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ERCOT IMM: Near-Term PCM Costs Will Hit $1 Billion Cap, With Little Expected Reduction In Shortage Revenues
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The ERCOT Independent Market Monitor filed with the Texas PUC an assessment of Performance Credit Mechanism (PCM)
The first page of a cover memo to the IMM's report was marked "draft" but otherwise the narrative did not mention the report being a draft
As previously reported, a $1 billion cap in annual gross PCM payments has been established by the PUC and statute
Noting the "substantial capacity" that has been recently added in ERCOT (mostly solar and storage), as well as recent ORDC changes and RTC implementation, the IMM expects less frequent operating reserve shortages in the near term
As a result, in the short-term, PCM payment costs will not be offset by reductions in shortage pricing, the IMM expects
Additionally, the IMM said that the energy and ancillary services offset to gross CONE to determine the PCM demand curve will be relatively low, resulting in PCM payments based on a relatively high-value demand curve
"These near-term factors will lead to PCM payments that are likely to be capped at $1 billion with little expected reduction in shortage revenues. Therefore, we would expect the annual short-term cost to be at the $1 billion cap in most near-term years," the IMM said
If the PCM cost cap were not in place, the IMM estimates that short-term PCM costs would range from $800 million to $1.7 billion.
"Over the longer term as higher capacity margins reduce the frequency of shortage pricing, we believe the net costs [of PCM] will fall to $300 to $600 million per year," the IMM said
The IMM observed that, "PCM revenues will not likely be as efficient as shortage pricing in motivating investment in resources that provide the highest reliability value," because PCM settlements would not be as accurately focused on resources utilized during shortages to minimize the risk or magnitude of load shedding
Separately, ERCOT filed a report on PCM based on an assessment by its consultant (E3), along with E3's assessment
ERCOT stated, "the proposed PCM
is anticipated to improve long-term reliability by approximately 18% compared to the long-term
ERCOT market design without PCM."
However, ERCOT said that, with a PCM design based on a $1 billion gross cost cap,
"the PCM could not by itself incentivize sufficient generation over the long-term to result in a
resource portfolio that meets the reliability standard."
ERCOT said that the PCM, with the cap, would be anticipated to increase
revenue to the ERCOT market such that development of an additional approximate 800 MW of
dispatchable generation is incentivized, which represents an approximately 0.9% increase to
dispatchable generation capacity relative to the base case.
ERCOT said that the net cost (taking into account reduced energy and A/S costs due to the new capacity stated above) from a capped PCM would be $12 million annually.
ERCOT's report states, "While PCM could have value for improving resource adequacy and
long-term reliability, it will be necessary to consider refinements to the PCM design before deciding to
move forward in order to ensure that the implementation of PCM provides sufficient value. Moreover,
alternative resource adequacy options should be explored before removing PCM as a potential design
option to improve resource adequacy."
E3's report states, "PCM, in its current design configuration, does not provide sufficient price signals for the
study system to achieve the reliability standard."
E3's report includes a scenario to support 10 GW of new generation
The IMM said that the cost increase associated with PCM payments to support an additional 10 GW of resources predicted by E3 would be "substantial."
Furthermore, the IMM said, "we find the 10 GW increase in capacity forecasted by E3 to likely be overstated, particularly given the changes to increase shortage revenues implemented in recent years."
"Our experience comparing markets with and without capacity markets suggest that the difference in capacity margin is likely to be 6 to 10 percent in the long-run, which is less than the 10 GW forecasted by E3," the IMM said
The IMM, ERCOT, and E3 reports were filed in Project 55000
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IMM: "PCM Revenues Will Not Likely Be As Efficient As Shortage Pricing In Motivating Investment In Resources That Provide The Highest Reliability Value"
ERCOT Report: PCM With Cost Cap Would Not Incentivize Sufficient Generation
December 6, 2024
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Copyright 2024 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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