POLICY: ERCOT responds to IMM criticisms of its handling of ancillary services

In comments to NPM, an ERCOT spokesperson provided some response to criticisms from the state’s Independent Market Monitor (IMM) Potomac Economics on the grid operator’s use of ancillary services.

The grid operator suffered its second high profile blow of the year from the state PUC earlier this summer when regulators rejected its proposal to artificially inflate ancillary services prices through NPRR 1224. This followed its rejection of the key proposal of ERCOT’s NPRR 1186 earlier this year, which would have implemented a state of charge requirement for battery storage projects.

The ERCOT spokesperson noted NPRR 1224 similarly included multiple key components including the implementation of a new trigger that would be used to manually release ERCOT Contingency Reserve Service (ECRS) from Security-Constrained Economic Dispatch (SCED) dispatchable resources. Specifically, the trigger would come into play when the system power balance constraint is consistently violated by at least 40 MW for 10 consecutive minutes.

The second, more controversial, piece of NPRR 1224 sought to maintain an artificial price floor of USD 750 per MWh for any capacity assigned to ECRS. ERCOT notes this number is actually a compromise that came about during its stakeholder process designing NPRR 1224 during which generator advocates pushed for a floor of USD 1,000 per MWh while consumer groups pushed for USD 100 per MWh.

In response to these proposals, ERCOT IMM Potomac Economics filed a scathing rebuke to the PUC ahead of its late-July decision to reject NPRR 1224’s price floor. Potomac Economics called the price floor “the most unreasonable element of the NPRR from an economic perspective,” arguing it would “substantially undermine the performance of the markets, diminish reliability and inflate costs for Texas consumers.”

Potomac Economics went on to criticize ERCOT’s use of ancillary services as a whole, concluding the grid operator had raised market costs by more than USD 12bn by “creating artificial dispatch shortages that doubled real-time energy prices on average” in the latter half of 2023 following ECRS’s implementation on June 10.

Specifically, Potomac Economics says these artificial price increases were a “direct result of ERCOT’s decision not to deploy ECRS resources when SCED needed them to satisfy demand on the system,” leading prices to spike to ERCOT’s price ceiling of USD 5,000 per MWh. While ERCOT argued the implementation of the new trigger would help address this, Potomac Economics did not budge, arguing price inflation could be “completely eliminated by simply implementing a reasonable deployment procedure that prevents avoidable SCED shortages.” Further, Potomac Economics noted that doing so would not even require an NPRR “since it is well within ERCOT’s operating authority to develop deployment procedures for its operating reserves.”

Critically, Potomac Economics argued that ERCOT’s use of stakeholder collaboration with generators “who have substantial economic interests in these artificial shortages” during its development of NPRR 1224 led to the proposal to artificially inflate prices, which was notably not included in ERCOT’s original proposal for ECRS.

“Every other market operator monitored by Potomac Economics writes its own operating procedures including reserve deployment triggers because they are fundamental operating actions to maintain reliability,” Potomac Economics, which also monitors MISO, ISO-NE, NYISO and RGGI, stated in its filing before the PUC. “While deliberately allowing preventable SCED shortages may generate windfall revenues for generators, it undermines reliability and is inconsistent with ERCOT’s perceived mandate to operate conservatively.”

In comments shared with NPM, ERCOT said “what the IMM calls artificial scarcity is simply a consequence of maintaining operating reserves.” Further, it says that releasing ECRS too often would “maintain too few operating reserves and inordinately increase risk to the system’s ability to maintain reliability.”

Additionally, ERCOT says its proposed USD 750 per MWh price floor was to “ensure that when resources carrying ECRS responsibility are released to SCED, energy prices reflect the value of the forgone reserves if that capacity is converted into energy.”

Finally, ERCOT says nothing prohibits it from proposing operating procedures through a stakeholder process, “especially when it determines stakeholder feedback may be valuable to determining the appropriate policy outcome.”

Ultimately, the PUC rejected the price floor proposal outright and instructed ERCOT to implement the revised trigger through a separate proposal.

Real-Time Co-Optimization

ERCOT continues to position its NPRR proposals, including 1224 and 1186, as “temporary measures to ensure grid reliability” until it can implement its Real-Time Co-optimization (RTC) market structure, which is currently scheduled for 2026.

“The proposed changes in NPRR 1224 were short-term changes expected to be sunset when REC is implemented,” the ERCOT spokesperson said specifically.

The spokesperson explained that under RTC, procurement of ancillary services will be “co-optimized” in real-time with the regular wholesale market. Through RTC, the spokesperson says SCED will use real-time conditions and an ancillary services demand curve to procure ancillary services and dispatch resources to serve load, notably without a price floor like the one proposed by ERCOT through NPRR 1224.

Under this paradigm, the spokesperson says RTC SCED may procure reduced amounts of ancillary services and use the online capacity available to serve load when additional ramp capacity is needed to serve the forecasted net load. The spokesperson noted this is distinct from today where the ERCOT manually releases portions of ancillary services and will “arguably be more efficient since RTC would automatically make the trade-off between procuring ancillary services and dispatching resources based on system needs.”

When asked whether ERCOT was collaborating or contracting with third parties to develop the software needed to implement RTC, the spokesperson would only say the grid operator is “relying on its existing vendors to develop the majority of the RTC software.”

*This story was originally published exclusively for NPM subscribers last month.

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