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The Fatal Flaw in ERCOT's Market Design

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John Reid's picture
CEO Evergrid

Previously Head of Trading - ERCOT, CAISO, and SPP.

  • Member since 2021
  • 5 items added with 1,666 views
  • Mar 3, 2021

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The conventional view that consumers are not price sensitive is outdated.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.....

Matt Chester's picture
Matt Chester on Mar 3, 2021

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.

Of course there are situations where this isn't 100% true (a hospital, for example, needs their constant power and can't just flip off the switch), but this is largely true as the new reality for utilities. Do you think they're finally starting to recognize this and will factor it into their programs and strategies? 

John Reid's picture
John Reid on Mar 3, 2021

Your point on the hospitals is the exact right one - hospitals should have a much higher price than say a residential home, which should be reflected in the "load shed" price when they sign the contract. Interestingly, most of the infrastructure that kept power also are the facilities with ample backup generation that actually does "switch" on automatically. If every building with backup generation fired up, vs. use grid power, we probably wouldn't have had any outages. 



Doug Houseman's picture
Doug Houseman on Mar 5, 2021

For some certain items, the customer CAN NOT be price sensitive. You need enough heat to keep from freezing to death, and hopefully keep the pipes from freezing. You need to make food, and on days when you have low temperature within the house, hot food makes a big difference. Sorry, price sensitivity does not beat Maslow.

Jim Galvin's picture
Jim Galvin on Mar 5, 2021

While I do not disagree with everything written, equating Demand Response and Involuntary Load Shed is a stretch. The results are the same, but the consumer during EEA3 does not have the means to voluntarily shed load, this is done by the Utilities at ERCOT's order. We have found that during those times, that load shed was not consistent across each utility; each did what they could to shed the necessary load required and yet keep critical care type premises energized. It may beg a question as to during emergency conditions, what type of market really does exist with respect to pricing and settlement, but I am sure that topic will get ample discussion going forward.

Marc Lindemann's picture
Marc Lindemann on Mar 8, 2021

The IoT will prevent this with the correct equipment. How long before and how the poorest consumer will afford it remains to be seen.

Paul Korzeniowski's picture
Paul Korzeniowski on Mar 17, 2021

Interesting points. IMO, they illustrate that US energy policy making is outdated. The fact that the energy companies caused the problem and benefitted from it at the consumers' expenses is not surprising. The rules and policy making are a convoluted hodgepodge that customers cannot fathom.  Have you tried to understand your monthly bill?

So, the rules tilt to the utilities. We need a national policy, one that would eliminate the waste and jerry rigging now seen in the system. IMO, we also need true deregulation and competition, as evident in other industries, like telecommunications, However, my sense is the status quo will remain intact simply because of the complexity of the issues, the power of the entrenched utilities, and the lack of understanding/advocacy among consumers.  

John Reid's picture
Thank John for the Post!
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