Monitor says ERCOT decision resulted in $16 billion in additional costs to market

by Paul Ciampoli
APPA News Director
March 5, 2021

An Electric Reliability Council of Texas (ERCOT) decision last month resulted in $16 billion in additional costs to ERCOT’s market, of which roughly $1.5 billion was uplifted to load-serving entities (LSEs) to provide make-whole payments to generators for energy that was not needed or produced, the independent market monitor (IMM) for ERCOT’s wholesale electricity markets said.

The IMM, Potomac Economics, on March 4 submitted a filing to the Public Utility Commission of Texas (PUCT) in a proceeding related to rotating outages implemented by ERCOT in February in the wake of an arctic blast that hit the state.

Potomac Economics said that it agrees with the PUCT’s order from Feb. 15, 2021, which mandated that real-time energy prices reflect firm load shed by setting prices at the value of lost load (VOLL). “This is essential in an energy-only market because it provides efficient economic signals to increase the electric generation needed to restore the load and service it reliably over the long term,” the IMM said.

“Conversely, it is equally important that prices not reflect VOLL when the system is not in shortage and load is being served. The Commission recognized this principle in its order, expressly stating it is only ERCOT’s out-of-market shedding firm load that is required to be reflected in prices,” Potomac Economics said.

ERCOT recalled the last of the firm load shed instructions at 23:55 on February 17, 2021. “Therefore, in order to comply with the Commission order, the pricing intervention that raised prices to VOLL should have ended immediately at that time,” the IMM told the PUCT.

 However, ERCOT continued to hold prices at VOLL by inflating the real-time on-line reliability deployment price adder for an additional 32 hours through the morning of February 19, Potomac Economics said.

This decision resulted in $16 billion in additional costs to ERCOT’s market, of which roughly $1.5 billion was uplifted to LSEs to provide make-whole payments to generators for energy that was not needed or produced.

Although most energy costs can be hedged by ERCOT’s LSEs through bilateral contracts or generation, “these make-whole payments are particularly harmful because they are uplifted to all loads through the Real-Time Ancillary Service Imbalance Charge. Therefore, they cannot be hedged and will likely result in substantial adverse economic effects, including higher levels of defaults,” the IMM said.

“Therefore, the IMM recommends that the Commission direct ERCOT to correct the real-time prices from 0:00 February 18,2021, to 09:00 February 19,2021, to remove the inappropriate pricing intervention that occurred during that time period,” Potomac Economics said.

“From a practical standpoint, this will primarily be accomplished by removing most, if not all, of the Real-Time On-Line Reliability Deployment Price Adder during these intervals, which will substantially eliminate the Real-Time Ancillary Service Imbalance Charge,” it said.

The IMM said that adopting this recommendation will not result any revenue shortfalls for ERCOT’s generation as the corrected prices will cover the generator’s as-offered costs, and efficiently reflect the actual supply, demand, and reserves during this period.

“We recognize that revising the prices retroactively is not ideal. In this case however, given that the prices are inconsistent with ERCOT’s protocols and the Commission order and that allowing them to remain will result in substantial and unjustified economic harm, we respectfully recommend that the Commission take the action described above to correct ERCOT’s real time prices,” Potomac Economics said.

In a March 1 filing in the proceeding, the IMM offered several recommendations “related to ancillary services in light of certain market outcomes.”

Among other things, Potomac Economics recommended that for operating days February 15 through February 20, 2021, there should be a repricing of all day-ahead ancillary services clearing prices to cap them at the System-Wide Offer Cap of $9,000 per megawatt hour.