By Tom Kleckner

ERCOT’s Independent Market Monitor said the market “performed competitively” in 2015, with low natural gas prices helping reduce energy costs and congestion revenue to record lows.

Potomac Economics’ annual State of the Market report, filed with ERCOT and the Public Utility Commission of Texas, said the ISO’s average real-time energy price fell 34% last year to $26.77/MWh, eclipsing 2012’s prices ($28.33/MWh) as the lowest annual energy cost since the nodal market came online in December 2010.

The drop was fueled by average natural gas prices 41% lower in 2015 than 2014, falling from $4.32/MMBtu to $2.57/MMBtu. The Monitor said the correlation between gas prices and energy costs is to be expected in a “well-functioning, competitive market,” as “fuel costs represent the majority of most suppliers’ marginal production costs.”

“Suppliers in a competitive market have an incentive to offer supply at marginal costs and natural gas is the most widely used fuel in ERCOT,” the Monitor said.

Lower gas prices also contributed to a $352 million decrease in congestion revenue, down 50% from 2014’s record $704 million, despite a similar number of binding constraints as the year before. The total was more than $100 million lower than the previous low for congestion costs.

“This is largely due [to] the significant reduction in natural gas prices and the cumulative benefits of large investments in transmission facilities,” the Monitor said, noting gas units are typically re-dispatched to manage system flows.

The report also indicates ERCOT’s average real-time load was up 2.4% from 2014 — the ISO set a new hourly demand record of 69,877 MW on Aug. 10 — but that shortages were “rare” and planning reserves were above the minimum requirement. However, the Monitor said the market’s net revenues were less than the amount needed to support construction of new gas units. It calculated net revenue for new gas turbines last year at $23 to $29/kW-year, far below the necessary $80 to $95/kW-year.

The Monitor found both nuclear and coal units to be money losers in 2015. The ISO’s four nuclear units’ generation-weighted average price was $24.56/MWh in 2015, compared to the Nuclear Energy Institute’s estimated operating costs of $27.53/MWh last year. Coal and lignite units averaged $25.94/MWh prices, compared with the Monitor’s assumed fuel-only operating costs of approximately $30/MWh.

“This is significant because the retirement or suspended operation of some of these units could cause ERCOT’s capacity margin to fall below the minimum target more quickly than anticipated,” the Monitor said. It currently predicts ERCOT’s reserve margin will stay above its 13.75% target “for the next several years.”

The Monitor acknowledged ERCOT made several improvements to its market in 2015 in response to its recommendations, but it said three suggestions from last year have yet to be addressed. It recommends ERCOT:

• Implement real-time co-optimization of energy and ancillary services;
• Modify the real-time market software to better commit load and generation resources that can be online within 30 minutes; and
• Price future ancillary services based on the shadow price — the system cost for the last megawatt of load — of procuring the service.

The Monitor also said the PUC should evaluate policies that create incentives for loads to reduce consumption for reasons unrelated to real-time energy prices, including the need for emergency response service (ERS) and the allocation of transmission costs. It said the “lucrative” ERS program limits the motivation for loads to participate and contribute to load formation in the real-time market, while rising transmission costs “significantly” increase the already substantial incentive to reduce load during the summer season’s probable peak intervals.

“Both of these mechanisms provide strong incentives for load to act in ways that are not aligned with the most efficient electricity market outcomes,” the Monitor said, “which are to ensure that the price continually reflects both the cost to provide (supply) and the value to consume (demand).”