Commission approves ERCOT ORDC change as “bridge solution”

Commissioner Cobos’ Memo

On August 2, 2023, Commissioner Cobos filed a memo stating her belief that near-term action should be taken to help retain existing long-duration dispatchable thermal generation that is necessary to maintain reliability during multi-day extreme weather conditions. She suggested that this is one of the primary goals for generation resources in the real-time market so ERCOT can reduce its use of Reliability Unit Commitment (RUC), which she believes is important.

If the Commission approves the ERCOT Board’s recommended bridge solution, Commissioner Cobos recommended that the Commission require ERCOT to track the effectiveness of the Operating Reserve Demand Curve (ORDC) price floor adders and report its findings in its ORDC report to the Commission, which must be filed by November 1, 2024.

In addition, Commissioner Cobos recommended that the Commission evaluate the need for the ORDC price floor adders after ERCOT implements the Dispatchable Reliability Reserve Service (DRRS). If so, she recommended that the Commission conduct this evaluation at 6 months and/or a year after DRRS implementation, so the Commission could assess performance during one or two shoulder seasons and determine whether they are effectively reducing RUC.

Open Meeting Discussion

Chairman Jackson noted that on January 19, 2023, the Commission directed ERCOT to evaluate bridging options to retain existing assets and build new dispatchable generation until the Performance Credit Mechanism (PCM) could be fully implemented. On April 17, 2023, the ERCOT Reliability & Markets (R&M) Committee recommended that the ERCOT Board approve the ORDC enhancements for recommendation to the Commission. On April 18, 2023, the ERCOT Board recommended to the PUCT that the ORDC enhancement, using a multi-step floor, as the preferred “bridge” solution.

Chairman Jackson noted that, since that time, the Texas Legislature approved House Bill (HB) 1500, ERCOT filed some supplemental information, and Commissioner Cobos and PUCT staff filed related memos.

Commissioner Cobos addressed her memo, reiterating her position that near-term action is important to retain long-term dispatchable firm generation assets that she believes are extremely necessary to maintaining reliability during extreme weather conditions. She supported using a market-based tool to incent self-commitment by generators in the real-time market to help reduce RUC, the goal of a near-term action bridge solution.

Commissioner Cobos identified three metrics she believes ERCOT should track to ensure that the intended purpose is fulfilled: 1) the amount of new revenue that results from the ORDC price floor adders, 2) the specific type of generation that received the new revenue, and 3) performance data showing whether the ORDC adders actually reduced RUC.

Commissioner Cobos also recommended the Commission evaluate the need for the ORDC price floor adders after ERCOT implements Dispatchable Reliability Reserve Service (DRRS), by December 1, 2024. She recommended that the Commission conduct this additional evaluation 6 months and/or one year after DRRS is implemented because the Commission needs to determine whether or not the ORDC price floor is actually working but also to see how the two are interacting and whether the ORDC floor continues to be needed.

Commissioner Glotfelty noted that he has struggled with this, adding that ERCOT’s Technical Advisory Committee (TAC), ERCOT and the ERCOT Board have all requested that the PUCT approve this. However, it was not clear to him that this is creating a bridge solution that would eliminate RUC or solve a resource adequacy issue. He recalled that this bridge came up in a discussion of resource adequacy, not as a means of eliminating RUC. Commissioner Glotfelty suggested that, if the goal is to eliminate RUC, the Commission should be looking all solutions that could eliminate RUC, not just one.

While acknowledging that RUC is problematic for generators, Commissioner Glotfelty does not want to use another out-of-market solution to solve an out-of-market solution that was created to solve a conservative operation out-of-market solution that the PUCT created, trying to fix the market with other out-of-market modifications.

Commissioner Glotfelty believed that the Commission has not really looked at ancillary services, as required by SB 3. He suggested that when the Commission really looks at ancillary services, this will encompass what is happening with the ORDC floor. He believed that, if it is determined that the ORDC price floor is not achieving its intended effect, the Commission will have to re-examine all of the ancillary services tools, as an entire market, at once. The commissioner noted his concern that adding these tools is creating uncertainties, something the Commission doesn’t want to do because they want to facilitate investment.

Commissioner Glotfelty noted that the issue of eliminating RUC has been discussed at ERCOT and wondered whether prohibiting “opting out” of RUC would incent self-commitment “in a cleaner, easier way.” He believed this option should be discussed in the future.

Commissioner Glotfelty had looked back at reasons for the ORDC and found that the IMM had made a presentation in 2019 stating that ORDC was being implemented instead of Real-Time Co-optimization of Energy and Ancillary Services (RTC) and, at some point after RTC is in the market, this would be another signal to re-examine the ORDC and its role in the market. He added that just throwing money into the market when reserves get tighter is not necessarily a solution that has “put more steel in the ground,” although it could in the future.

Commissioner Glotfelty concluded that he would support the proposed bridge solution, although he was not sure it would work, but believed the Commission needed to move forward and create certainty the best it could.

Commissioner Cobos agreed that Commissioner Glotfelty’s concerns were all valid. She noted a robust discussion at a workshop concerning what the near-term solution was intended to do. She believed it was intended to reduce RUC but that the wording in the PUCT’s “blueprint” was very broad. As a result, the blueprint left the PUCT as a RUC reduction solution but arrived at ERCOT as a resource adequacy solution.

Commissioner Cobos believed it was time for a “reset,” for the Commission to say what the bridge solution is intended to do. She suggested that its purpose is to retain long-duration, thermal generation assets and reduce RUC. She suggested that the ORDC price floor adders will put more money in the market but the amount is subject to debate and could be less than ERCOT projected, so it must be monitored.

