Top 3 Misconceptions about the Texas Power Market
Lots of ERCOT knowledge on social media these days - below are the top three misconceptions.
1) ERCOT is an energy-only market - FALSE!
2) ERCOT is not connected to other power grids - FALSE!
3) The price cap in ERCOT is $9,000 - FALSE!
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ERCOT actually has a very well designed "capacity" market!
In 2019, ERCOT implemented a mechanism (called ORDC) to ensure that real-time power prices reflected the true cost of blackouts to consumers. This mechanism is essentially a real-time capacity market and is vastly superior to typical capacity markets. It is also why ERCOT can produce highly efficient price signals in real-time.
In ERCOT, generators are paid a "capacity payment" (via ORDC) if the generator is actually online (vs. promised) and can produce power at that exact moment (vs. all year round). There is a new capacity price created every five minutes. Typically, the ERCOT capacity price is $0 (because there's no chance of blackout). During a scarcity event (when there might not be sufficient generation to supply all the demand in ERCOT), capacity prices will rise formulaically until there is 100% chance of an emergency. At that point, the capacity price will reach a max of $9,000 (Side note - the price cap represents the cost of shedding load...).
The market clearing price (price paid for energy) in ERCOT equals the marginal offer price (cost to run least efficient generator online) plus the ORDC value (which varies between $0 and $9,000), up to a max of $9,000.
ERCOT actually has five high voltage transmission lines connecting ERCOT to SPP (in Oklahoma) and Mexico.
ERCOT is typically called an island because it is independent from FERC regulation. FERC regulates interstate (vs. single state) energy transactions. So, why isn't ERCOT regulated by FERC?
ERCOT interties are DC lines, not AC lines. DC lines are one-way (bi-directional) lines, while AC lines balance electricity pools on both sides and can not regulate directional flow. This nuance gives ERCOT the ability to claim (rightfully so!) that no power transactions are interstate.
The ERCOT offer cap is $9,000. There is no price cap.
Battery operators in Texas got burned by this nuance last week, paying almost $15,000 to buy back ancillary services that were financially hedged (at a price of ~$10!). Generators can not offer electricity above $9,000 - but someone can always pay more than $9,000....
Would love to hear your thoughts!
JHR
Energy Derivatives Desk Co Manager
4 年Greg Molnár
Multifamily Acquisition Specialist
4 年A little irony in battery operators getting burned during a freeze. Thanks for explaining this better than the media.
Senior Term Trader at Omaha Public Power District
4 年Great article John, very educational considering I live in SPP back yard. My only comments would be Ercot had similar rolling blackouts in 2011, 2014, and now 2021, at what point does the PUC force major changes to prevent this again, or at least to reduce the severity. Should be interesting to see the fallout from this event......
Principal at RisQuant Energy
4 年Rubbish. Ercot”s reliability regime is obviously flawed. Im not an expert on ercot, but I’ve been in the industry for 23 years. If ercot had had capacity in the sense that the other ISOs have, this disaster never would’ve happened.
Portfolio Manager
4 年Great succinct article on how ERCOT actually functions. I stopped counting how many articles in the financial press are misleading or factually inaccurate about recent events. The debate has devolved into dogmatic views on renewables v. thermal, which totally misses the point. Two people that I follow have offered pragmatic views on the topic; curiously both are named John and reside in Texas (the other being @JohnArnoldFndtn).