Known in regulatory parlance as the Performance Credit Mechanism, the regulatory change calls for the creation of new financial instruments known as “Performance Credits” to be traded by market participants.
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Find out more about ERCOT in this glossary and primer, created in 2022 by the Oncor Cities Steering Committee.
A pending ERCOT market overhaul intended to shore up system reliability – but which carries extra costs for consumers – was the subject of a recent all-day policy workshop in Austin.
Known in regulatory parlance as the Performance Credit Mechanism, the regulatory change calls for the creation of new financial instruments known as “Performance Credits” to be traded by market participants. The April 17 workshop was led by the Public Utility Commission consultants at Energy + Environmental Economics, or E3, which in turn are expected to submit a draft PCM design to the PUC in May.
Background
Under the PCM, a reliability standard would be established along with a corresponding quantity of Performance Credits. Load-serving entities such as retail electric providers and municipally-owned utilities would be required to purchase these performant credits, and presumably would pass along their costs to end-users. Meanwhile, revenue from the credits would go to generation resources based on their availability during high-risk hours. The PCM design also allows for load-serving entities and electric generators to trade the Performance Credits during the year, through a voluntary market.
In January of 2023, PUC commissioners adopted a Performance Credit Mechanism proposal in partial response to the market upheaval from Winter Storm Uri in 2021. The 88th Texas Legislature then provided a qualified endorsement for the PCM by including a version of it in House Bill 1500, the PUC Sunset Bill, which was signed into law in June 2023. However, the Legislature also added guard rails to the PCM, including a $1 billion cap on net costs of Performance Credits.
Purpose of the Workshop
The purpose of the workshop was to provide an overview of the general design of the PCM, provide for common understanding of the recommended design parameters, and give stakeholders an initial opportunity to pose questions and provide input.
The issue that received the most attention during the workshop was the $1 billion cost cap. Several stakeholders said that measuring the net costs of the credits would be a significant challenge. The E3 consultants also said that with the $1 billion annual net cost cap in place, it would be difficult to meet the corresponding reliability standard that the PUC is expected to announce in May. However, the consultants said one possibility for meeting the reliability standard with the cost cap in place would be if low prices in the energy market end up offsetting potentially extreme prices for Performance Credits. Several workshop stakeholders met this explanation with extreme skepticism.
Some of the other discussions and themes that arose during the workshop include the following:
- Confusion about mechanics. As the PCM proposal remains novel and untried, many stakeholders expressed confusion about how the market for PC’s would work in practice.
- Complexity: Many stakeholders during the workshop described the PCM design as needlessly complex.
- Diminishment of the energy market: E3 described the PCM as a move away from the energy-only market design. However, many stakeholders remain invested in the energy market design and expressed a desire for the PCM to enhance the energy market, not diminish it.
- High cost to retailers: Retail Electric Providers see the PCM design as a risk unique to retailers that may be very hard to manage through hedging arrangements.
- Battery participation uncertainty: While the PCM design is intended to allow Battery Energy Storage Resources to compete for Performance Credits—unlike wind and solar, which are excluded—there is great uncertainty among stakeholders as to how batteries would operate in the PCM market.
- Market Power: in a recent memo to the Commission, the new Independent Market Monitor for the ERCOT Market largely dismissed the risk of market power manipulation of the PCM by generators. However, stakeholders during the workshop continued to express concern.
Find a link to the workshop rebroadcast is here.