There has been significant debate, quite heated at times, surrounding the future structure of the Texas electricity market that the Electric Reliability Council of Texas (ERCOT) manages. The discussion has been centered on several topics, including how to ensure that there is sufficient generation capacity in the state to meet future electricity needs. On October 25, 2013, without a final vote, two out of the three Public Utility Commission of Texas (PUCT) commissioners expressed support for a mandatory reserve margin to address resource adequacy concerns. At this time, ERCOT’s board does not plan to take action on proposed changes to the target reserve margin until the PUCT provides further direction. In the meantime, ERCOT has been working on revamping its load forecasting assumptions and its methodologies are being re-examined and may be more important than ever. ERCOT’s staff has also been working to refine its load forecast models and process, and will update the board on these proposed changes on December, 10,2013. Therefore, the release of the next Capacity, Demand and Reserve report will be postponed.
Why power forecasting is related to reserve margins?
To understand the likely impact of the recent PUCT interest in setting a mandatory minimum reserve margins and what this means for consumers, understanding what the reserve margin represents is critical. At the most basic level, reserve margin is expressed as a percentage and is the sum of the total available generation resources minus the projected peak demand forecast, divided by the peak demand forecast. Expressed as an equation:
Reserve Margin = (total generation capacity – peak demand forecast)/peak demand forecast
The higher the reserve margin, the more generation available above the peak load forecast. In theory, this condition reduces the likelihood of blackouts; however, history has shown that this is not always the case. In 2011, ERCOT forecasted a reserve margin north of 17%, comfortably above the 13.75% target level. Yet, with sustained record temperatures, ERCOT declared emergency events and barely avoided widespread rolling outages. Conversely, theory would suggest that as reserve margins dip, the odds of blackouts increase. Nevertheless, with higher price caps, real-time price response from distributed generation and load shedding and scarcity pricing incentives, market operation paradigms have shifted. The market response to these changes has mitigated reliability problems by improving the balance between supply and demand as conditions get tight. This raises the question: how necessary is overcapacity in today’s market?
ERCOT’s peak load forecasting—does it need to change?
Traditionally, the peak load forecast for ERCOT, or any other system operator, has been determined by looking at historical weather patterns, gross domestic product, and population growth to forecast forward power demand. This complex methodology has worked reasonably well but there are several reasons why this approach needs to be reconsidered:
- Increased energy efficiency on devices that consume electricity
- Real-Time price response
- Load Shedding
- Economic Price Response
- ISO and Utility Demand response programs
The market is responding to price signals (e.g. increase in price caps and scarcity pricing) that are the result of regulatory actions.
What does this mean for energy risk management?
Any change to the ERCOT wholesale power market, whether it occurs in the form of the mandatory reserve margin requirement which will be implemented by the PUCT or a change in market structure, will bleed into the retail market. In light of resource adequacy concerns in ERCOT and the regulatory measures that are being implemented to incentivize the development of new generation, electricity end users need to shift to a holistic energy management approach. Efficiency measures, procurement, risk management and product structuring need to be interrelated to enable participation in demand response programs and/or Real-Time price response. Today, it is critical to develop a strategy that not only focuses on managing risk and reducing energy spend, but also that takes advantage of market incentives to generate revenue.
