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Texas Industrials Propose Replacing Existing Low Offer Cap In ERCOT With Event-Specific "Circuit Breaker" Mechanism

Vistra Proposes Increasing LCAP To Greater Of $4,500/MWh Or 50x Fuel Index For Rest Of 2021

March 22, 2021

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Copyright 2010-21
Reporting by Paul Ring •

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In comments at the Public Utility Commission of Texas, Texas Industrial Energy Consumers (TIEC) has proposed replacing the low system-wide offer cap (LCAP) in ERCOT with an event-specific circuit breaker mechanism

Currently, the LCAP applies once the Peaker Net Margin (PNM) threshold is reached, with the LCAP replacing the high system wide offer cap (of $9,000 per MWh). The LCAP is currently established as the greater of: (i) $2,000 per MWh and $2,000 per MW per hour; or (ii) 50 times the natural gas price index value determined by ERCOT, expressed in dollars per MWh and dollars per MW per hour

TIEC said that, in the recent weather event, "the LCAP calculation of '50 times a natural gas price index selected by ERCOT' would have resulted in absurd outcomes due to gas pricing and availability during the February freeze."

The PUC had requested comments on changes to the LCAP heading into this summer given that the PNM threshold has been met, and the LCAP would be in place absent any change

"TIEC has long had concerns about the design feature that would keep the LCAP in place for the remainder of the year once a certain Peaker Net Margin (PNM) threshold is reached. It is important to maintain performance incentives during typical capacity-driven scarcity events-when market participants are generally not constrained in their ability to respond-to ensure maximum reliability. TIEC has concerns about going into the summer without these incentives intact," TIEC said

TIEC said that its proposed circuit breaker mechanism -- which would not apply to shortages of installed capacity, but rather disaster and other operational-driven issues such as the recent weather event -- would, "incentivize generators to show up during a crisis by allowing several hours of pricing at or near the HCAP, while providing a circuit breaker to preserve the integrity of the market during natural disasters, storms, system attacks, other catastrophes, widespread supply chain failures, or similar operational events."

Specifically, TIEC recommended that the Commission consider eliminating the current LCAP formulation and replacing it with an event-specific circuit breaker to achieve the following objectives:

(a) Reduce maximum prices during sustained operational events, when a substantial portion of the market is unable to respond to pricing incentives due to an identifiable event that is beyond market participants' control. TIEC is open to discussion on the price level but believes an LCAP of $2,000/MWh could be a reasonable number.

(b) Ensure that no generation operates at a loss during this period by transitioning to the LCAP after a certain period of time, and then providing generators an opportunity to prove up their verifiable costs, akin to the "cost plus" settlement process that occurs for Reliability Unit Commitment (RUC) or Reliability Must Run (RMR) units.

(c) Maintain reasonable price signals to encourage price-based response and limit uplift to the extent possible. TIEC believes this would likely be achieved at the $2,000/MWh level. This proposed LCAP is above the current RUC offer floor of $1,500/MWh, which was specifically designed to be above most generators' marginal cost of operating. As a result, under normal circumstances most generators' actual costs should be recovered at this level, minimizing potential uplift

(d) Restore the default scarcity pricing regime once the event is over. This preserves market performance incentives and improves reliability for capacity-driven scarcity throughout the year.

"Importantly, TIEC does not believe that this circuit breaker feature is appropriate during a capacity-driven scarcity event, like a long hot summer. As we have seen since 2011, even when relatively low reserve margins were projected, the market's response to scarcity pricing has provided a high level of reliability and resource adequacy without the need for an LCAP or other 'circuit breaker.' This response has included adding distributed resources and price-responsive demand, which has significantly contributed to reliability over peak periods. In line with its commitment to competitive markets, the Commission should adopt stringent standards for activating this event-based LCAP and should only invoke the circuit breaker when it has become clear that external forces are substantially impeding typical behavioral response, creating sustained "operational" scarcity," TIEC said

"While TIEC believes further discussions may be needed on the appropriate trigger, a revised, event-specific LCAP could potentially be implemented when ERCOT has been in an Energy Emergency Alert (EEA) Level 3 for more than 10 hours over any 48-hour period, and when there is an identifiable disruption preventing typical market response and creating operational issues," TIEC said

"PNM has always been an imperfect measure of when the market has sufficiently incentivized long-term resource adequacy in a given year, particularly since 80-90% of wholesale market transactions are not part of ERCOT's real-time market. Switching to the LCAP early in the year may also impede performance incentives during the summer and other critical periods. For these reasons, TIEC questions whether the LCAP should remain in effect going into this summer," TIEC said

