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ERCOT stakeholders debate proposal that could create 'winners and losers'

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ERCOT stakeholders debate proposal that could create 'winners and losers'

A recent Brattle Group study found that an independent market monitor-endorsed proposal to incorporate transmission losses into pricing and dispatching generation in Texas' power market would shift costs and benefits versus the current market design in which average transmission losses are socialized.

According to the study, the implementation of a proposed marginal loss methodology would reduce system production costs in the Electric Reliability Council of Texas by $8.6 million per year and drive generator net revenues 7.54% lower per year before potential allocation of over-collected marginal loss payments. ERCOT estimates implementing marginal loss pricing would take 18 to 24 months following board approval and cost a minimum of $10 million.

Transmission losses generally increase over the distance electricity travels, with higher voltage transmission lines losing less energy. Typically electricity transmission and distribution losses average about 5% in the U.S.

In spite of the lower net revenues on a marketwide basis, generators closer to Houston would benefit from the proposal, according to the study. System-wide load inclusive of losses would decline by 0.27% per year, or 1.06 TWh out of 402 TWh, as generation in the Coast, South and South Central zones would increase by 14.2 TWh, which would be offset by a decrease of 15.3 TWh elsewhere.

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Stakeholders debated the proposal at an Oct. 13 workshop hosted by the Public Utility Commission of Texas.

"It's been described as an attempt to create new winners and losers in the market. And that carries the implication that somebody from market beginning has been losing out," Calpine Corp.'s vice president of market design, Randy Jones, said. "We locate very close to our loads. And we feel that that should have a premium value."

"We've been chosen as a loser for the last 15 years in how [the market has decided] to treat losses," NRG Energy Inc.'s director of regulatory affairs, Bill Barnes, said.

Katherine Coleman, a partner at the Thompson & Knight law firm that represents Texas Industrial Energy Consumers, a coalition of large power consumers, argued that it is difficult to site new generation near Houston.

"From a policy standpoint, is it a good idea to put something in place that is just going to systematically hit one of the state's most important economic areas," Coleman asked. "[What is] the long-term impact that [marginal losses] will have on investment in that region?"

Invenergy LLC's director of regulatory affairs, John Fernandes, argued that the market change would constitute a major policy shift for the state.

"From what I understand the transmission cost allocation processes that were adopted here are a core principal of economic development in the state of Texas," Fernandes said. "[Under the proposal] Invenergy would be looking at $9 [million] to $11 million of lost revenues per year in West Texas."

"In 2016, Invenergy paid over $34 million in taxes, land payments and salaries. … The company paid over $76,000 in good-neighbor program donations. And we had on staff 151 employees mostly in field offices. As far as … transmission allocation bringing development to these areas where you wanted it, that's an example of where the market is working," he said.

Other stakeholders cautioned about the timing and unintended consequences of implementing marginal losses.

"There are [retail] contracts that are subject to and price based on the current set of rules that will have to change if we make such a wholesale design change," Vistra Energy Corp.'s vice president of regulatory policy, Amanda Frazier, said. "I think taking money out of the wholesale market and redistributing it to wholesale generators in Houston doesn't support the reliability of the ERCOT system. It will certainly put additional pressures on generators outside of Houston who are already struggling with the low power prices in this market. … Generators have already made their siting decisions … based on the rules in place. … I don't think [the marginal] efficiencies justify the major distortions that it would cause."

Eric Goff, a director at Citigroup Energy Inc., said implementing marginal losses "whether a good idea or a bad idea, would upend and change the value" of long-term power purchase agreements.

But Jones brushed concerns aside as he cracked the door open for negotiation: "The context of this discussion so far has been pretty much black and white, one or zero. Are we going to do marginal losses or not? And I think one thing we're neglecting to take into account is there are two aspects to the marginal loss question. One is whether you do it or not versus seasonal average or socialized cost. And the other is what do you do with the allocation of the overcollection of revenue. … This decision when it's made can be made in the future very conveniently so that contracts can rationalize around the outcomes."

"The way that overcollection flows back to loads might influence whether we hate this a lot or just a little," Coleman responded.