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ERCOT Implements Operating Reserve Demand Curve

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This article was written by Read Comstock and Sandy Morris of the Direct Energy Government & Regulatory Affairs team.

After a couple years of intense debate as to whether or not ERCOT should implement a capacity market, the Public Utility Commission of Texas (Commission) in February of this year declared the energy-only market as “healthy” and indicated they will not consider implementing a capacity market in the foreseeable future.

This decision provides regulatory certainty regarding this Commission’s commitment to the energy-only market. As part of the resource adequacy debate, the Commission directed ERCOT to implement an Operating Reserve Demand Curve (ORDC) on June 1, 2014. With the implementation of the ORDC on June 1st, the price cap in ERCOT increased from $5,000/MWh to $9,000/MWh. The ORDC administratively increases the real-time energy price by including an adder in the energy price that is based upon the value of lost load and the loss of load probability at different levels of operating reserves. The Commission set the value of lost load at $9,000/MWh.

For illustrative purposes only, if the loss of load probability at a certain level of reserves is 10%, then the ORDC would administratively increase the real-time energy price by $900 ($9,000 X 10%). It is important to note that the adder also can be zero when ERCOT has robust operating reserves. Under the ORDC approved by the Commission, if ERCOT reserves are 2,000 MWs or less in real-time, then the real-time energy price will be set at the value of lost load ($9,000/MWh). Because the ORDC adder is included in the real-time energy price, customers can hedge this risk via a fixed price product or an energy procurement strategy. The implementation of the ORDC increases the volatility risk in ERCOT and is a reminder that customers should always consider whether or not their current product selection supports their appetite for risk.

Given that ERCOT is a market that sends strong scarcity price signals when ERCOT is deploying reserves, it is important to consider information regarding ERCOT’s forecasted reserve margins when determining an energy procurement strategy. In May, ERCOT updated its projection of reserve margins with the release of the Capacity, Demand, and Reserves Report (CDR). The CDR is a 10-year view (2015 – 2024) of projected reserve margins with a view on anticipated generation and forecast system peak demand, based on 12-year average weather conditions and other factors that affect electric use during peak demand periods. ERCOT releases the CDR twice a year, typically in May and December. The new CDR indicates that reserves should be at or above the current minimum target of 13.75% through at least 2017. According to a Brattle Group report, a reserve margin of 14.1% should maintain ERCOT’s current reliability standard of 1 in 10 year loss of load event. For reference, ERCOT has operated for the last few years with a reserve margin of approximately 14% including in 2011. This is a reminder that extreme weather, such as the weather experienced in 2011, can lead to scarcity prices even when reserves are deemed adequate.

In May, ERCOT also provided a resource adequacy assessment for this summer. The Seasonal Assessment of Resource Adequacy (SARA) for summer 2014 indicates that conditions could be tight for the first half of the summer until several generation units are scheduled to come on line in August. ERCOT warns that if an extreme weather event were to occur, there would be a potential for an Energy Emergency Alert and corresponding public appeals for conservation or more drastic measures such involuntary load curtailments. By August, six new generating units totaling 2,153 MW of combined capacity are expected to begin operations, with 2,112 MW of that coming from four new facilities: Ferguson Replacement, Panda Sherman, Panda Temple I,  and Deer Park Energy Center.

Please contact your Direct Energy Business representative if you would like to discuss in greater detail the information provided in this update.

Posted: June 17, 2014