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ERCOT's market reform proposals defended

Factors outside of Texas regulators' control have been "putting enormous stress on generators," prompting concern about the operability and reliability of the energy-only market in the Electric Reliability Council of Texas, but an economist said Oct. 5 that his proposals can address these concerns.

During the University of Texas School of Law's 16th annual Gas and Power Institute, William Hogan, the Raymond Plank professor of global energy policy at Harvard University's John F. Kennedy School of Government, described and defended a paper that he and Susan Pope of FTI Consulting wrote for Calpine Corp. and NRG Energy Inc., which was submitted in May to the Public Utility Commission of Texas.

Entitled "Priorities for the Evolution of an Energy-Only Electricity Market Design in ERCOT," the submission has become the inspiration for a PUC workshop set for Oct. 13.

After discussions in 2014 about possible generation shortfalls resulting from ERCOT's lack of a capacity market, the PUC established a systemwide Operating Reserve Demand Curve, which produces an adder to prices as generation reserves decrease, but Hogan said generation shortfalls are no longer much of a risk.

"One of the things that has happened was that the capacity scarcity problem has almost disappeared entirely," Hogan said. "The distribution of prices has been shifting lower and lower, and that is putting enormous stress on generators. That is the stress you have in markets [now]. ... These market forces are what they are, and they are working. There's nothing fundamentally wrong."

Low prices may affect reliability

However, the federal government's production tax credit for wind resources and the massive growth in wind capacity over the past few years has had the effect of reducing wholesale power prices so low that "it may affect the operability and reliability of the market," Hogan said.

The Hogan-Pope paper makes several recommendations, such as the following:

* Including marginal line losses in calculations used to determine which generation units to dispatch to supply load.

* Real-time co-optimization of energy with ancillary services.

* Establishment of locational reserve requirements.

* Creation of local Operating Reserve Demand Curves, which provide an adder to energy prices as operating reserves decrease and the probability of load losses increases.

* Shifting transmission planning and cost recovery toward a market-based process and away from its current socialized process.

Regarding marginal line losses, Hogan said, "Congestion is a very big deal because it happens episodically, and when it happens, it's big, whereas marginal losses are always around, and they're not very big ... [but] when you add up all of those [marginal loss] costs over the course of the year, it's about the same magnitude."

During the Gulf Coast Power Association Fall Conference in Austin, Texas, earlier in the week, several stakeholders criticized the idea of including marginal losses in ERCOT's Security Constrained Economic Dispatch system, as it would tend to penalize generators far from load and reward those close to load.

Stakeholders also criticized the idea of changing the market after generators, such as wind farms, had been built in good faith based on existing rules, but Hogan on Oct. 5 dismissed that concern.

"People should not have a property right in inefficient regulation," Hogan said. "If there's a problem, you have to fix it."

Charges for marginal line losses would likely result in a surplus, Hogan said, which the PUCT could decide to share with those harmed by including marginal line losses in ERCOT's dispatch algorithm.

New York has better approach to wires planning, cost

Regarding Texas' transmission planning and cost recovery, Hogan said, "Transmission projects can be big and lumpy, and you are [collecting] from people who don't want to pay."

In comparison with ERCOT, the New York ISO has a better approach for transmission planning and cost recovery, Hogan said.

"[For] large-scale projects, you identify up front what the benefits are and who benefits," Hogan said. Then a supermajority of the beneficiaries who would pay for the project would have to vote to build such a project, he said.

Hogan favors a rate design that would require all who benefit to pay a fixed unavoidable cost for such projects.

Although Hogan and Pope have proposed significant changes to the ERCOT market, Hogan offered high praise for the market's overall operation.

"Texas is doing a great job," Hogan said. "When I go speak in other parts of the country, I say, 'Do what they are doing in Texas.'"

Mark Watson is a reporter for S&P Global Platts which, like S&P Global Market Intelligence, is owned by S&P Global Inc.