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CERAWeek: 'Performance is key' in maintaining ERCOT reliability this summer

Highlights

Price signals needed for consumers

Backwardation for forward curve a challenge

Houston — The Electric Reliability Council of Texas' CEO and executives with its largest generator and a smart-grid service provider held out hope Thursday that ERCOT -- facing its tightest-ever power supply situation this summer -- could come through without having to impose rolling blackouts.

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"The reality is that our energy-only market in Texas provides very strong incentives to be available in periods of scarcity," ERCOT President and CEO Bill Magness said during a panel discussion -- "Texas: Passing the stress test?" -- during the CERAWeek by IHS Markit event at the Hilton Americas in Houston.

Last summer, ERCOT came through a period with its lowest-ever planning reserve margin of about 11% without having to declare an energy emergency alert by a confluence of factors, including significantly reduced forced-generation outages and unexpectedly strong wind output.

This summer, the reserve margin is even lower, 7.4%.

"This summer, again, performance is the key," Magness said, adding that "we'll learn more about what is out there on the demand side" in terms of an ability to manage the system in periods of tight supply.

ERCOT on March 1 implemented a change in the calculation of its Operating Reserve Demand Curve at the direction of the Public Utility Commission of Texas, such that a scarcity price adder is used more frequently and at higher levels as operating reserves diminish.

The PUCT directed the change in order to raise revenues for generators, to encourage them to either retain or develop more resources in the Texas power market, which is growing at about 2% a year - much more in areas such as the Permian Basin of West Texas.

DEMAND RESPONSE

"We need to create the right price signals for energy consumers as well," said Sid Sachdeva, CEO of Innowatts, a company that focuses on smart-grid predictive analytics and artificial intelligence services for utilities. "That can help us move the load curve later and help us flatten load curves."

However, that could counteract the goal of the ORDC change by discouraging additional investment in generation, said Sara Graziano, senior vice president for corporate development at Vistra Energy, parent of Luminant, ERCOT's largest generation owner.

"The challenge is that the forward curve is very heavily backwardated," Graziano said, adding that investors seem to think the ERCOT market will use technology and demand response to maintain sufficient reliability without an influx of new dispatchable generation.

This means power prices further into the future are lower than those closer to today. At the ERCOT North Hub, for example, the S&P Global Platts M2MS Forward Curve indicates that August 2023 on-peak power on Wednesday was priced at just $76.54/MWh, less than half the August 2019 price of $162.96/MWh.

Under these circumstances, when it takes at least two years to build a new natural gas-fired plant, developers cannot find financing, Graziano said.

While the ORDC change "is a very positive step," she said, "we would argue that where in a situation where scarcity price signals are not really being sent."

"They are really hoping in this summer to increase the demand curve pretty dramatically," Graziano said.

DISTRIBUTED GENERATION

Sachdeva said accessing information about distributed energy resources can help "de-stress" the ERCOT grid, and Magness said ERCOT is working on a rule change such that DERs would get nodal pricing, rather than load zone pricing, when they are feeding power into the grid.

With load zone pricing, DERs may be incentivized to feed power to the grid in locations that contribute to system congestion, rather than reduce electricity scarcity, according to a recent study by Massachusetts Institute of Technology researchers.

Demand response has played a bigger role in other power markets that tend to have higher retail electricity rates, while ERCOT has had relatively low retail rates for several years, Magness said.

"Until conditions heighten and we do see higher retail prices, the incentive for the consumer is not as strong," Magness said.

-- Mark Watson, markham.watson@spglobal.com

-- Edited by Jason Lindquist, newsdesk@spglobal.com