As Real-Time prices surged yesterday, ERCOT Market Participants had a graphic illustration of how changes to the market — that the Public Utilities Commission of Texas (PUCT) directed ERCOT to have in place by Jan. 1 of this year — will affect future prices.
Cold weather brought robust, but not extreme demand to our forecast. However, the Day-Ahead market cleared relatively mild prices.
Older units that traditionally don’t run for just a day or two unless Day-Ahead prices are high enough to activate them, sat on the sidelines. ERCOT called on these units to run. But that was still not enough to keep Operating Reserves — a measure of the backstop of online generation that can quickly react to system disturbances — high enough for the new, more conservative ERCOT operations.
The new change to reliability adders, known as ORDC, was instituted back on Jan. 1 , but had not really seen a test until yesterday. Our team has alerted our customers about this change during webinars and briefs, but this was the first real look into what we can potentially expect this summer.
Reliability Unit Commitment
ERCOT has taken a much more conservative approach to grid management since last year’s freeze. This includes choosing the worst-case Load scenario forecasts during cold swings to incentivize more participation in the Day-Ahead market. It also includes continuing to utilize Reliability Unit Commitment (RUC), a mechanism that ERCOT has at its disposal.
Historically, RUC was a rarely used fail-safe. ERCOT calls up units out-of-merit, and pays for them to idle online, in case they are needed for a Reliability Issue. ERCOT began using RUC at an unprecedented rate last year as an attempt to achieve greater system stability prior to the time that new market change legislation would be enacted. Calling RUC on resources more than 18 times the number of hours they had in the previous year.
For wholesale traders that consume the risks of price volatility in the ERCOT market, RUC is anthemic to their cause. An important nuance of RUC is that it does not send a price signal to the wholesale market that traders can prepare for, and artificially changes prices when units that are called upon start.
Operating Reserve Demand Curve
One of the features of the ERCOT market is that it does not have a capacity market to incentivize generation for being there when it is needed.
In lieu of a capacity market, a mechanism was developed to incentivize additional capacity only during times that it is needed. In the longer term, this mechanism acts as a price signal for investment into new generation that can take advantage of these adders.
Operating Reserve Demand Curve (ORDC) is a forward-thinking idea that rewards traditional capacity and investment in new technologies, such as batteries and nimble quick-start thermal units.
The calculation of ORDC is complex and took many years of workshops to be formalized. In its essence, as system reserves begin to fall, these adders begin to kick in. They begin at small amounts, pennies added to the system-wide wholesale price. As reserves get closer to a predefined level, called the minimum contingency level (MCL), these reserves grow quickly to top out at the price cap.
It was this curve that the PUCT chose to adjust last winter, reducing the system-wide offer cap maximum price, but at the same time fattening the long ramp in of the curve.
This caused the rarely seen system-wide offer cap to be reduced from $9,000/MWh to $5,000/MWh. But more importantly, as we saw in yesterday’s Real-Time performance, magnitudes of dollars more in Online Reserve costs, at levels that would be considered “normal operations” in any other year.
So, what do these changes look like when compared to how the old ORDC operated?
The differences become apparent when recalculating ORDC from Wednesday through noon CT on Thursday, using the values from the old curve versus the values of the new curve. Substantially higher ORDC revenue is generated from the new “fatter” curve even though the cap is lower.
Adding in the cost of the Deployment Price Adder for RUC to the mix, it becomes clearer why this new paradigm that ERCOT is operating under is a change in how wholesale traders will do business.
The units that get called for RUC are generally older and not staged for a one or two day run. Also, owners would prefer to run these units only during the summer to minimize wear-and-tear on their startups. This use of RUC may backfire and cause these older units to retire early. It will incentivize more participation in the Day-Ahead markets as traders seek to limit their exposure to these Real-Time costs, which itself limits optimal price discovery. Continued heavy use of RUC is bad for the market, even if it does provide the desired reliability.
For the wholesale trader, this summer is going to be a unique event. The level of reserves we saw yesterday are a daily event during a warm summer. But the good news is that everyone will be running around-the-clock as the summer tradition and ready for the game.
We’ll have more solar online. Texas has far too much cooling demand for a duck curve in the summer, but folks will have to watch the edges more closely as solar waxes and wanes in the morning and evenings. Batteries and the new fleet of LM6000s will help, but we’ve got far too little of it yet to stave off ORDC.
These changes to the ORDC will incentivize more generation in ERCOT and bring down the risk of high ORDC levels in the longer term. More ultimately the PUCT is about to embark on a second round of market changes which will likely be more relevant for 2024-2025.