Hogan paper