Board approves ERCOT Ancillary Services methodology without IMM recommendations

At the December 19, 2023 ERCOT Reliability & Markets Committee (R&M) meeting, ERCOT's Vice President of System Operations, Dan Woodfin, presented ERCOT’s prosed methodology for determining minimum ancillary service requirements. This methodology has evolved over the last 15 years in response to changing system dynamics marked by increased variability and uncertainty. Adjustment to the procurement method have tailored ancillary service quantities to the actual risk during different time periods.

Ancillary Services:

1.    Regulation Service: for balancing supply and demand every four seconds to maintain frequency, is proposed to undergo no major changes in procurement.

2.    Responsive Reserve Service (RRS): responds to low-frequency events such as generating unit trips. To implement conservative operations, ERCOT added 500 MW to the 2,300 MW floor during summer peak hours. Pursuant to an IMM recommendation, ERCOT agreed to revert to the 2,300 MW floor but plans to add additional quantities during periods of lower inertia.

3.    ERCOT Contingency Reserve Service (ECRS): a 10-minute product to address frequency recovery, forecast errors, and ramp response. Proposed adjustments for 2024 include enhanced net load forecast error risk coverage during sunset hours and adjustments to frequency recovery analysis using two years of historic information, covering 60% of historic net load and inertia conditions.

4.    Non-Spinning Reserve Service (NSRS): NSRS must be available within 30 minutes but is always available for dispatch, unlike ECRS, which is held in reserve and not used in the energy market. Changes for NSRS in 2024 involve buying less during overnight hours and adjusting quantities based on forecast error risks.

Emily Jolly, representing the ERCOT Technical Advisory Committee (TAC), reported on TAC discussions on the 2024 ancillary services methodology, noting that the vote at TAC failed initially but the methodology was approved after ERCOT committed to review the methodology by April 30, 2024. Concerns at TAC focused on ECRS procurement costs, regulatory uncertainty, and the lack of a consistent methodology throughout the year.

PUCT Commissioner Lori Cobos asked whether the IMM’s estimated $12.5 billion represented wholesale power cost or cost to consumers, adding that the PUCT is very concerned about costs to the market. She noted that there are petitions at the PUCT from independent retailers requesting to pass ECRS cost through to consumers outside of the fixed rate contracts.

Ms. Jolly noted that Load Serving Entities (LSEs) had also raised concerns about ERCOT's conservative posture, ancillary service costs affecting liquidity, and impacting hedging ability. The approved methodology calls for a comprehensive reevaluation to align with market needs.

Dr. Patton clarified the difference between ERCOT's $600 million and IMM's $12.5 billion estimates, explaining that they measure different factors. ERCOT's estimate represents the cost of buying 6,000 MW of ECRS while the IMM's estimate reflects the energy price increase over time.

Dr. Patton emphasized the importance of Real-Time Co-optimization of Energy and Ancillary Services (RTC) for enhanced reliability, market efficiency, and dispatch. Due to RTC being a few years away, he stressed urgency in addressing these concerns promptly.

Mr. Woodfin agreed with the importance of swiftly implementing RTC to address these and other issues. He explained that ERCOT is working to mimic RTC's functionality while maintaining its reliability benefits. He noted the Texas Legislature's directive for the PUCT to reassess ancillary service structures in collaboration with ERCOT in 2024.

Commissioner Lori Cobos emphasized the need for a thorough reevaluation, considering legislative requirements and costs. She stated that there is no disagreement that ERCOT has paid approximately $600 million for ECRS and that holding ECRS reserves out of the market, not scarcity pricing from ORDC, has raised energy prices.

Commissioner Cobos noted that there is a recognition among the PUCT commissioners that the PUCT needs to be involved in approving ERCOT’s ancillary services methodology for 2025, adding that this reevaluation needs to be “a true reevaluation.” She stressed the importance of understanding the disagreement over 10-minute vs. 30-minute ahead net load forecasts. Commissioner Cobos suggested that the most important long-term issue is the ability to more specifically identify the loss of load risk.

PUCT Chair Kathleen Jackson emphasized the need for consensus and collaboration on implementing RTC while maintaining grid reliability and affordability.

The ERCOT Board of Directors ultimately approved ERCOT’s 2024 methodology for determining minimum ancillary services requirements, as proposed by ERCOT staff, but without the IMM’s recommended short-term modifications to ERCOT’s proposed methodology.