Commissioner Cobos suggested that the extra revenue would hopefully create another revenue stream that would allow generators to look at “a portfolio of revenue streams” that would allow them to make an investment decision concerning the ERCOT market.

Commissioner Cobos addressed Commissioner Glotfelty’s assertion concerning the out-of-market solution, adding that she looked at it differently, believing that the ORDC is an in-market market-based tool developed by the Commission to incent price-responsive behavior and more appropriately value reserves as they become more scarce.

Finally, Commissioner Cobos acknowledged that she understood Commissioner Glotfelty’s concerns regarding “pancaking,” adding that this is why she wants to include the metrics. However, she noted there are other factors in the market that will impact whether the price floor adders are working as intended. She added that there is a direct connection between the day-ahead and real-time markets and the more power that is reserved, the less is available for operational dispatch, leading to more scarcity and potentially more use of the ORDC. Commissioner Cobos stressed the need for the PUCT to work with ERCOT to ensure that they are doing what’s best for the market on an ancillary service portfolio basis.

Commissioner Glotfelty agreed that the ORDC was implemented as a market solution but believed that modifications to that solution were implemented by the Commission, rather than being market functions, to put more money into the market for a reason the Commission chose.

Commissioner McAdams suggested that there was insufficient clarity of purpose on each one of the ORDC modifications. He suggested that they were based on meeting “some nebulous definition of resource adequacy, which has never been clearly defined” and has never been defined anywhere else in the country.

Commissioner McAdams stated that the ORDC modifications were sold to the legislature and the Commission as driving installation of new capacity into the system, which it has not done to date but, theoretically, could do future. However, he suggested that is not what is being done now, these revenues are not being introduced to “achieve” resource adequacy. Instead, they are designed to induce self-commitment and market-driven behavior in the market in order to maintain conservative operations, to avoid conservation alerts, not unduly alarm the public, or degrade confidence in the system, retain the generation that is on the system today, stabilize the system and start working toward a long-term solution. He suggested that the “bridge” is to the statutory DRRS framework that is now in law, which is specifically designed and required to reduce RUC. He clarified that this is not meant to address all RUCs but only capacity-driven RUCs, not congestion-driven RUCs, which are a real-time reliability constraint, and an important distinction.

Commissioner McAdams believed that the mechanism being considered today is specifically designed to maintain current levels of generation and reduce RUC for capacity, an out-of-market action by the system operator, which is linked to the amount of conservative operations, renewable penetration and ancillary procurement.

Commissioner McAdams suggested that Commissioner Cobos’ memo laid out a roadmap to a series of checkpoints where the Commission should automatically initiate evaluations of the success on that “clearly defined mission.” He stated that, if it is not working, it should be eliminated and the market should know that and be aware of it well in advance.

Commissioner McAdams suggested that DRRS launch is the first checkpoint. He added that the Commission needs to see a testing period because it will take some time for DRRS to accomplish its intended purpose, including seeing how it interacts with the system in a peak season as well as a shoulder season. The Commission should then evaluate how the mechanism could be phased out if DRRS is successful in accomplishing its mission.

Chairman Jackson noted that there appeared to be a consensus regarding moving forward with the ERCOT Board resolution. She noted it is incumbent on the Commission to measure the success and determine whether there needs to be a change based on performance, in the vein of continuous improvement.

Staff confirmed that this discussion was exactly the kind of guidance they were looking for. Staff noted that the ORDC change is expected to add around $500 million of additional revenue to the system.

Commissioner Glotfelty reiterated his support for the proposal but did not believe $500 million would keep a unit operating or incent new generation in this market, believing there are too many other variables in this “dynamic market” to allow that much money for long-duration, high capital cost resources.

Commissioner McAdams asked if Commissioner Glotfelty believed this change would accomplish its objective for one year.

Commissioner Glotfelty replied that generators will be happy with this change but was not sure what it would accomplish.

Commissioner McAdams noted that this modification is being implemented in conjunction with other mechanisms and is acting in concert, not alone, an important consideration.

Commissioner Glotfelty replied that, due to load growth, he did not believe generators would go away but was uncertain whether it would be because of this revenue stream or because of high prices in the market. The commissioner noted that the ORDC put more than $12 billion in the market since 2014. He believed this issue would continue with increasing renewables penetration and that more money would have to be put into some capacity function, whether through PCM or DRRS. Commissioner Glotfelty suggested that, with zero marginal cost resources in the market, it will be necessary to provide additional revenue to those that have high operating costs, “buying insurance” to achieve reliability for blue sky days and long-term winter events.

Commissioner Glotfelty suggested that, without a vision of where they are going it’s hard to determine what success will be with all of these little modifications. He encouraged the Commission and ERCOT to undertake a longer view of ancillary services in the near future, once some data is available.

Commissioner McAdams replied that, like his experience in Iraq, success is “conditions dependent” and you only know when you get there, adding that “we are not there yet.”

Commissioner Cobos stated that she does not believe this single action is going to be the “monumental action” that will drive, retain or incent investment, instead it is one piece of a broad portfolio of revenue streams in the market. She noted that the Commission can only put incentives in the market, it can’t make generators invest. She stated that this will create an incentive for generators to self-commit but, if they don’t, there is another problem and it will need to be addressed in another way.

Commissioner McAdams suggested that one of the important features of this ORDC modification is that in clearly defining the goal, the Commission is building a means for accountability into the ORDC that the Commission had previously not addressed.

Commissioner Cobos agreed with the need for building appropriately for the future rather than pancaking without a thorough evaluation of how things interact.

The Commission voted to approve the ERCOT Board’s resolution and recommendation concerning a bridge solution, including requiring reporting metrics consistent with the Commission’s discussion.