Electricity Markets

Comment Period Opens on Proposal to Add Reliability Mechanism to Texas Market

The Public Utility Commission of Texas (PUCT) is seeking comments on a report on reforms aimed at bolstering the reliability of the state’s wholesale electric market.

The report, Assessment of Market Reform Options to Enhance Reliability of the ERCOT System, includes “novel hybrid designs that maintain the unique” energy-only wholesale power market of the Electric Reliability Council of Texas (ERCOT). The study was done by Energy+Environmental Economics (E3).

The PUCT developed a Blueprint for Wholesale Market Design in response to legislation passed by Texas’ 87th Legislature, SB 3, calling for electric market reforms in the wake of the widespread outages and hundreds of deaths caused by Winter Storm Uri in February 2021.

The objective of the law, as regards generation reliability during extreme weather, is to set a reliability standard of a 1-in-10 loss of load expectation (LOLE) in order to establish sufficient reserves at all times and to provide a means of providing incentives for building new dispatchable generation.

Pursuant to the law, the PUCT agreed to develop tools to meet reliability needs not met by ERCOT's real-time and ancillary services market. Phase II of the Market Design Blueprint adopted by the PUCT last December called for the commission to study hybrid designs that would maintain ERCOT’s energy-only energy market while providing incentives to ensure sufficient generation resources to meet reliability needs.

The recently released E3 report analyzed six proposed market design modifications and incorporated the results of over 35 hours of testimony and more than 300 written submissions received during the PUCT’s public comment period.

The PUCT was not, however, able to open for comment one design, the Performance Credit Mechanism (PCM), that emerged from the review and analysis process. The PUCT, therefore, opened a public comment period on the PCM option (Project 54335). The public comment period closes at noon on Dec. 15.

In addition to a status quo option, the reviewed market modification options included a Load Serving Entity Reliability Obligation (LSERO) that would require load serving entities to acquire reliability credits bilaterally from generators based on forward forecasts, a Forward Reliability Market (FRM) that would create a mandated, centrally cleared reliability market administered by ERCOT, a Backstop Reliability Service (BRS) that would authorize ERCOT to procure resources sufficient to meet reliability needs, and a Dispatchable Energy Credit (DEC) that would require load serving entities to procure credits equal to 2 percent of their annual load. The PCM would establish a process in which credits are awarded based on historic generation during periods of high stress on the grid.

The energy-only status quo scenario would result in a 2026 loss of load expectation of 1.25 days per year, far above the common industry standard of 0.1 days per year, and the exit of 11,260 megawatts (MW) of coal- and gas-fired generation capacity at a customer cost of $22.3 billion per year, according the E3’s analysis in the report.

The LSERO, FRM and PCM designs would result in the addition of 5,630 MW of incremental gas-fired capacity with a LOLE of 0.1 days per year and an annual cost of $460 million per year.

The BRS design would result in the addition of 5,620 MW and a LOLE of 0.1 days per year at an annual cost of $360 million. The DEC design would lead to an aggregate reduction in natural gas-fired generation, resulting in an LOLE of 2.03 days per year at an annual cost of $490 million, according to E3’s analysis.

The PCM design is similar to the LSERO and FRM designs but is less complex and avoids the need for forward looking accreditation, but generator revenues would be less stable under PCM and the design would be less able to less able to reflect infrequent extreme weather conditions, E3 said.

Multiple market designs in the report appear capable of improving market signals to ensure reliability, E3 said, but in the end the report’s authors recommended the FRM design as a “more suitable fit” for the ERCOT market that would “provide more natural year-to-year stability over market outcomes.” The PCM design, E3 said, would “entail significant risk because of its novelty.”

The PCM design has elements similar to the LSERO but “introduces features that may be more consistent with ERCOT market principles such as earned accreditation rather than an upfront administrative process,” PUCT staff said in the filing releasing the report and recommending the opening of the comment period on the PCM design.