At the Public Utility Commission of Texas (PUCT) open meeting on October 25, 2013, the PUCT voted 2-1 to establish a mandatory reserve margin. Chairman Donna Nelson and Commissioner Brandy Marty voted in favor of such directive, however, Commissioner Kenneth Anderson unwaveringly opposed to such measure. Nelson was, however, against an immediate decision as to which specific market model would best support the mandate. Therefore, the PUCT will wait for a report from the Brattle Group that will provide a study on the economically optimal reserve margin and mechanism to achieve it. The move toward a mandatory reserve requirement raises the following questions:
- Does a government mandate destroy the competitive nature of the Texas electricity market?
- What will be the standard be to measure reserve margin (e.g. 1 in 10 years loss of load standard)?
- Load will foot the bill, but will such measure ensure reliability?
- ERCOT is currently revamping its load forecasting models. Did it make sense to vote now prior to a new report of Capacity, Demand and Reserves?
- What is the best market model for ERCOT?
- Is a capacity market unavoidable?
These questions illustrate the uncertainty surrounding the mandate. ERCOT needs a long term solution to resource adequacy that strikes a balance between reliability and market competition. Over the past 2 years, as the resource adequacy debate has evolved the PUCT has taken multiple measures to incentivize generation investment in ERCOT. The most significant mechanisms intended to send price signals during times of scarcity include:
- Price cap increase in ERCOT to $5,000/MWh as of June 1, 2013, $7,000/MWh as of June 1, 2014, and $9,000/MWh as of June 1, 2015.
- Implementation of the Operating Reserve Demand Curve B+ Option (ORDC B+). This mechanism is intended to be a more appropriate method to pricing scarcity during conditions of low operation reserves in Real-Time by co-optimizing Energy and Ancillary Services.
Despite these measures, investment in new generation has been limited. ERCOT is a market where long-term supply contracts are not very common. Moreover, in a low natural gas price environment, electricity wholesale prices have made it difficult for developers to obtain financing. Plant developers and investors require readily apparent pricing signals to ensure they will cover costs and cover return on investment. Nevertheless, it remains uncertain as to whether the PUCT allowed sufficient time for the scarcity price mechanisms discussed above to send the intended price signals to developers.
Consequently, at its meeting on the 25th,the PUCT made its most drastic move to date when it approved the use of a mandatory reserve margin. “Reserve margin” means the difference between the total available generation capacity minus the projected peak demand. ERCOT’s current reserve margin target necessary to deliver the 1-in-10 years loss-of-load standard is 13.75%. With Friday’s vote, the PUCT drastically shifted market dynamics such that the target will now become a requirement. What the PUCT did not do, however, was actually set the actual mandatory reserve margin, instead opting to defer the decision until early next year.
Loss-of-Load Expectation (LOLE)
The chart below shows the degree to which weather can affect the 1-event-in-10-years LOLE analysis. Applying a 1-event-in-10-years loss-of-load criteria leads to a target reserve margin of approximately 13.7 to 18.9% depending on weather year assumptions (data and chart source: ERCOT).
Weather Year Probabilities based on NOAA data:
- Extreme summer weather with a 5% probability
- Composed of 2011
- Warmer than average with a 15% probability
- Composed of 2010
- Average weather with a 50% probability
- Composed of 25% for 2006 and 25% for 2009
- Cooler than average with a 25% probability
- Composed of 3.5714% for the following years: 1998 – 2000, 2003, 2005, 2007, 2008
- Much cooler than average with a 5% probability
- Composed of 1.25% for the following years: 1997, 2001, 2002, 2004
The information above demonstrates the LOLE analysis applied by ERCOT in calculating the target reserve margin. Interestingly, on June 6, 2011, ERCOT published the 2011 Capacity, Demand, and Reserves Report, which showed a reserve margin of 17.5%, well above ERCOT’s 13.75% target. Notwithstanding a 17.5% reserve margin, prolonged record-breaking temperatures and record system peak demand stressed the grid to the brink of declaring rolling blackouts. This example lends support to the idea that even at a very high reserve margin, reliability is not guaranteed.
Throughout August 2011, ERCOT implemented various emergency actions, including:
Appeals for conservation: August 1-3, 18-25, and 29-30.Demand response called: August 24.
Interruptible load shed: August 4 and 24.
ERCOT successfully avoided the next level of action, which would have been rotating blackouts. On August 16, ERCOT executed short-term contracts to bring back four generators from "mothballed" status (source EIA).
Conclusion
The regulatory decisions surrounding the mandatory reserve margin will reverberate throughout the electricity market in Texas. Uncertainty remains as to whether the government, rather than the open market, will determine the adequate supplies of electricity that will be needed to ensure reliability. Likewise, there is a high probability that the costs associated with making this determination could exceed the benefits.
The PUCT will publish questions for market stakeholders on the mandatory reserve margin for the November 15 meeting. Comments will be due on December 9, and a workshop will be held during the week of January 13, 2014.
