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ERCOT power prices could hit offer cap even after ‘circuit breaker’ tripped

By: Mark Watson |

Even if the Electric Reliability Council of Texas market trips a “circuit breaker” threshold that triggers a drop in systemwide offer cap to $2,000/MWh from $9,000/MWh, ERCOT’s scarcity pricing mechanism could keep clearing prices near $9,000/MWh, stakeholders learned Wednesday.

During the ERCOT Wholesale Market Subcommittee, Pamela Shaw, ERCOT’s lead market operations analyst, made a presentation about what would happen if wholesale power prices this summer stay so high for so long that the peaker net margin — the cumulative amount of money expected to be received by a hypothetical gas-fired peaker under actual prices during the year — tops $315,000/MW-year.

That $315,000/MW-year is key, because it equals three times ERCOT’s net cost of new entry for a new gas turbine, assumed to be $105,000/MW-year. When PNM reaches that $315,000/MWh-year threshold, Public Utility Commission of Texas rules drop the systemwide offer cap from $9,000/MWh to $2,000/MWh or 50 times the “fuel index price” — currently the Houston Ship Channel price of natural gas — whichever is greater. Monday’s Houston Ship Channel price for delivery Tuesday was $2.71/MMBtu, so the “50 times FIP” price would be $135.50/MWh.

Since September, more than 5,000 MW of coal- and gas-fired generation capacity has retired, and power supplies are expected to be tight this summer, with August on-peak forwards at the ERCOT North Hub topping $197/MWh on Tuesday.


The highest historical PNM was about $125,000/MW-year in 2011, which featured extreme cold in February and extreme heat in summer, but the systemwide offer cap was just $3,000/MWh for the last 11 months of the year and $2,250/MWh in January.

Beth Garza, who heads Potomac Economics’ independent market monitor office for ERCOT, said Wednesday that power prices would have to hit $9,000/MWh for about 30 hours for PNM to hit $315,000/MW-year this year. In 2011 — widely described as an extreme year for cold, heat and drought — ERCOT prices were at the cap just about 17 hours, Garza said.

But if ERCOT’s PNM did top $315,000/MW-year, the prices at which generators could offer power would drop to $2,000/MWh, but under scarcity conditions, ERCOT’s Operating Reserve Demand Curve rules could provide a price adder that could set clearing prices as high as $9,000/MWh, Shaw said. ERCOT implemented the ORDC in mid-2014.

One stakeholder not clearly identified for Wholesale Market Subcommittee conference call listeners said Texas regulators set the lower systemwide offer cap, once the PNM topped three times net CONE, “as a sort of circuit breaker” to give market participants, particularly on the load side, time to consider alternatives.

If PNM tops $315,000/MW-year, it “might not be the only issue we’re dealing with at that point,” the stakeholder said.

If the PUC decides to drop the ORDC cap to $2,000/MWh or “50 times FIP” during the summer, another identified speaker said ERCOT could implement the change “pretty quickly.”


Another fuel-index-price issue arose during a presentation by Ino Gonzales, ERCOT supervisor in settlement and billing market analysis. The FIP is used regularly in a number of formulas, especially for calculating limits related to market power, Gonzales noted.

Natural gas trading activity has been falling at the Houston Ship Channel, and there are days in which no index price is available — nine days in 2017, for example. Under those circumstances, ERCOT rules mandate using the previously published Houston Ship Channel price, but Gonzales suggested that the Katy natural gas price would be more appropriate, because its liquidity has been increasing.

Potomac Economics’ Garza said illiquidity at the Houston Ship Channel price “offers opportunities for individual market entrants to manipulate the price in a way that affects electricity prices.”

While the two prices on average have remained closely aligned, the Katy price has occasionally diverged from the Houston Ship Channel price by as much as $5/MMBtu.

Ultimately as a short-term fix, the Wholesale Market Subcommittee directed ERCOT staff to develop a rule to allow the Katy price to be used when the Houston Ship Channel price is unavailable.

For the longer term, some stakeholders said contracts may be in place that specify the Houston Ship Channel, so the Wholesale Market Subcommittee directed the Resource Cost Working Group to develop a schedule to implement a complete switch to using the Katy price as the FIP, so market participants will have sufficient time to adjust.