Newly Published Assessment Finds Performance Credit Mechanism Would Cost Consumers $5.7 Billion Annually; Dispatchable Reliability Reserve Service Would be More Effective at a Fraction of the Cost

AUSTIN – The proposed Performance Credit Mechanism being considered among ERCOT market reform options, “would entail billions in costs for customers without a meaningful improvement in reliability,” according to an Assessment of ERCOT Market Reform Alternatives, prepared by Bates White Economic Consulting, a firm with 25-years of experience in providing advanced economic, financial, and econometric analyses to law firms, companies, and government agencies. The firm has consulted with or testified widely regarding electric issues, including on behalf of Texas Public Utility Commission staff in a utility merger case and on behalf of competitive generators in design of the PJM Capacity Market.

The Texas Association of Manufacturers (TAM), the Texas Oil & Gas Association (TXOGA), the Texas Chemical Council (TCC), and the Texas Industrial Energy Consumers (TIEC) engaged Bates White to evaluate proposed modifications to the ERCOT electricity market intended to support reliability of the system, with specific reference to the results of the market reforms assessment conducted by Energy and Environmental Economics, Inc. (E3 Report). Bates White reviewed E3’s evaluation of the ERCOT market reform options, including the Performance Credit Mechanism (PCM) proposal, and also performed preliminary analysis of two modifications to the ERCOT markets that would support system reliability while also retaining the essential features of the energy-only construct: (1) a Dispatchable Reliability Reserve Service (DRRS), a new ancillary reliability service similar to the uncertainty product recommended by ERCOT’s Independent Market Monitor (IMM), and (2) a Direct Procurement mechanism that could be implemented as a last resort if a shortfall of dispatchable resources is identified in the future.

“ERCOT market design reform will be among the most consequential decisions the Legislature will make and we wanted an expert review of the leading options on the table to ensure that any redesign will be consumer-focused, actually enhance reliability and maintain competitive cost structures,” said Tony Bennett, president and CEO of TAM. “Future job growth, company location and investment decisions depend upon the Legislature charting the right course, so this evaluation of options is essential.”

The Bates White assessment concluded that a DRRS will provide additional market signals sufficient to incentivize new dispatchable generation as Texas’ needs grow at a fraction of the cost of a PCM, which would create a tortuously complicated system that adds massive costs without improving reliability.

Some of the assessment’s other findings include:

  • There is no current or imminent capacity shortage in ERCOT.
    • The existing energy and ancillary services markets have successfully supported the addition of dispatchable capacity…We believe the current ERCOT system will continue to support investment in sufficient generation to reliably serve customers.
    • By enhancing the revenues available to dispatchable resources, DRRS will further incentivize the continued investment in dispatchable generation to meet ERCOT’s reliability needs.
    • ERCOT’s immediate reliability challenge is to ensure operational flexibility to accommodate continuing additions of intermittent renewable generation.
    • The energy and ancillary services markets are the appropriate focus for ensuring flexible and cost-effective operations; these markets would be enhanced in this function with the addition of a DRRS product to efficiently manage operational uncertainty.
  • The modeling performed by E3 is not a forecast of capacity need, and flawed modeling assumptions exaggerate the potential for retirements while radically underestimating the incremental cost of capacity market proposals such as PCM.
  • The proposed PCM capacity mandate would entail billions in costs for customers without a meaningful improvement in reliability.
    • The E3 Report estimates annual costs of PCM of $5.7 billion, which would be largely or fully additive to current market costs.
    • Based on actual performance of the ERCOT market, PCM is not needed as an additional incentive to retain and induce new capacity. Further, PCM would not guarantee the addition of any new capacity, but would with certainty impose substantial new costs.
  • Implementing DRRS would provide a targeted procurement of dispatchable resources specifically suited to addressing intermittent resource forecast uncertainty, and would guide revenue to such dispatchable resources corresponding to the reliability value they contribute.
    • We estimate that DRRS would provide annual revenue of approximately $1.7 billion directed to the dispatchable resources that help address forecast uncertainty.
    • …we estimate the net annual cost of DRRS to be approximately $923 million.
  • If the need should arise, direct procurement of backup capacity to support grid reliability offers a straightforward and much less costly failsafe mechanism as compared to the PCM or any other capacity market construct.

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Founded in 1919, TXOGA is the oldest and largest oil and gas trade association in Texas representing every facet of the industry.

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