Reserve Requirements Workshop

1
Reserve Requirements Workshop

• September 24, 2001
• Shams Siddiqi, Ph.D.
• Lower Colorado River Authority

2
Policy Issues

• LCRA favors Option 3 Establish min. reserve
  margin level and a mechanism for maintaining that
  level implementation of proper mechanism should
  not trigger any action until it is projected that
  reserve margin will fall below the minimum within
  3 to 5 years
• RESOURCE ADEQUACY IS A PUBLIC GOOD
• As with any Public Good, a public (usually
  governmental) entity, in this case ERCOT, must
  ensure Resource Adequacy and collect the cost of
  providing this Public Good on a equitable basis

3
Resource Adequacy Mechanism

• Whenever ERCOT determines that the reserve margin
  will drop below minimum, say 9, within 3 years
  based on load forecast, resource retirements and
  additions, it will hold a capacity auction for
  capacity in years 3 and beyond with 3 months
  notice.
• Existing and new resources have the option of
  bidding an annualized /MW-year for 15 years
  required to make viable investment in new
  resources or to keep existing resources
  available.
• ERCOT will acquire sufficient capacity to meet 9
  reserves at lowest cost and will pay all selected
  bids the clearing price over the 15 year period
  based on unforced MW. New resources are price
  setters while existing resources are price
  takers.
• Once selected, resources cannot bid again until
  after the 15 year period and if retired, they are
  excluded from all future auctions
• Loads pay the costs of these payments on a /MWh
  basis.

4
Advantages of Proposed Mechanism

• It is forward looking
• It pays resources only if they are available in
  the future years
• It is done sufficiently into the future so that
  revenue that resources make from the auction will
  be factored into the bilateral prices
• The short-term market and the requirements for
  LSEs are not made more complex by having to deal
  with an ICAP-like market
• As with any Public Good, if implemented as
  requirements on LSEs, good players that meet or
  exceed their requirements subsidize bad players
  who find ways to cheat on their requirements -
  the proposed mechanism cannot be gamed in this
  manner