Calpine and NRG Energy have filed with the Texas PUC a paper by William W. Hogan, Harvard University and Susan L. Pope, FTI Consulting, which argues that, "A review of energy price formation in ERCOT leads to two important conclusions: (i) while the ORDC is performing consistently within its design, scarcity price formation is being adversely influenced by factors not contemplated by the ORDC; (ii) other aspects of the ERCOT market design must be improved to better maintain private market response to energy prices as the driver of resource investment, maintenance expenditure and retirement decisions."

Among the factors the paper lists as impacting price formation are:

System-wide Price Formation

• Marginal Losses: The efficiency of region-wide prices in ERCOT is distorted by the omission of the marginal cost of transmission losses from ERCOT’s energy market dispatch and pricing.

• ORDC Enhancements: The system-wide ORDC calculation should be enhanced to address the reliability impacts of changes in the generation supply mix and the price impacts of reliability deployments.

Locational Scarcity Pricing

• Out-of-Market Actions to Manage Transmission Constraints: Local scarcity pricing and mitigation rules require changes to properly set prices when there are reliability unit commitments or other ERCOT reliability actions to manage transmission constraints; these changes should not disable rules for local market power mitigation.

• Dispatch and Pricing for Local Reserve Scarcity: Introduction of local reserve requirements, implemented through co-optimization of the energy dispatch and reserve schedules, would provide a market solution to properly set prices when there are constraints on reserve availability in a sub-region.

Transmission Planning and Cost Recovery

• Transmission Planning: Market-reflective policies for transmission investment should be considered as a replacement for Texas’ socialized transmission planning, which, by building new transmission in advance of scarcity developing, fails to provide the opportunity for markets to respond.

• Transmission Cost Recovery: Alternatives for transmission cost recovery to replace or reduce dependence on the summer peak demand-based mechanism for the allocation of sunk transmission costs would reduce distortion of energy market pricing.

Among recommendations from the paper are:

• Enhance price formation rules to price local scarcity occurring when RUCs and other out-of-market actions are used to manage transmission constraints;

• Enhance price formation rules to price local scarcity occurring when RUCs and other out-of-market actions (i.e. RMR) are taken to manage the impact of transmission constraints on the local deliverability of reserves during contingencies;

• Change market and operational rules to limit conditions for the system operator employing out-of-market mechanisms to address reliability constraints.

Notably, the paper also calls for a change in the allocation of transmission costs, arguing that 4CP allocation provides an "out of market" incentive for loads to reduce during peak periods.

"For example, efficient pricing for transmission cost recovery would follow the general outline of a two-part tariff, with fixed and variable components. Typically for transmission infrastructure, the variable component ($/kWh) would be insufficient to recover the full cost of the transmission investment. The fixed component would be used to collect the balance of the requirement in a manner that provided the least distortion to peak demand decisions. Although a perfect fixed and variable charge may not be achieved, it should be possible to provide workable access charges that do not distort energy pricing because they depend so directly on individual peak demand decisions," the paper states

"This situation may not be amenable to full correction in the short term through modification to allocation rules for transmission cost recovery; however, the PUCT should closely examine this issue as the current 4CP transmission," the paper states

The paper also takes aim at "socialized" transmission building in ERCOT

Link to paper

Tags:
ERCOT   Energy-only   Texas  

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