The Electric Reliability Council of Texas (ERCOT) has been taking a "conservative" approach to grid operations in the wake of the February 2021 blackouts, and Independent Market Monitor Carrie Bivens told lawmakers on Wednesday that additional reserves required by the strategy added $300 million to $400 million to customer bills in the latter half of 2021.

Changes to how the grid operator schedules emergency reserve generation and demand response resources are also distorting ERCOT markets, say experts.

ERCOT now procures 6,500 MW of non-spinning reserve generation in the day ahead market, and up to an additional 1,000 MW more on days with high forecast demand or uncertainty. The reserve was raised from approximately 4,500 MW after Winter Storm Uri.

Bivens, representatives from ERCOT, and Public Utilities Commission of Texas (PUCT) Chairman Peter Lake testified to the Texas Senate Committee on Business & Commerce on efforts to reform wholesale markets. The "conservative" approach has meant expanded use of emergency resources, and bringing more resources online sooner.

"The grid is strong, and more reliable than it's ever been," Lake told Texas lawmakers.

Lake credited the improved reliability to greater coordination between the electric and gas industries, a requirement to winterize power facilities, and adjustments to the wholesale markets. Lawmakers praised the commission's efforts, but were also wary.

"PUC commissioners all collectively have done an amazing job in a very short period of time," Sen. Robert Nichols, R, said, speaking to Lake. "We were operating [the grid] so close to our margins that .... we were on the edge of the cliff all the time. You widened that margin."

Reliability unit commitments

Nichols then delved into a topic that came up throughout the hearing, and extended into Thursday's PUCT open meeting.

"You widened the margin by using RUC," Nicols said, referring to an ERCOT reliability product, reliability unit commitment, through which the grid operator can compel generators to be available in case they are needed.

"I saw the breakdown of the age of the units that are being called up, and they are about 50 years old," Nichols said. He also noted that while the units are paid for their costs, they are not always making money and do not want to be called.

Observers say the increased use of RUCs is having broad impacts on the wholesale market. RUCs are not new, but since Uri, ERCOT has been using them more frequently to boost reserves. 

"We're not just using [RUCs] a little more ... it's like 10 times more, almost 20 times more," said Nichols, who asked how long the practice would continue.

Though there is no clear date to phase out expanded use of RUCs, the practice was "never intended to go on in perpetuity," said Lake. Rather, it was a step necessary to ensure immediate reliability. The expanded reserve margins, however, are likely "good long-term changes," he said.

RUCs cost Texans about $5 million last year -- not a large sum relative to the cost of the increase in non-spinning reserves, Bivens noted. However, their use is not efficient because of how ERCOT counts and dispatches its reserves.

RUCs were designed for emergency use, and utilizing them daily is adding costs and distorting the market, said Michael Jewell, an attorney with Jewell & Associates who represents ERCOT market participants. On Feb. 24, for instance, RUCs likely contributed to Texas consumers paying hundreds of millions of dollars more for electricity than they should have, he said.

Feb. 24 planning 'not conservative enough' 

ERCOT experienced two winter storms in February. The earlier storm was not a significant test of the grid, observers say. The conservative forecast used by the grid operator meant more resources than were necessary showed up in the market and kept prices low.

But in the late February event, the conservative forecasts were "not conservative enough," Lake said when the RUC discussion carried over into the PUCT open meeting on Thursday. Wind resources failed to show up and load was higher than anticipated.

While RUCs may have helped keep the lights on, they also caused prices to be higher than necessary, say regulators. Texas needed all the resources it had teed up, according to Lake. But it would have been preferable to procure them through an Operating Reserve Demand Curve (ORDC) adder rather than an RUC, he said.

The ORDC is used by ERCOT to determine when scarcity pricing events occur — but, critically, it does not count reserves acquired through RUC. So if ERCOT uses RUC to increasingly ensure sufficient reserves, the ORDC will not relay accurate signals, said Jewell.

"It's an emergency tool," said Jewell. "But in this 'conservative' approach to running the grid, ERCOT is no longer treating RUC as an emergency tool. It is using it as an everyday tool. And the problem is, the market is not designed for it to be used as an everyday tool."

And on top of that, Jewell noted that under the conservative approach to grid operations ERCOT is not counting load resources that can reduce grid stress as part of its reserves. And that is leading to even more units being RUC'd.

"On February 24 there were so many units that were RUC'd and available to the market but were not seen by the ORDC, that it artificially inflated the impact of the ORDC," Jewell said. Energy prices jumped to about $4,000/MWh that day.

Regulators may be wary of further ORDC changes 

Market monitor Bivens told the PUCT that a failure to account for non-controllable loads in ERCOT reserves creates "a disconnect" that "can lead to high prices that may or may not necessarily reflect underlying operational uncertainty."

"We want to see high prices when there's a potential or expectation of scarcity and not necessarily on a non-scarce day," Bivens said. 

"The reason why the loads are treated the way they are is that they're deployed last in the order," ERCOT Vice President of Commercial Operations Kenan Ögelman told commissioners. If you count the non-controllable reserves, "the probability of going into an [Energy Emergency Alert] is higher," he said.

A proposed rulemaking would allow ERCOT "an option to slightly deviate from that accounting," he said. And self-commitment of more resources would help the grid operator get a clearer picture of the system's status, he said. "The self commitment decision by resources needs to happen and be demonstrated to us so that we don't feel the obligation to RUC," Ögelman said.

Adjusting the ORDC "could further enhance the market-based incentives to bring those generators on sooner rather than later," Lake said.

"It could have other effects as well," Bivens warned.

"If there are a deep number of RUCs that are committed, then the ORDC adder is significant and can lead to high prices, that may or may not necessarily reflect underlying operational uncertainty," she said.

Commissioner Lori Cobos expressed some hesitation about more changes to the ORDC, as it was adjusted in January. "We've sent one message and we have to let it play out ... the whole point of the ORDC changes that were made was to encourage operational reliability, so that we have fewer RUCs."

Regulators are watching the interplay between the "conservative operation posture" and market reforms already put in place, said Cobos. "We just need to continue to explore what the right balance is, between the two," she said.

Some responsibility lies on the customer side, said Commissioner Jimmy Glotfelty.

"We are not going to see the markets work exactly the way we want all the time. But we have to let them work as markets. Both generation and load have a responsibility here for their customers," he said.