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Texas regulator to revise ERCOT scarcity pricing to avoid 'absurd results'

Energy Transition

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Texas regulator to revise ERCOT scarcity pricing to avoid 'absurd results'

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'50 times FIP' could near $18,000/MWh

Other changes await Legislature's actions

Houston — The Public Utility Commission of Texas on April 7 initiated a revision to the Electric Reliability Council of Texas' scarcity pricing rule to ensure that a "circuit breaker" change in the systemwide offer cap, designed avoid harming consumers, does not create what the chairman called "absurd results."

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At issue is the switch from ERCOT's $9,000/MWh "High Systemwide Offer Cap," or HCAP, to the "Low Systemwide Offer Cap," known as LCAP, which is the higher of either $2,000/MWh or 50 times a fuel index price chosen by the grid operator. ERCOT has set that FIP as the spot natural gas price at the Katy Hub, as determined by Argus.

Under ERCOT and Public Utility Commission of Texas rules, ERCOT is to maintain the HCAP until the "Peaker Net Margin" crosses a threshold of $315,000, when the LCAP is to be used. The PNM represents 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 gas prices.

The $315,000 threshold is considered three times the cost of new entry for such a hypothetical plant, which would send a signal that building such a plant might be a good investment.

However, during the February winter storm, as ERCOT entered an emergency and lost almost 44 GW of generation capacity, the PUC decided Feb. 16 to maintain the HCAP indefinitely during the emergency, although the commission had learned that the $315,000 threshold was likely to be crossed that day, which did happen.

As of April 6, the cumulative PNM was $711,548.

DeAnn Walker, who was PUC chairman Feb. 16, expressed concern that the LCAP could result in prices well in excess of the estimated $9,000/MWh value of lost load. On Feb. 17, S&P Global Platts assessed the Katy spot gas price at $359.14/MMBtu, which would have set the LCAP at $17,959/MWh.

Consensus for change

On April 7, Arthur D'Andrea, who assumed the chairmanship March 3 following Walker's March 1 resignation, directed Connie Corona, PUC deputy executive director, to draft a proposal to dispense with the "50-times-FIP" language in ERCOT's scarcity pricing rules, as part of Project No. 51871, a review of ERCOT's scarcity pricing mechanism.

"The one thing we probably all agree on that needs to be fixed is [that] 50-times-FIP does not make sense, and I think could lead to some absurd results," said D'Andrea, who resigned March 16 pending appointment of his replacement. "I think my inclination right now is to replace it with a make-whole provision, instead."

Corona said she would have a draft proposal available before the PUC's next regular open meeting, scheduled for April 22.

D'Andrea was the sole PUC member at the April 7 meeting, although Texas Governor Greg Abbott on April 2 appointed Will McAdams as a PUC member. Under state rules, McAdams cannot participate until the Texas Senate advises and consents to the appointment, PUC spokesman Andrew Barlow said April 7.

McAdams is president of the Associated Builders and Contractors of Texas, having previously worked for more than 10 years for the state, most recently as advisor for business and regulated industries for Dennis Bonnen, who served as speaker of the house from 2019 to 2021.

D'Andrea did not discuss any of the nine other projects on the agenda related to the February energy emergency.

"I think we should wait and see how the conversation on market design develops at the Legislature and at ERCOT," he said.