Power and Renewables

The Texas power market evolution

A look at performance credit mechanism, bridging solutions and the Texas Energy Insurance Program

byScott Bruns

Performance credit mechanism

In a decision that could reshape Texas’ power market, The Public Utilities Commission of Texas (PUCT) voted Jan. 17 to adopt the performance credit mechanism (PCM) market design, a strategy developed by consultant E3 in partnership with the commission. The PCM mechanism aims to provide payments to power units that are available during peak conditions, incentivizing reliable capacity and retaining generator assets at risk of retirement. Although resembling capacity mechanisms in deregulated markets such as California’s CAISO, the PUCT emphasized that PCM is not a capacity market feature.

Bridging solutions

As the PCM market design takes shape, discussions have focused on bridge solutions for the transition given that the redesign will take several years to implement. With the long timeline, the Electric Reliability Council of Texas (ERCOT) board recently voted in conjunction with the PUCT to enact a bridging mechanism. The bridging solutions involves changing of the operating reserve demand curve (ORDC). In lieu of a capacity market like most other deregulated independent system operators (ISO), the ORDC mechanism adds money to ERCOT’s real-time prices when the buffer of capacity available to react to large system disturbances fall below a certain reliability limit. This buffer of online idle generating capacity is often called operating reserves, or online reserves.

Historically, these adders were a function of an exponential curve and at higher levels of reserves are mere pennies; however, as the reliability limit ERCOT establishes nears, these prices skyrocket to the price cap. The changes reflect two new characteristics to the curve. At an operating reserves level (PRC) at or below 7,000 megawatts a price floor to the curve of $10/MWh, at or below 6,500 megawatts, a price floor is increased to $20/MWh.

graph-showing-current-and-future-reserve-price-curves

To understand why this level is important, one can look back to historical operating conditions. This newly adjusted range is where operating reserves spend a significant amount of time exhibited in the yellow bars in the histogram below.

ERCOT expects the adjustment will add $500 million annually to the cost of power. This change has an asymmetric benefit to thermal units over renewable units which are known to push operating reserves well above the 7,000-megawatt floor. The original ORDC curve still allows prices to exceed these price floors as PRC decreases, which eventually reaches the $5,000/MWh price cap as reserves fall enough. This bridging solution is expected to take four months or longer to develop, so not a risk for this summer’s trading but will potentially impact fall/winter 2023 as maintenance outage season begins again.

graph-showing-ercot-average-hourly-operating-reserve-levels

More on PCM

The Texas House State Affairs Committee convened March 1 to discuss grid reliability and the proposed PCM design. The Committee heard testimonies from ERCOT CEO Pablo Vegas, Zach Ming of E3, PUCT Chairman Peter Lake and other industry representatives. As the 88th Texas Legislature Session approaches its conclusion May 29, PCM appears poised to pass with minimal additional legislative scrutiny.

Senate Bill 6

In parallel, Senate Bill 6 (SB 6), introduced Jan. 19, 2023, proposes the Texas Energy Insurance Program and the Texas Energy Infrastructure Fund, providing financial assistance for new thermal generation and infrastructure improvements. A revamped version of the “Berkshire Hathaway bill,” SB 6 aims to address reliability concerns following Winter Storm Uri by establishing 10,000 megawatts of “reliability assets” outside the ERCOT market structure. The estimated cost of $8-16 billion will be passed directly through to consumers. Eyebrows were raised as the Lower Colorado River Valley Authority (LCRA) appeared to be throwing their hat in the ring to build these units, which would likely require it to change its status from a public non-profit in charge of waterways to some unknown new business entity.

While ERCOT supports the bill for grid reliability, critics argue it may increase costs, impact the ERCOT wholesale market and limit future investment. SB 6 also restricts eligible participants for new plant construction, potentially benefiting only the largest power generators and river authorities like LCRA.

After passing the Senate Feb. 15, 2023, SB 6 is under consideration by the House Energy Resources Committee. The committee is currently considering it on agenda items and should soon begin discussions on items from the Senate given the close of the legislative session. If passed, it will proceed to the full House, Senate conference committee and, potentially, the governor’s desk.