"[A]s demonstrated during the February freeze, the current LCAP formulation does not work well during a prolonged operational event when the market cannot 'behave its way out,' particularly if there are fuel or other supply chain dislocations. Due to gas prices during the February event, setting the LCAP at 'the higher of' $2,000 or 50x natural gas prices would have actually increased prices far above the HCAP . This does not make sense .. [C]ontinuing to send scarcity signals during events that are driven by operational failures-rather than a capacity shortage-does not incentivize long-term investment or meaningfully contribute to resource adequacy, and is not economically justified," TIEC said

"TIEC believes that the Commission should consider implementing a new event-based LCAP through a rule change before June 2021. Ideally, the Commission would restore the HCAP at that time. However, TIEC acknowledges the extreme financial impacts the February event had for many market participants, and is open to other timing for the restoration of the HCAP. The Commission should be aware, however, that keeping the LCAP in place through the summer could create reliability and operational concerns," TIEC said

Other Comments

The Independent Market Monitor recommended that the LCAP multiplier for natural gas be lowered to 25 from 50, while at the same time ensuring that LCAP does not exceed the high system-wide offer cap (HCAP) in 16 TAC §25.505(g).

The IMM recommended that the PUC, "Modify LCAP to be the greater of 25 times the natural gas price index value determined by ERCOT or $2,000/MWh, with a maximum value equal to HCAP."

NRG Energy said that, "Given the PNM threshold has been reached, NRG strongly encourages the Commission to maintain the system-wide offer cap at $2,000/MWh for the remainder of the year rather than temporarily increasing it to a higher value for the summer. Maintaining the LCAP at $2,000/MWh is consistent with the structure provided by 16 TAC § 25.505(g)(D). The ERCOT market needs a return to certainty."

"However, NRG recognizes the issues with the LCAP calculation when natural gas prices are extremely high and proposes modifications below," NRG said

Specifically, NRG recommends a modification to the rule that would remove the 50 times fuel index price component and allow for generators to recover exceptional fuel costs if this situation were to arise. ERCOT Protocol Section, Mitigated Offer Cap, and Section 9.14.7, Disputes for Reliability Unit Commitment (RUC) Make-Whole Payment for Fuel Costs, allow for filing of exceptional fuel cost and fuel cost recovery during make-whole settlement for the RUC process. Those rules should be adjusted to cover this situation and ensure all costs for operating up to a generator’s high sustainable limit can be recovered.

In separately filed comments, Vistra said, "It ... seems clear from legislative testimony and power industry disclosures that profiting by generators from the winter storm event was mixed at best and likely negative overall challenging the premise of the LCAP rule. In fact, surveying Wall Street analyst reports would strongly suggest that investors are quite skeptical of investing in the ERCOT market given the myriad of rules changes and triggers of which the LCAP rule is one. There is no doubt setting the cap at the LCAP price of $2,000/MWh will be bearish for the ERCOT market and support the notion by investors that the ERCOT market rules have a number of provisions that trigger risk for generators."

Vistra said that the specific LCAP adjustments depend, as an initial matter, on legislative and/or Commission decisions on broader policy questions regarding the effectiveness of the current energy-only market structure. However, if the Commission determines that the energy-only market design should be maintained, then the Commission should consider eliminating the LCAP construct altogether, Vistra said

"[I]n the short term, the Commission should find good cause to grant an exception to the rule and raise the LCAP for the remainder of 2021 to an interim level that balances the costs of Winter Storm Uri with the public policy objective of providing strong and proper behavior incentives for both generation and loads through the critical summer peak period. In addition, it is worth noting that raising the LCAP would not affect most end-use customers (particularly in the competitive market), who should be protected from direct exposure to real-time wholesale prices due to their contracting with retail electric providers (REPs) that should hedge their customers’ load to limit their financial risk," Vistra said

"Vistra thus supports increasing the LCAP to the greater of $4,500/MWh or 50 times the fuel index price for the remainder of 2021," Vistra said

In separately filed comments, Exelon said that it, "believes that the LCAP should be set consistent with the formula included in the Texas Administrative Code and that decision should be made immediately in order to provide certainty to the market."

"Exelon respectfully requests that the Commission promptly rule that it will adhere to current LCAP provisions, and open an informal conference/workshop process to explore the appropriate value for the LCAP on a prospective basis, along with questions regarding related market rules and protocols," Exelon said

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