Although quite technical in nature, the change has the potential to curb any instances of very high wholesale power prices in Texas this summer.
In response to the financial fallout following Winter Storm Uri, Texas regulators have tightened an ERCOT rule limiting price surges in the wholesale power market.
Although quite technical in nature, the change has the potential to curb any instances of very high wholesale power prices in Texas this summer. High wholesale prices indirectly can affect the retail cost of power for homes and businesses.
The Public Utility Commission adopted the change on June 24 by a 2-0 vote, with new member Lori Cobos abstaining. The Texas Coalition for Affordable Power, in comments filed with the PUC, also has expressed support for the change.
The amended rule relates to one of the ERCOT-enforced caps on the price for which generators can offer their power for sale. The cap in question — known as the Low Systemwide Offer Cap or “LCAP” — comes into play when power on the grid is running short, and during certain economic conditions.
Previously, the LCAP was defined as $2,000 per megawatt hour or 50 times the fuel index price of natural gas, whichever is higher. Under the amended rule, the second part of that formulation — the natural gas multiplier — has been removed. The amended rule instead provides a cost-recovery mechanism for generators that lose money because of the revised cap.
“The 50-times fuel price was something we were able to identify as a distorting mechanism in the process,” said PUC Commissioner Will McAdams, shortly before the vote. “Right now, as we address this, we provide certainty for the LCAP. It provides a ceiling for $2,000.”
Wholesale power typically sells for less than $50 per megawatt hour in Texas. However, the market is designed to allow prices to spike substantially when power is running short. ERCOT enforces the LCAP whenever the ERCOT market generates sufficient revenues during a given year to support the cost of new market entry of a hypothetical peaking generation unit. This revenue threshold is called “Peaker Net Margin.”
However, whenever the Peaker Net Margin threshold has not been reached, then ERCOT enforces the separate “High Systemwide Offer Cap,” which is $9,000 per mWh. The High Systemwide Offer Cap acts as the cap on offers during energy scarcity conditions, while the LCAP is the circuit breaker to limit the impact of high prices on consumers.
ERCOT currently is enforcing the LCAP because Peaker Net Margin was achieved as a result of the massive surge in wholesale power prices during Winter Storm Uri. The LCAP will remain in place through the summer and for the remainder of the year.
The PUC’s amended rule also includes a make-whole provision. Under it, generators that lose money selling power during periods of exceedingly high natural gas prices can pursue recovery for those losses through a process to be set by ERCOT. In Texas, natural gas prices help determine wholesale power prices. During Winter Storm Uri, natural gas fuel prices spiked more than 700 percent.
TCAP jointly filed comments with a separate municipal coalition, the Steering Committee of Cities Served by Oncor, in advance of the decision. The organizations expressed general support for the then-proposed rule changes and noted that Winter Storm Uri had resulted in electric bills that challenged municipal finances. “Though the changes presented are technical and complex, the financial impact of this year’s winter event on the market, and by extension, consumers, should be kept in mind,” wrote attorneys Thomas Brocato and Taylor Denison on behalf of the coalitions.
PUC Chairman Peter Lake noted that the PUC amended the scarcity pricing rules, in part, to address the potential for high energy prices looming this summer. He said the PUC also will continue to address scarcity pricing rules as it works to implement recently adopted Senate Bill 3. Among other things, SB 3 limits to 12 hours the amount of time that the price of power can remain at the $9,000 HCAP.
More information about the PUC’s changes to the LCAP can be found in the PUC Interchange, in Project 51871.
Is a policy analyst consultant for TCAP, a coalition of political subdivisions in Texas that purchase electricity in the deregulated market for their own governmental use. Because energy costs are typically a significant budget item to our members, TCAP is consistently looking for ways to save our members money, through cost-saving contracts, energy efficiency or demand response programs.