“While we continue to believe that an energy-only market can be successful and adapt to changing system needs, it is not compatible with ERCOT’s current conservative operational posture.”
ERCOT’s new “conservative” operating approach is not compatible with the state’s energy-only market’s design, according to the grid’s Independent Market Monitor.
Writing in a comprehensive report released May 29, the independent monitor also urged policymakers to closely monitor the effects of new approach and recommended several reforms to keep the market on track.
“It will be crucial to closely observe and evaluate the market outcomes in 2022 and beyond since these changes have implications for adequacy of ERCOT’s resources in the long-term,” Independent Monitor Carrie Bivens wrote.
At issue are changes in ERCOT’s operating procedures implemented in response to last year’s devastating winter emergency. Among the changes are shifts in a price adder system that provides more money to power generators during scarcity conditions, as well as other changes intended to bring more generators online when they might otherwise remain idling in reserve.
Economist Bivens with the Virginia-based Potomac Economics consulting firm serves as the independent market monitor for the Electric Reliability Council of Texas. Each year the independent monitor releases a comprehensive “State of The Market” report for ERCOT that identifies potential market design flaws and includes corrective recommendations. This year’s report focused in large part on concerns relating to ERCOT’s new conservative operational approach.
More specifically, Bivens warned that this approach could undermine the state’s “energy-only” market for trading wholesale power. Under the energy-only structure, power generators generally receive payments only for the energy they sell, as opposed to also receiving separate payments for owning generation capacity. This is in contrast to “capacity markets” common to other U.S. wholesale electricity markets under which generators receive separate payments for the amount of capacity they own. (For more about energy-only and capacity markets, see the online glossary, here.)
The independent monitor noted that recently adopted conservative operational policies had distorted important economic signals created by the Texas energy-only market. This will end up diminishing expected revenues for generators, which, in turn, could threaten ERCOT’s long-term resource adequacy and system reliability, she wrote.
“The results of the changes … are that the pricing outcomes have grown disconnected from the actual operational conditions,” she wrote. “This is problematic because the energy-only market design relies on efficient pricing that reflects the reliability needs of the system. In addition, this can increase risk for market participant if ERCOT over-commits the system and renders generation owner’s decisions uneconomic.
“While we continue to believe that an energy-only market can be successful and adapt to changing system needs, it is not compatible with ERCOT’s current conservative operational posture,” she wrote.
To address these concerns Bivens issued a number of recommendations, including the development of an “uncertainty product” whereby intermittent generators — such as wind power — could purchase standby power in two-hour increments to account for weather uncertainties. She also said policymakers should consider a form of a capacity payment system.
WINTER STORM URI
In addition to her observations regarding ERCOT’s new operational approach, the IMM also enumerated a number of findings regarding the effects of the 2021 winter storm. Among them:
- The total value of electricity during the event equaled $59 billion.
- A “back cast” analysis reveals that a potential peak of energy usage during the storm could have been 76,819 MW had the blackouts not occurred. That would have been an all-time ERCOT record.
- Winter Storm Uri generated $560 million in transmission congestion, approximately a quarter of all congestion costs for 2021.
In addition, the report also included new data regarding generation additions and output during 2021. Among the details:
- Generation additions during 2021 included 7,000 MW of new wind and solar resources, 820 MW of new energy storage resources and 700 MW of new natural gas resources. Retirements includes 150 megawatts of wind and 22 megawatt of natural gas.
- Wind provided 24 percent of total annual output, solar provided 4 percent and natural gas provided 42 percent. The natural gas share represents a decline from 2020, when it stood at 46 percent.
- The annual average market price for energy for 2021 equaled $167.88 per MWh, which is six and a half times higher than the 2020 price of $25.73 per MWh. Excluding the impacts of Winter Storm Uri from pricing, 2021 Real-time Energy Market prices rose 58 percent above 2020, largely due to higher natural gas costs.