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ERCOT IMM Reports Net Revenue Analysis in Annual Market Report
August 30, 2011
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Independent Market Monitor Potomac Economics released today the 2010 ERCOT State of the Market Report.
As in past years, the IMM found that dependence upon market participants to submit offers at or near the offer cap was not a reliable means of producing scarcity pricing during shortage conditions under the old zonal market design which was in place for nearly all of 2010.
Peaker net margin for 2010 was about $52,000 per MW-year. The IMM said that net revenue required to satisfy the annual fixed costs (including capital carrying costs) of a new gas turbine unit is approximately $80 to $105 per kW-year (i.e., $80,000 to $105,000 per MW-year).
The IMM did observe improvements in two areas in 2010 with respect to scarcity pricing: (1) ERCOT's day-ahead load forecast bias and (2) appropriate energy pricing during the deployment of non-spinning reserves.
The 66 shortage intervals for the first eleven months of 2010 were significantly fewer than the 108 and 103 shortage intervals that occurred in 2007 and 2008, respectively, but more than the 42 intervals that occurred in 2009.
The IMM noted that the pricing outcomes during shortage intervals varied widely, with the majority of prices reflecting the marginal offer of the most expensive generation resource dispatched as opposed to the value of foregone operating reserves. In fact, although the system-wide offer cap was $2,250 per MWh, there was only one interval in 2010 when an offer submitted by a market participant set the clearing price at greater than $1,000 per MWh.
Had an offer been submitted that established the MCPE at the system-wide offer cap in each of the 66 shortage intervals of zonal market operations, the 2010 annual peaker net margin would have increased from $52,491 to $79,009 per MW-year, an increase of over 50 percent. The associated increase in the annual load-weighted average balancing energy price would have been less significant, increasing from $39.40 to $43.27 per MWh, a 9.8 percent increase.
The IMM noted that under the nodal market, at times when there is insufficient capacity available to meet both energy and minimum operating reserve requirements, all available capacity is dispatched and the clearing price will rise in a predetermined manner to a maximum of the system-wide offer cap. During December 2010, when nodal went live, there were fifteen executions of the security constrained economic dispatch (SCED) algorithm that resulted in the system-wide energy clearing price being set at the system-wide offer cap. These fifteen SCED intervals represented thirty-two minutes spread over five settlement intervals.
Net revenue generally increased in 2010 compared to 2009, but was still below projected new entry levels. Based on IMM estimates of investment costs for new units, the net revenue required to satisfy the annual fixed costs (including capital carrying costs) of a new gas turbine unit ranges from $80 to $105 per kW-year. The estimated net revenue in 2010 for a new gas turbine was approximately $45 per kW-year.
For a new combined cycle unit, the estimated net revenue requirement is approximately $105 to $135 per kW-year. The estimated net revenue in 2010 for a new combined cycle unit was approximately $70 per kW-year.
For a new coal unit, the estimated net revenue requirement is approximately $210 to $270 per kW-year. The estimated net revenue in 2010 for a new coal unit was approximately $105 per kW-year. For a new nuclear unit, the estimated net revenue requirement is approximately $280 to $390 per kW-year. The estimated net revenue in 2010 for a new nuclear unit was approximately $221 per kW-year.
As to market outcomes, the IMM found that the ERCOT zonal wholesale market performed competitively in 2010, raising no concern regarding un-offered capacity, the incremental output gap, or derating patterns.
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