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Generators Seek to Impose Capacity Obligation on ERCOT Retail Customers
June 20, 2011
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Texas Competitive Power Advocates is seeking to impose a "backstop" capacity obligation on ERCOT loads.
In comments on reserve adequacy to the PUCT (37897), TCPA urged consideration of a "reasonable" and "effective" backstop mechanism, which would compel loads to purchase capacity, to be implemented when ERCOT's projected reserves fall below the target 13.75% margin.
"There is nothing in place today to backstop an inadequate energy-only market, nothing to ensure that generation investors will construct new capacity in ERCOT when the target reserve margin nears or is reached. With the goal of fine-tuning ERCOT's energy-only design, TCPA suggests consideration be given to requiring loads to bring capacity to the market to incent both forward contracting and direct investment when the target reserve margin is projected to be breached. Ultimately long term resource adequacy provides reliability to the benefit of loads, therefore loads should be responsible for proving up their own efforts at securing their reliability," TCPA said.
TCPA provided no specifics on the mechanism. Notably, TCPA offered no details on how far out the capacity obligation would be triggered. Especially now that ERCOT is producing reserve margin forecasts for 10 years, rather than five, generators seeking additional revenue streams could claim that the capacity obligation must be triggered for any year in which a reserve margin shortfall is triggered, even 10 years out based on administratively determined load and capacity forecasts which by their very nature amount to best guesses.
In exchange for the costs of this new capacity obligation, TCPA offered no accommodations to load, such as a reduced energy market price cap, as seen in organized markets with mandated capacity obligations.
TCPA spun ERCOT's most recent reserve margin projections as an "imminent threat to grid reliability."
However, the Steering Committee of Cities Served by Oncor and the Texas Coalition for Affordable Power stressed that the report must be taken in context.
"A review of ERCOT's historic CDR [Capacity, Demand, and Reserves] reports since 2005 indicates that the reports nearly always estimate a decline in reserves in the out years of the study period - and in some cases project far sharper declines than are estimated in the 2011 report," the Cities said.
"For instance, as the chart contained in Appendix A to these comments indicates, if the 2007 CDR Report had borne true, the system would currently be at a 6.7% reserve margin. If the 2006 projection had materialized, the system would now be at a reserve margin of 4.5%, a remarkable reserve margin that would be so low as to never have been experienced in our market, and to never have been projected before or since," Cities said.
"Cities urge caution in adopting significant market reforms on the basis of the 2011 CDR Report. As the Commission is aware, ERCOT's wholesale market is an energy-only market premised upon the policy judgment that less, rather than more, administrative interference in the operation of the market is preferable. Any additional or different scarcity pricing mechanism, other than the framework set out in the Commission's rule, would necessarily entail command-and-control mechanisms such as ICAP mechanisms, price floors, or proxy offer curves designed to increase wholesale prices under certain conditions. The 2011 CDR Report is not a sufficient basis for such a marked departure from the current market design."
The Texas Industrial Energy Consumers made similar observations, noting that even in 2001 with a 25% margin, the Commission "was concerned whether there were appropriate incentives to maintain a sufficient reserve margin in the future"
The result of that 2001 docket was to "allow prices to rise in response to a scarcity of resources in the market," using "competitive rather than regulatory methods" to facilitate sufficient capacity, TIEC noted. "This decision has proven to have been the right one. Despite the concerns expressed by some, the market has continuously responded and new resources have been added. The Commission should continue to allow market forces to incentivize new capacity rather than taking any administrative or regulatory actions, which could add unnecessary costs to the market and interfere with the development of appropriate resources," TIEC said.
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