Special Report: ERCOT: Are Changes in the Wind?

We recently sent out the informal RSI below to some trusted trading partners, colleagues and peers in a search for transparency for a changing ERCOT market. Low prices have tainted our risk outlook and we need to get on an even keel. There are two components to responses, the first being Real-Time prices (LMP) as they have moved up fairly quickly; the second is directed to resource adequacy, ancillary services, and how “energy-only” models (Texas) compare to other deregulated jurisdictions’ “capacity” models.

Since the aftermath of the February freeze, the ways some things perform is unclear. Specifically, how does real-time pricing (LMP) behave in different market conditions? Noting the range of prices, what triggers dramatically higher prices such as seen in the first days of November? What are the cap(s)?

Additionally, where are ancillary services heading in regards to pricing and options of locking them in retail adders as was common practice from virtually all REPs we deal with? We’ve heard that some considerations are to have them defined in bilateral trades, unique to that specific transaction. The rise of third-party management companies that design backup generation and related services may be the rise of a new business, one that we need to understand.

Any clarity you might provide will be great. Thanks in advance.

Real-Time pricing (Locational Marginal Price or LMP) went ballistic during the February freeze with prices beyond most industry expectations. Situations that weren’t foreseen happened and were addressed in accordance with rules and protocols set by ERCOT. The most dramatic was the increase to price caps ($9,000/MWh) and remaining there for virtually the whole week. When in doubt, following the rules are a response, which is what occurred much to the detriment of end-users and REPs. There was really no choice but to stomach the pain and then correct shortcomings in the future. This is an ongoing discussion.

Later, on June 14th, an adequacy concern prompted ERCOT to caution usage amounts to avoid more outages. Fortunately, no impact was felt yet generation tightened (read this as price rise). The chart below depicts the June spike with firming going forward.

History has shown us that the most direct correlation to LMP price is feedstock price (natural gas). No secret here with the first bull market for a long time, one that shows no indication of ending. In direct response to our November price spike query, most replies centered around planned maintenance in shoulder months missed wind forecasts and the lack (due to maintenance) of thermal (fossil-fueled) assets. As is true with the path of ancillary services as we know them today, onsite generation, demand response, and other innovations are likely influences to come, but the path is unclear. The debacle of February has made Real-Time price structures options limited to large, sophisticated loads with documented risk appreciation. Our take: An upmarket without answers to how LMP will perform going forward isn’t appealing.

The second subject for a response was ancillary services and related functions, some existing and some offered for consideration. The focal point is resource adequacy and how to insure keeping the lights on. ERCOT (Texas) is an island unto itself with intended isolation from other jurisdictions. The model is “energy-only” which means designers expected higher prices to incentivize generation. If there’s an increase in demand or some asset goes off-grid, then money will provide answers. This compares to “capacity” market design that prices and reserves resource adequacy through auction. Texas felt the full spirit of self-determination and capitalism to solve problems. Capacity jurisdictions secure adequacy through scheduled pricing. Maybe some marriage of the two is in the future?

Ancillary services provide grid integrity with four primary functions:

Regulation Up Service (Reg-Up)
An Ancillary Service that provides capabilities that can respond to signals from ERCOT within five seconds to respond to changes in system frequency. Such capacity is the amount available above any Base Point but below the HSL of a Generation Resource and may be called on to change output as necessary throughout the range of capacity available to maintain proper system frequency. A Load Resource providing Reg-Up must be able to increase and decrease Load as deployed within its Ancillary Service Schedule for Reg-Up above the Load Resource’s LPC limit.

Regulation Down Service (Reg-Down)
An Ancillary Service that provides capabilities that can respond to signals from ERCOT within five seconds to respond to changes in system frequency. Such capacity is the amount available below any Base Point but above the LSL of a Generation Resource and may be called on to change output as necessary throughout the range of capacity available to maintain proper system frequency. A Load Resource providing Reg-Down must be able to increase and decrease Load as deployed within its Ancillary Service Schedule for Reg-Down below the Load Resource’s MPC limit.

Spinning Reserve
Generation idling to enable quick addition to the grid if needed.

Non-Spinning Reserve
Generation available for grid if needed not spinning and requires time to ramp up.

There is a concern in some groups that the requirements/functions/pricing for these services will change in some way to accommodate better grid integrity. If true, this would no doubt be at an increased price that is unknown. Does the change result in a “change in law” that allows REPs to pass through such an increase? If not, what’s the number? If still undefinable (moving target, variables yet to be determined), REPs may opt to pass through the cost of these services. If they do, is such pass-through at cost or “fluffed” – read as hidden margin? Transparency will provide answers and lead to decisions.

Another part of the puzzle is where onsite generation, demand response, and a storage figure are in planning. Could providing ancillary services by managing assets by third parties be a growth industry? Would it be cheaper? Our estimation is that this is a change in progress. We believe that when economic, large storage of power is available, the entire landscape changes. But when?

Our take is that procurement pricing is changing. Changing resource adequacy capture that currently is from “energy-only” incentives to some capacity capture is probable. It will come at an increased cost. We have no inkling as to what that might be but suspect that it too will be subject to change. Time will provide answers. Stay tuned.