Navigating the Waves: A Recap of ERCOT's 2023 Journey

Well, over the past few weeks, my Instagram feed has been flooded with 2023 recap reels, capturing all the excitement and the ups and downs of the year. It got me thinking, why not have a 2023 recap of ERCOT? Here's a rundown of all the exciting events that unfolded in the energy markets this year. This has shown us so many new phases in market evolution, with the highest peak demand record hit, the introduction of a new ancillary service (ECRS), approval of new bills as part of the 2023 legislative session, an increase in renewable investment in the market, changes in congestion trends, and new transmission upgrades. Huh! What not. Here is a recap of everything that happened this year.

Demand, Settlement Price – North Hub, Gas Price (Henry Hub), and Scarcity

The 2023 summary indicates the second-hottest summer in the history of Texas, surpassed only by 2011. Demand peaked at 85.46 GW on August 10th, 2023, breaking last year’s high of 80.15 GW a staggering 193 times this summer. This substantial demand led to tight system conditions and higher energy prices during the summer. Overall, this summer experienced an average forecast error of 6.1%, where actual demand exceeded the forecasted demand at the start of the year.

The market seems to be recovered from the impact of the Russia-Ukraine war, where Henry Hub prices fluctuated between $2.10 and $3.27/MMBtu, averaging $2.54/MMBtu. Trends have been consistent, with Henry Hub prices higher in winters and lower during spring and summer.

The north hub's average day-ahead settlement price was $55.90/MWh, influenced by market demand. In August, the real-time settlement price skyrocketed to $196.1/MWh due to higher demand, tight conditions, and scarcity events. Congestion patterns varied significantly, with solar and non-solar generating hours causing shifts in power flow across different regions.

Congestion Trends

With the integration of more and more renewables on the grid, the patterns widely vary between solar generating hours and non-solar generating hours. During solar generating hours, the west usually exports power towards the north and south regions, leading to congestion across West Export GTC, resulting in negative congestion for all generation in the west. Conversely, during non-solar hours, power usually flows towards the far-west in the gas-drilling region and data centers, causing congestion on the Far-west and res-of-west corridor. This congestion results in a premium to far-west nodes during non-solar hours. The primary congestion on this corridor was caused by the Medissa transformer. Due to ongoing load integration in the far-west area (mostly data centers, crypto), ERCOT has approved various transmission projects scheduled for the next 2-3 years, resulting in local outages and prominently increasing congestion on this corridor.

Assets in the valley (Lower-South) area have traded at a significant discount with respect to any hub in the market. Once again, the discount stemmed from outages associated with the first phase of upgrades, specifically the ETT second circuit upgrades within the LRGV enhancement project. These upgrades caused LOBO GTC, Valley Export GTC, and other transmission lines exporting power from LRGV to the rest-of-South to function at a derated line rating, leading to a significant discount.

ERCOT has given the green light to two projects in the Lower Rio Grande Valley (LRGV) Area. Firstly, the double circuiting of existing lines (ETT 2nd circuit's project), expected to conclude by the end of 2024. The second project involves building a new circuit (Option 2), set to be completed by 2027.

In the South, one of the major transmission issues is situated in the San Antonio region. This congestion is caused mostly due to load in the area and exports moving towards the North and Houston region. In 2023, there have been outages in the area that have caused huge congestion on the Spruce – Pawnee 345 kV line. This is one of the prominent issues in the market, and as the LRGV enhancement project completes, it is expected to cause more congestion on this network as more and more power will move towards the south and Houston region. In response, ERCOT has approved a $329 million reliability project in the San Antonio area. ERCOT studied five options for the project, shortlisting three. They determined the chosen option improves long-term load-serving capability and operational flexibility, providing an additional transfer path from South Texas into the San Antonio area.

As we move towards Houston, we have seen huge congestion between the North – Houston and South – Houston corridor, where the North – Houston interface has resulted in the separation of the North from Houston. Additionally, congestion on the STP – Wap 345kV lines has resulted in significant congestion on the South – Houston corridor.

