A coalition of energy industry stakeholders, including the Texas Association of Manufacturers, the Texas Oil & Gas Association, the Texas Chemical Council, and the Texas Industrial Energy Consumers, engaged Bates White to evaluate proposed modifications to the ERCOT electricity market that are intended to support the system’s reliability.
Partly in reaction to the blackouts stemming from Storm Uri in February 2021, proposals have been advanced to create new market mechanisms to compensate generating capacity, aimed at delaying resource retirements and inducing new investment. Bates White evaluated the likely costs and impacts of the proposals and assessed alternative mechanisms that would retain and enhance the energy-only structure of the market.
Two Bates White experts, Partner Collin Cain and Principal Spencer Yang, concluded that implementing a dispatchable reliability reserve service (DRRS) would help manage operational uncertainty and enhance the revenues available to dispatchable resources—incentivizing continued generation investment to meet ERCOT’s reliability needs as substantial quantities of new renewable generation enter the market. A DRRS could meet these needs at a fraction of the cost of proposed capacity mandates that would entail increased costs to retail customers of $5.7 billion or more annually.
Other findings included:
- There is no current or imminent capacity shortage in ERCOT; the existing energy and ancillary markets have successfully supported the addition of dispatchable capacity.
- ERCOT’s immediate reliability challenge is to ensure operational flexibility to accommodate expected large additions of intermittent renewable generation.
- Implementing a new ancillary reliability service—the DRRS—would help manage operational uncertainty and enhance the revenues available to dispatchable resources, thus incentivizing continued generation investment to meet ERCOT’s reliability needs.
- Based on actual performance of the ERCOT market, the proposed performance credits mechanism is not needed as an additional incentive to retain and induce new capacity.
- Implementing a DRRS would provide annual revenue of approximately $1.7 billion directed to the dispatchable resources that help address forecast uncertainty. The net annual cost of DRRS would be approximately $923 million.
A March 2 article in Utility Dive summarized Bates White’s findings: “Implementing a new ancillary reliability service known as a Dispatchable Reliability Reserve Service would provide a targeted procurement of dispatchable resources specifically suited to addressing intermittent resource forecast uncertainty.” Read the Utility Dive article here.
