The Fatal Flaw in ERCOT's Market Design

Last week, retail energy providers (“REPs”) pocketed a multi-billion dollar windfall - at the expense of Texas ratepayers.

This article explores two issues:

1) Texas ratepayers, not REPs, should earn the market value of providing demand response during an involuntary outage

2) Load is price sensitive - ERCOT should modify its market so load is curtailed based on a price that each customer makes explicit when signing a contract

Every home that lost power last week should have earned ~$15,000 (that was the approximate value of one home consuming electricity last week). Instead, ERCOT rules allow REPs to keep this money.

Shedding load involuntarily is the same as "demand response" and should be compensated accordingly.

An example: Let's say you buy a new home and sign a contract with a local electricity supplier ("REP") that costs you $10 per day. Now, let's assume this REP goes to market and buys that same amount of electricity for $8 a day. Every day, the REP earns $2 (20% margin). This is straight forward enough.

Fast forward to last week - the power goes out.... Here's the rub, your REP bought electricity (for $8) to sell to you, but you aren't consuming any power, so the REP takes "your" power and sells it to the market - at the prevailing price of ~$3,000 per day - for 4 days straight - that's $12,000 a residential meter! 

This is exactly what happened last week in Texas last week!

Texas PUC should mandate that families, not REPs, are compensated for shedding load.

Taken to the next logical next step - what if it was mandated that to finalize an electricity contract, the customer must explicitly state the exact price where they are indifferent to "shutting off power". This would create a powerful solution:

Instead of paying a generator to produce power, pay a neighbor to reduce power.

The conventional view that consumers are not price sensitive is outdated. Due to the physics of electricity, supply must always equal demand. Therefore, negative consumption has the exact same effect on the grid as positive generation - either side can balance the supply/demand equation. If all consumers provide a price point where they prefer to stop consuming, the can never be a "shortfall" of generation at the prevailing market price.

Not only is this the ultimate solution from a sustainability standpoint, it's also an excellent solution from a reliability standpoint. Implementing this solution is possible because Texan's have already installed smart meters (98%+ coverage). Even if this solution can not be implemented on a home-by-home basis (due to technical reasons), circuits with the lowest average cost could be "cut" first, allowing those consumers to earn a handsome reward for not consuming (via an ERCOT payment to REPs).

The cleanest power is the power not generated

Technical note: All ORDC requirements, specifically collateral, should be covered by ERCOT (via Texas-backed bond), not REPs. This would alleviate most of the massive credit burden placed on REPs to serve load in Texas. Would require a DAM ORDC proxy to implement correctly.

Final thought: Personally, I'd take $12,000 and bundle up next to a fire, but other folks might not. That's the point - Texan's should be able to choose what's best for their own families. As the saying goes, when life gives you lemons.....