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Brattle Economists Analyze Economically-Optimal Planning Reserve Margin For Texas Power Market



February 3, 2014

Economists at The Brattle Group released a study that estimates what planning reserve margin would be economically optimal in the Electric Reliability Council of Texas' (ERCOT) wholesale electricity market. The study finds that ERCOT's current energy-only market design can be expected to support an average reserve margin that is above the risk-neutral economic optimum, but substantially below the reserve margin consistent with the traditional reliability standard. The study also shows that the current energy-only market design exposes customers and suppliers to higher price volatility and reliability risk than under higher reserve margins. Mandating higher reserve margins would mitigate risks at a slightly higher cost.

The analysis was based on detailed simulations of the ERCOT power market using SERVM, a probabilistic reliability modeling tool. With their partners at Astrape Consulting, the Brattle authors undertook detailed simulations of the ERCOT power market, including weather patterns and other drivers of load uncertainty, generation dispatch costs, generation and transmission outages, intermittent wind and solar generation, different types of demand response, operating reserves, the full range of emergency procedures and their costs, scarcity pricing provisions, and load shedding protocols.

Based on these simulations, the Brattle study finds that:

  • The risk-neutral, economically-optimal planning reserve margin of 9-11% is one that balances expected marginal costs of additional reserves against the marginal costs of unserved load. This margin is less than the 13-15% reserve margin that would be required to meet the traditional one-day-in-10-years reliability standard.
  • ERCOT's current energy-only market can be expected to support investment sufficient to maintain an 11.5% reserve margin, exceeding the economic optimum by more than 1 percentage point on a long-term average basis.
  • At the 11.5% reserve margin supported by the current market design, supply would be insufficient to meet peak loads approximately once every two years, when 1700 MW would need to be curtailed for 2.7 hours on average during each load shedding event.
  • Mandating a reserve margin higher than 11.5% would reduce the uncertainty of year-to-year variances in total system-wide costs and energy market prices, offering meaningful risk mitigation benefits for both policy makers and market participants.
  • While the cost of adding capacity and associated capacity prices increases with higher planning reserve margin requirements, the increased capacity expenses are largely (but not entirely) offset by reductions in the energy market price. Customers' average energy costs drop at the higher reserve margins due to a reduced frequency of price spikes associated with scarcity and emergency events.
  • The net long-term average annual cost associated with mandating planning reserve margins in the 13-15% range is modest, increasing customer bills by about 1% on a long-term average basis compared to the risk-neutral economic optimum.
  • Sensitivity analyses on weather patterns and various economic assumptions indicate that these factors could affect reserve margin results a couple percentage points without a change in the overall conclusions.

"This analysis indicates that ERCOT's current market is not likely to lead to poor outcomes from an economic perspective. However, mandating higher reserve margins could reduce certain price and reliability risks, at a modest incremental cost. This study quantifies these tradeoffs and discusses the practical implementation challenges that ERCOT and stakeholders would face if they decided to introduce mandated reserve margins or a capacity market," said Samuel Newell, a Brattle principal and co-author of the report. "Additionally, it is important to recognize that increasing reserve margins will not address all system-level reliability challenges, nor will it improve the much more frequent distribution-system-related reliability events."

The study, commissioned by the Public Utility Commission of Texas (PUCT), was authored by Brattle Principals Samuel Newell and Johannes Pfeifenberger, Senior Associate Kathleen Spees, Brattle Research Analyst Ioanna Karkatsouli, and Nick Wintermantel and Kevin Carden of Astrape Consulting. The report, "Estimating the Economically Optimal Reserve Margin in ERCOT," is available for download at www.brattle.com.

The Brattle Group analyzes complex economic, finance, and regulatory questions for corporations, law firms, and governments around the world. We are distinguished by the clarity of our insights and the credibility of our experts, which include leading international academics and industry specialists.

For more information :

Organization:
The Brattle Group
www.brattle.com

Contact person:
Stephanie Schwartz
The Brattle Group
Tel: +1 617 864 7900
E-mail: Stephanie.Schwartz@brattle.com


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