Final Electricity Market Assessment Finds Performance Credit Mechanism Would Cost Consumers Billions Annually with No Guarantee of Any New Capacity
May 17, 2023
“Proposed capacity mandates would fundamentally alter the ERCOT market construct and would impose substantial costs with uncertain resulting effects on reliability.”
AUSTIN – The proposed Performance Credit Mechanism (PCM) being considered among ERCOT market reform options “would entail billions in costs for customers without a meaningful improvement in reliability,” according to the final results of an Assessment of ERCOT Market Reform Alternatives, prepared by Bates White Economic Consulting, a firm with 25-years of experience in providing advanced economic, financial, and econometric analyses to law firms, companies, and government agencies.
Texas electricity consumers have expressed serious concerns with the Public Utility Commission’s (PUC) adopted PCM and are urging the Legislature to implement a meaningful firm cap on the PCM’s costs that provides real protections for consumers against potential exposure. Fundamentally, the PCM will provide billions in profits to the very generators who failed Texans during Winter Storm Uri.
“The PCM is a costly, unnecessary tool that will allow the PUC to guarantee profits for generators on the back of Texas customers. This is a regulated approach, but without the customer protections and spending oversight that go hand-in-hand with regulation. This unproven model has the potential to add billions to the market, and without a firm cost cap, it threatens to significantly increase prices on all consumers without meaningfully improving reliability,” said Tony Bennett, president & CEO of the Texas Association of Manufacturers (TAM). “Future job growth, company location, and investment decisions depend upon the Legislature charting the right course before the legislative session ends.”
To ensure that any market redesign is consumer-focused, actually enhances reliability, and maintains competitive cost structures, TAM, the Texas Oil & Gas Association (TXOGA), the Texas Chemical Council (TCC), and the Texas Industrial Energy Consumers (TIEC) engaged Bates White to evaluate proposed modifications to the ERCOT markets intended to support reliability of the system, with specific reference to the results of two recent reports assessing the modifications – one produced by Energy and Environmental Economics, Inc. (“E3 Report”), and one produced by ICF (“ICF Report”). As part of that evaluation, Bates White has reviewed E3’s evaluation of the ERCOT market reform options, including the PCM proposal, and has also performed analysis of two modifications to the ERCOT markets that would support system reliability while also retaining the essential features of the energy-only construct. These are: (1) a Dispatchable Reliability Reserve Service (“DRRS”), a new ancillary reliability service similar to the uncertainty product recommended by ERCOT’s Independent Market Monitor (“IMM”), and (2) a Direct Procurement mechanism that could be implemented as a last resort if a shortfall of dispatchable resources is identified in the future.
Some of the assessment’s findings include:
There is no current or imminent capacity shortage in ERCOT, but increased renewable penetration is causing operational challenges.
o The existing energy and ancillary services markets have successfully supported the addition of dispatchable capacity and have done so at least as well as other RTOs with capacity markets. We believe the current ERCOT system, with additional targeted incentives, will support investment in sufficient generation to reliably serve customers.
o ERCOT’s immediate reliability challenge is to ensure operational flexibility to accommodate expected large additions of intermittent renewable generation.
o The energy and ancillary services markets are the appropriate focus for ensuring flexible and cost-effective operations and would be enhanced in this function with the addition of a DRRS product to efficiently manage operational uncertainty.
o By enhancing the revenues available to dispatchable resources, DRRS will further incentivize the continued investment in dispatchable generation to meet ERCOT’s reliability needs.
The proposed PCM capacity mandate would entail billions in costs for customers without a meaningful improvement in reliability. These payments would be largely additive to existing market revenues.
o Based on actual performance of the ERCOT market, PCM is not needed as an additional incentive to retain and induce new capacity. Further, PCM would not guarantee the addition of any new capacity but would with certainty impose substantial new costs.
o PCM could also create counter-productive incentives for resources – including demand response – to chase anticipated reliability credit hours, when they are not actually needed.
o PCM would be a novel and untested alteration to the ERCOT market that would be complicated to implement and administer. It would require a number of complex tasks, including defining the periods during which performance credits (“PCs”) would be awarded, establishing the quantity of PCs needed to meet a reliability standard and developing a process for market clearing.
Media contact: Gretchen Fox, 512-694-4326