WASHINGTON — ERCOT can ensure long-term reliability with its energy-only market, but it must operate its grid less conservatively for that to happen, said Potomac Economics President David Patton, the Texas grid operator’s Independent Market Monitor.

ERCOT’s ancillary services demand curves, which are part of the soon-to-go-live real-time co-optimization plus batteries (RTC+) initiative, imply a value of lost load of about $35,000/MWh, which is already well short of the $200,000/MWh implied by the one-day-in-10-years reliability standard, Patton said at S&P Global’s Nodal Trader Conference on Oct. 24.

“What makes me pessimistic in Texas is that there are multiple levels of problems getting to an efficient shortage price,” Patton said. “And most of it is driven by an extraordinarily conservative posture by ERCOT in how it operates the system.”

The grid operator pays for excessive ancillary services and has demand response programs that kick in too early, both preventing it from reaching the needed scarcity prices that energy-only models rely on to attract investment, he added.

“I think until we get some degree of alignment between how ERCOT operates the system and the markets, we’re going to be stuck in a state where it’s nearly impossible to set efficient shortage prices,” Patton said. “And, so, I don’t know how it would motivate people to build dispatchable generation.”

Plenty of DR is caused by the market, Patton said, with cryptomining data centers dropping offline when prices start to hit about $100/MWh, when the activity becomes unprofitable. But he said he is worried about DR from “outside the market” such as a residential DR program that will pay the load class to curtail at peak hours.

“The value of residential consumption is like $3,000, $4,000, $5,000/MWh, but the tightest net load hours like when ERCOT imposes that and artificially cuts the load. … I’m guessing the price in those hours is going to be $50, $60, $70[/MWh],” Patton said.

That will serve to artificially hold the price down when the market would proceed to shortage pricing, he added.

ERCOT has grown its renewable energy production more than any domestic market, with 40 GW of wind, 33 GW of solar and 14 GW of batteries — and more of that is coming, said Keith Collins, vice president of commercial operations.

“The peak loads don’t really matter as much with the solar on the hot days,” Collins said. “What matters is when the sun isn’t there, and that’s what we see in the load ramps, the net load that we see in the summer days. In the winters, we’re seeing when the sun isn’t up yet and the peaks are rising, that’s the concern, and it’s a big area of concern for us — the need to get dispatchable resources. That’s where our dispatchable reliability reserve service is hopefully going to point us to focus on getting those types of resources.”

Collins said the problem with scarcity pricing is that it will create incentives for all resources, when ERCOT needs more supply that can actually help balance renewables when their production drops.

Getting the Signals Right

Texas last debated major reforms for its wholesale market nearly five years ago after Winter Storm Uri led to widespread blackouts.

“After Uri, they looked at lots of options,” Collins said. “Many options were crossed off the table and, so, we’ll have to revisit some of those.”

Patton pushed back on Collins’ description of how scarcity pricing works, arguing it favors resources that can produce energy when the grid needs it most.

“If I have an unreliable unit that has a lot of forced outages, they’re going to miss a lot of the shortages; they’re going to make less money,” Patton said. “A solar resource is probably not going to make any money getting shortages, because shortages are going to happen when the sun has gone down. If I have a wind resource, I’m not going to make very much money, because you’re not going to have shortages when the wind is blowing.”

Reliable, dispatchable resources will get high prices when the grid needs energy the most, so a key to getting energy-only models right is ensuring their signals align with that need, he said.

“You may say: ‘We need other products to supplement that, because we have certain reliability needs that go beyond what our needs are in any one five-minute interval,’” Patton said. “So, I think we do need the dispatchable reliability service, but that’s not going to be the answer to providing price signals.”

Ideally, ERCOT would procure fewer reserves and let the system operate in a way that is more conducive to its energy-only design.

“There’s no way to fix excessive conservatism with market design like that. At some point, you have to move from both ends,” Patton said. “You have to operate the system in a manner that’s more consistent with the true value of electricity. And then you have to identify market design issues that are undermining pricing as well, and hopefully then get to a point where your energy price is going to do most of the job in terms of motivating investment.”

The Public Utility Commission of Texas told ERCOT to start operating more conservatively after Uri, Collins noted.

“There have been directions from the commission,” Collins said. “Now, there was some recent discussion about perhaps revisiting that. We’re happy to have that conversation. And if the commission were to direct us, we would take actions.”

Patton argued that many of the conservative operations are coming from the grid operator itself because the PUC has approved only proposals to procure additional reserves that come from ERCOT.

“I think the conservative mindset is coming from ERCOT operations,” Patton added. “Clearly, there’s a sense that [the PUC wants] them to be conservative, but I don’t think they’re driving them to be this conservative.”