Conservative approach to Texas grid operations could cost consumers $1.5B this year, says market monitor

Dive Brief:

Changes to how the Electric Reliability Council of Texas manages the state’s grid could add $1.5 billion to customer bills this year, and it isn’t clear those costs are justified, Independent Market Monitor Director Carrie Bivens told a Texas legislature committee on Wednesday.
The higher costs are the result of a “conservative” operating posture by the grid operator and adjustments to scarcity pricing mechanisms in ERCOT’s wholesale market. But “the result of many of these changes is that the pricing outcomes at times grow disconnected from the actual operating conditions,” Bivens said.
Despite higher costs, regulators say Texas grid reliability is improving. There have been “at least six days” in the past year when the additional reserve generation made available by ERCOT’s new operating approach may have helped to avoid rolling blackouts, Public Utilities Commission Chairman Peter Lake told lawmakers.

Dive Insight:

The Texas House Committee on State Affairs on Wednesday received an update on efforts to overhaul wholesale electricity markets, as the state suffers through a heat wave and ERCOT has seen grid demand set multiple records.

The Houston Chronicle reports ERCOT demand reached 76,592 MW on Thursday, topping Monday’s high of 76,566 MW — which bested the roughly 75,000 MW record set earlier this month.

Despite this, the Lone Star State’s grid has remained stable.

“We’ve built a bigger margin of safety into our current operating posture. We're buying more reserves, and adjusting the amount of reserves we have at any given time to real-time conditions,” Lake told the committee. “We're operating the ERCOT grid with an abundance of caution, and we're moving away from the crisis-based business model that drove our grid before and moving towards a reliability-based business model.”

Regulators have altered the ERCOT industrial demand response program to ensure it is used earlier, increased conservation and demand response in ancillary services, and are working on a new voltage support product, Lake said. The maximum price for power was also lowered from $9,000/MWh to $5,000/MWh.

But the more cautious approach to grid operations is costing consumers a lot of money, market monitor Bevins, who works for Potomac Economics, told lawmakers. Changes to the operating reserve demand curve, for instance, have increased prices during times of smaller shortage conditions than was previously done and are creating “disconnected” market signals, she said.

ERCOT’s conservative operating approach has cost consumers an additional $210-$385 million so far this year, according to a recent analysis by the IMM. Changes to the ERCOT operating reserve demand curve have added another $475 million through May 2022, the report said.

“The energy-only market design relies on efficient pricing that reflects the reliability needs of the system,” Bevins said. “While we continue to believe that an energy-only market can be successful at managing a changing grid, it is increasingly incompatible with ERCOT’s conservative operational approach.”

ERCOT has no capacity market and instead has relied on high energy prices to ensure sufficient generation was available. However, Bevins made recommendations to address possible market distortions, including implementing real-time co-optimization to dispatch energy and ancillary services interchangeably, and introducing an uncertainty ancillary service product to increase the flexibility of the system.

“We also want to consider adopting a form of capacity procurement that augments the economic signals that are provided by the energy on the market to ensure the adequacy of ERCOT’s resources over the long term,” Bevins said. But she added that Potomac Economics believes ERCOT should “avoid a piecemeal approach” of targeted payments to narrowly-defined categories of resources.

“A well performing market will facilitate new investment and the retention of existing resources that are needed to bolster reliability when margins are relatively low or falling, and to facilitate the retirement of existing resource and not motivate new investment when capacity margins are relatively high,” Bevins said.