The amended rule relates to a cap on the price for which generators can offer power into the ERCOT-administered market.
In response to the financial fallout following Winter Storm Uri, Texas regulators last week tightened an ERCOT rule that limits price surges in the wholesale power market.
The amended rule relates to an ERCOT-enforced cap on the price for which generators can offer their power for sale. That cap, 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 Public Utility Commission of Texas adopted the amended rule on June 24 by a 2-0 vote, with new member Lori Cobos abstaining.
“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.
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.