ERCOT ancillary services concerns: IMM identifies flaws, urges reforms

At the December 19, 2023 ERCOT Reliability & Markets Committee (R&M) meeting, Dr. David Patton, representing the ERCOT Independent Market Monitor (IMM), expressed profound concerns about ERCOT's current and proposed ancillary services (AS) methodology, notably the ERCOT Contingency Reserve Service (ECRS). The IMM identified several issues, including the lack of sound reliability criteria, excessive reserves procurements, artificial shortages generating massive, inefficient market costs exceeding $12 billion in 2023, and a decrease in reliability by withholding units that could be used for managing transmission congestion.

Wholesale Electricity Prices

Dr. Patton reported that despite tighter conditions in 2022 leading to higher shortage pricing under the Operating Reserve Demand Curve (ORDC), the "all-in" price of electricity more than doubled in 2023. He suggested that shortage pricing adders, designed to indicate the shortage value of energy, should contain any price spikes. However, in 2023, the implementation of ECRS led to significant shortage events even when the market wasn't in actual shortage, resulting in higher prices. The Peaker Net Margin (PNM) rose substantially due to high prices in 2023, offering strong incentives for new dispatchable resources, particularly energy storage resources (ESRs).

Reserve Levels

Dr. Patton emphasized reserve levels as being the most accurate measure of market tightness and the basis for ERCOT's shortage pricing mechanism (ORDC adder). Despite higher average reserve levels in 2023 than in 2022, suggesting lower prices, inefficiencies in the AS methodology influenced market dynamics.

Ancillary Services

Ancillary service procurements, though relatively small in quantity compared to energy, significantly drive prices in the ERCOT market. Dr. Patton compared AS procurements in ERCOT with other markets, highlighting their importance in responding to contingencies. He discussed the significance of 10-minute and 30-minute reserves, stressing the absence of Real-Time Co-optimization of Energy and Ancillary Services (RTC) in ERCOT, a critical mechanism available in other markets.

Issues with ECRS

ECRS 10-minute reserves are segregated from the real-time market, causing potential inefficiencies. In 2023, ERCOT escalated its procurement of 10-minute reserves to unprecedented levels while segregating them from the real-time market, leading to perceived capacity shortages.

Dr. Patton explained the importance of reserve margins in determining efficient prices and how falling reserve levels trigger ERCOT’s scarcity pricing adders. He credited the remarkable increase in storage and solar capacity from 2021 to 2023 for preventing potential disasters during the summer of 2023.

Cost of ECRS Over-Procurement

The IMM's analysis revealed that the first few megawatts of ECRS protected against events with a low probability of occurrence. The final tranche of ECRS procurements, however, was deemed to have no effective value. Using a stochastic model, the IMM quantified the loss of load probability and the value of ECRS, estimating the cost of ECRS procurement at $600 million, 50 times higher than its estimated value.

Dr. Patton discussed the cost increases resulting from higher online reserve procurements in 2023. The simulated energy cost increases, attributed to ECRS implementation, amounted to $12.5 billion. He emphasized the importance of correcting these prices, as they impact the Day-Ahead Market, forward prices, and consumer costs over time.

Recommendations and Path Forward

The IMM's No. 1 recommendation for ERCOT is to model uncertainty resulting from random factors and determine the actual need for 10-minute reserves. The IMM suggested that ERCOT lower the Non-Spin 6-hour ahead net load forecast error criteria, use 10-minute ahead net load errors for ECRS requirements, and further reduce the frequency recovery MW procurement for ECRS.

ERCOT's Technical Advisory Committee (TAC) initially did not endorse ERCOT's proposed AS methodology but later endorsed it subject to a commitment to re-evaluate it by April 30, 2024. The IMM recommended that the Board require ERCOT to implement certain changes starting January 1, 2024, to avoid exposing the market to substantial costs under the proposed methodology.