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Texas cuts ERCOT cap from $9,000/MWh to $2,000; summer exemption mulled


Orders ancillary service "clawback"

Orders forensic audit of storm market

Retail billing for storm period to resume

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Houston — Texas regulators March 3 ordered the resumption of a scarcity-pricing rule that changes the Electric Reliability Council of Texas systemwide offer cap from $9,000/MWh to the higher of either $2,000/MWh or 50 times a natural gas fuel index price.

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The Public Utility Commission of Texas convened virtually the evening of Feb. 15 and suspended the "circuit-breaker" pricing mechanism that would change the systemwide cap from $9,000/MWh to the greater of $2,000/MWh or 50 times the natural gas price index, when the peaker net margin threshold of $315,000 is reached.

The fuel index price ERCOT currently uses is at the Katy, Texas, location, where S&P Global Platts assessed it at $359.14/MMBtu Feb. 17, for example. At that natural gas price, the "LCAP" would have been $17,957/MWh. On Feb. 15, the PUC required ERCOT to set systemwide locational marginal prices at the cap during the energy emergency.

On March 3, Arthur D'Andrea, as the PUC's acting chairman following the March 1 resignation of DeAnn Walker, said of the Feb. 15 order, "That was an emergency action, and I think the lawful thing to do is let it expire as we expected."

Shelly Botkin, the only remaining member of the normally three-person PUC, agreed.

The commissioners also directed its executive director, Thomas Gleeson, to open a rulemaking on whether ERCOT should allow the LCAP to remain in effect over the summer.

"I have not decided nor am I even close to deciding, but I do think it's worth having the conversation about, do we want to go into the summer with a $2,000 cap or do we want to raise it?" D'Andrea said. "I'm not sure what the answer is. I've heard a lot of discussion on both sides."

The peaker net margin "circuit-breaker" mechanism relies upon a calculation of how much net revenue a hypothetical natural gas generator might have earned in a year, given real-time power prices and spot natural gas prices. The 2020 total was less than $50,075. Before 2020, ERCOT's record-high PNM was almost $150,000 in 2019, according to Potomac Economics, ERCOT's independent market monitor.

The PNM was $717,500.40 as of 4 pm CT March 2, the latest date for which a calculation is available.

While the rule is clear, D'Andrea said he did not want the PUC to get rushed into a decision in May about how the ERCOT market should proceed over the summer.

"I want to open a rulemaking in which we can think about whether we want to keep the cap at $2,000/MWh going into the summer, put it back at $9,000/MWh or somewhere in between, and that way we've given it some thought," D'Andrea said. Botkin agreed.


Manan Ahuja, S&P Global Platts Analytics manger of North American power, said the lower price cap "could have an impact on price expectations for the summer."

"As it is, our forecast for summer 2021 has been bearish as compared to the market, due to our modeled reserve margin expectations," Ahuja said in a March 3 email. "Further lowering of the price cap (from 9000 to 2000/MWh), lowers our expectation further for the summer - by [about] $5/MWh for July 2021 and by $10-15/MWh for August 2021."

However, some capacity could be mothballed or retired, as the prospect of forward revenue dims because of the lower price cap, Ahuja said.

"That's because if you are a generator and you lost a lot of money in February (were unable to run) and the forward summer price cap is lower, then it's just economically harder to justify running," Ahuja said.

Carey King, University of Texas Energy Institute assistant director, said that if the LCAP is allowed to continue into the summer, it would likely have "very little" effect, other than the cap being set at $2,000/MWh, as natural gas prices are unlikely to exceed $40 -- the point at which the 50-times-gas-price rule exceeds $2,000 -- without "a natural disaster with malfunctioning infrastructure."

The issue is more important for the long term, as the winter storm of Feb. 14 "exposed a flaw in the market design," King said in a March 3 email.

"The markets were not designed to deal with the Feb. 15-18 events in terms of so many power plants being offline, the [gas] supply not operating at full capability, and [gas] prices going so high as to make the LCAP [more than the] HCAP," King said. "It should be a priority to determine how to deal with [gas] prices that can go more than $20 to $40/Mcf because these are now pass-through costs to many electricity stakeholders and [gas] customers."

The PUC should work with the attorney general to determine applicability of price-gouging laws in relation to the gas prices Feb. 13-20, King said.


The PUC also directed ERCOT to "claw back" payments to ancillary service providers that did not perform as contracted and to consider repricing ancillary services at the systemwide energy offer cap of $9,000/MWh. Potomac Economics recommended that clawback.

Ancillary services are contracted to keep the power system in balance at 60 Hz. ERCOT's four types are those designed to increase or decrease the frequency, plus those designated as responsive reserve services and non-spinning reserve services.

The day-ahead market clearing price for responsive reserve services would have been $21,819.38/MWh Feb. 15, according to a market notice based on ERCOT protocols.

"[T]he formula that was used to calculate ancillary services generated some answers in the $20,000s," D'Andrea said. "I haven't talked to anyone yet who thought they could get above $9,000. That was surprising -- I think, shocking -- to a lot of us."

Therefore, the IMM recommended March 1 that the PUC reset ancillary service prices at the systemwide cap of $9,000/MWh. This would affect relatively few market participants, D'Andrea said.

"It sounds like we could do this without too much effect, but I don't know," D'Andrea said. "We'd have to figure out our authority to do it."

Botkin said, "I think it's ... definitely worth considering, and given that we have another meeting on Friday ... I'd probably support that."


D'Andrea also asked Executive Director Gleeson to work with the Legislature and the State Auditor's Office "to do a forensic audit of the market-clearing process at ERCOT, so that we can have a third party that is trusted by the Legislature and this agency go in there and figure out where the money went and make sure that, if any money is owed to ratepayers, it goes back into their pockets."

Gleeson said he would also call on the State Comptroller of Public Accounts' office assistance "to come up with a path forward to look at the finances of ERCOT."

The PUC also ordered transmission and distribution utilities not to charge late fees to retail electricity providers for Feb. 22 through March 3, except for CenterPoint Energy and American Electric Power, which must charge late fees because of bond covenants for hurricane reconstruction costs.

The PUC also ordered retail electricity providers to resume issuance of bills for the winter-storm period, which had been suspended pending review of meter readings.

Separately, the US House Subcommittee on the Environment has requested documents and information on ERCOT's lack of preparation for the February storm that caused millions of Texans to go without power and heat for several days.

"The risk of increased extreme winter weather events in the United States underscores the need for adequate preparation," US Rep. Ro Khanna, a Democrat from California who chairs the subcommittee, wrote in a letter to Bill Magness, ERCOT's president and CEO.

"ERCOT and the state of Texas are well-aware of the weather predictions, yet you have failed to prepare adequately for them. It is the hope of the subcommittee that greater public attention and accountability will cause this cycle to change."

Pointing to prior extreme winter weather events that led to widespread blackouts in 1989 and in 2011, Khanna asked for a wide range of documents related to the grid failures "in order determine why Texans have endured decades of blackout events and compromised electric reliability."