Introduction of New Ancillary: ERCOT Contingency Reserve Service (ECRS)

ERCOT introduced the ERCOT Contingency Reserve Service (ECRS) on June 10th, ushering in significant changes, some of which have remained untold. As temperatures soared during the scorching Texas summer of 2023, energy demand surged, prompting ECRS to step in and support grid reliability, addressing real-time operational challenges and maintaining a delicate balance between supply and demand.

Under ECRS, capacity can respond within a mere 10 minutes, making it a crucial tool to correct forecasting errors and replace deployed reserves, with a runtime of up to 2 hours. The average ECRS price this year stands at $61.63/MWh, with a peak of nearly $100/MWh during the summer months (July-September), making it the highest-priced ancillary service in the market.

While ECRS significantly strengthens grid reliability, its implementation has resulted in reduced supply and liquidity in the day-ahead market. This, in turn, has led to inefficient day-ahead Ancillary Service price spikes. Notably, efficient generators, specifically 2 GW of efficient combined cycle and 2-hour battery assets, are reserved exclusively for ECRS and RSS, rendering them unavailable for day-ahead or real-time market participation. Consequently, this has caused an increase in day-ahead/real-time prices and introduced artificial price spikes and congestion in the system.

The term "artificial scarcity" has become a focal point in discussions surrounding ECRS. It refers to a situation where supply is intentionally restricted or manipulated, creating a sense of scarcity that could potentially drive up prices. Opinions on ECRS's role in contributing to this phenomenon vary, with some viewing it as a contributor while others argue that it serves as a necessary safeguard.

2023 Legislation Summary

This year, Texas voters overwhelmingly passed Proposition 7, garnering nearly 65% of the votes. This pivotal proposition paves the way for the creation of the Texas Energy Fund (TEF), a groundbreaking $7.2 billion low-interest loan program aimed at catalyzing the development of up to 10 GW of natural gas plants. A substantial portion of the fund, $5 billion, will be earmarked for 20-year, 3% interest loans dedicated to constructing new generation facilities with a minimum capacity of 100 MW of fully dispatchable power. Notably, power plants coming online before June 2029 stand eligible for bonus payments, incentivizing timely development.

An additional $2.8 billion will be allocated to grants designed to fund infrastructure enhancements in non-ERCOT regions. The grants will also bolster resiliency efforts by establishing microgrids at critical facilities such as hospitals and fire stations. The Public Utilities Commission (PUC) is slated to commence accepting loan applications for ERCOT region projects by June 1, 2024, with initial disbursements for approved loans scheduled by Dec. 31, 2025. The fund primarily supports the development of new gas peakers, explicitly excluding batteries and paired renewables from eligibility.

The fund permits loans up to 60% of the total capital cost, offering completion bonus grants of up to $120/kW. As a result, the total state investment, combining subsidized loans and grants, is estimated to range between $500-900/kW, considering all-in capital costs of $700-1300/kW. However, a provision in the bill restricts funding to the development of no more than 10 GW in total in ERCOT, suggesting that the $7.2 billion set aside could potentially fund 7-10 GW of new development. Additionally, the microgrid component of the bill may generate an additional ~0.5-2 GW of capacity.

In a move to enhance grid flexibility, a new ancillary service, tentatively named Day-Ahead Responsive Reserve Service (DRRS), is on the horizon. This service aims to address real-time operational uncertainties stemming from changing demand, variable resources, and unexpected thermal generation outages. The legislature has specified that eligible resources must be capable of dispatching for at least 4 hours, akin to non-spin today, with a 2-hour notice or start time. While the impact is expected to be positive on overall ancillary prices, gas Peaker's are poised to benefit the most. However, the magnitude of the impact remains uncertain, hinging on the quantities to be procured, which will serve as the main determinant. Frequent deployment could potentially reduce real-time volatility but may pose challenges to battery revenues. As Texas navigates this transformative landscape, Proposition 7 stands as a cornerstone for reshaping the future of its energy infrastructure.

In summary, 2023 has been a dynamic year for ERCOT, marked by record demand, congestion challenges, the introduction of ECRS, and significant legislative developments. As we navigate through these changes, the energy market continues to evolve, presenting both opportunities and challenges for the future.