The proposals signal a potential shift in legislators’ thinking on the Texas power markets. Historically, free and open markets have driven renewable and technology expansion. Stakeholders, including market participants, private equity firms and market analysts, are raising important questions about the bill’s implications. A key concern is the uncertainty about who would be responsible for building the next power generation plant if the bill is enacted. The outcome of these legislative efforts will shape the future of Texas power markets.

Keep your eye on the House committees and the Texas State Legislature over the coming weeks!

We discuss many important topics for power traders and developers in our Flash Publication 90-Day Reports which come out every two weeks for CAISO, ERCOT, PJM, MISO, Mid-C, NYISO, ISONE and SPP.

Learn more about how Enverus’ Power Market Publications can help you navigate the Texas power market evolution.

Picture of Scott Bruns

Scott Bruns

Scott D Bruns is the Director of Power Markets at Enverus, leading the research division who specialize in analyzing large datasets for informed decision-making. As an expert in the ERCOT market, he provides comprehensive reports on market trends for various stakeholders. Leveraging his background in power trading and asset management, Scott contributes to the development of innovative SaaS products and offers expertise on US power market fundamentals. As an Enverus spokesperson, he guides clients in asset siting, trading optimization, and investment decisions. Prior to joining Enverus, Scott traded power and provided in fundamental analysis at Direct Energy. He holds a bachelor’s degree in mathematics from the University of Houston. When not obsessed with power markets, Scott spends time with his family who provide the inspiration for all his efforts.

Subscribe to the Enverus Blog

A weekly update on the latest “no-fluff” insight and analysis of the energy industry.

Related Content

risk-manager-sector
Trading and Risk
ByChris Griggs

Are you struggling to find reliable, transparent benchmarks for your energy trading and analytics? Do you often face challenges in accessing consistent pricing data that is compliant with industry standards?

Enverus Intelligence Research Press Release - EIR: Density drives steepening declines in U.S. shale
Analyst Takes Intelligence
ByAl Salazar, Enverus Intelligence® | Research (EIR) Contributor

The following blog is distilled from an interview on the CBC’s “The Eyeopener,” hosted by Loren McGinnis who interviewed Enverus Intelligence® Research’s very own Al Salazar. Click here to listen to the full radio segment. With Brent hovering around $75,...

energy-transition
Energy Transition
ByAdam Robinson, Enverus Intelligence® | Research (EIR) Contributor

With the recent surge of renewable fuel adoption in California, we have analyzed and updated our long-term price forecast for low carbon fuel standard (LCFS) credits using the latest two quarters of the California Air Resources Board (CARB) data.

energy-transition
Energy Transition
ByBrynna Foley

Over the last century, power demand and supply have been unmistakably intertwined. However, with the addition of variable renewable power this is no longer the case.

Serious-nature-topics-man-1
Intelligence
ByChris Griggs

Explore the contrasting energy policies of Kamala Harris and Donald Trump and their potential implications on the U.S. and global energy sector. From renewable energy shifts to hydrocarbon strategies, understand how the 2024 election outcomes could reshape the industry. Watch...

Enverus News Release - Banking on Buzios’ oil supply
Intelligence
ByJoseph Gyure, Editor, Enverus Intelligence

Insurance companies are largely backing away from fossil fuel investments, but two major exceptions, Berkshire Hathaway and State Farm, have reportedly increased their holdings so much that they skewed the entire sector’s results.

Enverus Press Release - Seeing the ceiling: Maximizing output for today’s natural gas-fired grid
Midstream
ByAndrew Dittmar

Explore how NGLs are fueling North America's midstream merger momentum, driving operational synergies, and positioning companies for future growth.

lithium-extraction-blog-image
Energy Transition
ByAmyra Mardhani

Current EV charging behavior causes a peak in load during late evening hours when motorists return home and plug in their vehicles.

energy-transition
Energy Transition Financial Services
ByEnverus

Petroleum systems lose natural gas to the atmosphere in many ways that have drawn a laser focus from regulators seeking to stem the impact of greenhouse gases on global warming.

Let’s get started!

We’ll follow up right away to show you a quick product tour.

Let’s get started!

We’ll follow up right away to show you a quick product tour.

Sign up for our Blog

Register Today

Sign Up

Power Your Insights

Connect with an Expert

Access Product Tour

Speak to an Expert