The following is an article written by Robert Borlick, Senior Energy Advisor at Borlick Energy Consultancy.
As a result of Storm Uri, small customers served by retail electricity supplier Griddy received huge electricity bills at ERCOT wholesale market prices. Most defaulted, bankrupting Giddy and leaving ERCOT with a $ 3 billion shortfall. Texas lawmakers responded by passing HB16, which prohibits anyone from offering a wholesale indexed product to a residential or small commercial customer.
Poorly designed and rushed through, HB16 prevents the development of an entire class of innovative retail products, but it does not close the door to responsive price demand (PRD) from small customers. HB16 does not prohibit contracts allowing a small customer to sell its load reductions to its retail electricity supplier at a price indexed on the ERCOT wholesale market. Before describing this product in more detail, let’s take a look at the benefits that the small PRD customer would bring to the ERCOT electricity market.
Benefits of price-sensitive demand from small customers
The PRD efficiently provides the bulk feed system with an additional reserve cushion, reducing the need for unintentional load reductions. In the ERCOT footprint, residential and small business customer loads account for approximately 70% of summer peak demand, primarily due to their cooling loads. An aggressively marketed PRD program could produce up to 5 GW of peak load reduction as the wholesale market price approaches the market cap price of $ 9,000 per MWh.
PRD also reduces wholesale market price volatility, providing producers with a more stable source of income to recoup their fixed costs. It does this by slowing the upward movement of the operating reserve demand curve which determines the additional scarcity added to the energy price determined by the generator’s marginal supply price.
Finally, the PRD reduces the market power of producers by forcing them to compete, not only with each other, but also with retail customers.
How Customers Can Sell Their Load Reductions
When a small customer sells a load reduction to their retail electricity supplier, they are actually selling their right to use energy. This right is a purchase option. The value of this purchase option is the wholesale market price less the fixed price of energy in the customer’s contract with the retail electricity supplier and the price of energy in its delivery tariff. Call options have been sold in other electricity markets for many years, so there is extensive operational experience.
Writing PRD calls is not as effective as PRD products which require the customer to pay prices indexed to the spot wholesale market price (like the Griddy product), mainly because the former requires using a consumption benchmark to estimate the amount of energy the customer used if the wholesale price had not increased beyond the normal level. Typically, baselines are developed from the customer’s historical usage during periods of normal energy prices and can be adjusted based on ambient temperature to account for temperature sensitive loads in the plant. customer.
Consumption baselines have several drawbacks. First, they are necessarily created from the customer’s consumption history, so they cannot immediately capture the effects of non-price causal factors that change over time. Thus, a customer may be over- or under-compensated for his response to price signals. For example, this can happen if the client’s family unit changes size, affecting energy use, or if the client goes on an extended trip away from home.
Second, a smart customer may be able to manipulate their baseline to get payment for non-existent load reductions. This is done by artificially increasing usage when prices are low to inflate credits received when prices are high. Most of the manipulations that have been identified have occurred with large commercial and industrial customers who can afford to devote resources to the âsystem gameâ. For most residential and small business customers, the required transaction costs typically exceed the gain.
There are ways to detect and minimize baseline manipulation. However, there will always be cases where a customer will be credited for load reductions that would have occurred in the absence of the payment inducement, or will not be credited for legitimate load reductions.
Implementing load reduction sellbacks involves four activities:
Develop consumption references for participating customers
Evaluate the load reductions of each customer
Settlement of each client’s account
Â· Credit customers and bill their retail electricity supplier.
The logical entities to fulfill these functions are the transport and distribution service providers (T&D) because their customers are captives and are therefore assured of recovering the costs of developing and implementing the consumption benchmarks. In contrast, retail electricity providers do not have this assurance due to customer migration. In addition, T&D service providers have access to all historical smart meter data for their respective customers; retail electricity providers do not. Finally, it will be necessary to conduct pilot programs to assess the effectiveness of different benchmark methodologies and the best means of marketing PRD products before launching large-scale programs. Retail electricity providers cannot afford to recoup the cost of these development efforts.
When a retail electricity supplier pays for a load reduction, they are simply transferring the income they would have paid (or would have earned had they been fully covered) for the energy their customer has reduced. ; therefore, the retail electricity supplier should be indifferent to participating in these PRD programs. However, to encourage participation, it would be helpful to credit the customer at prices slightly below the full wholesale market prices and refund the difference to the retail electricity supplier. While this would reduce the economic efficiency of the program, the loss is unlikely to be very large as demand from small customers will become very inelastic at market prices well below the $ 9,000 cap.
PRD benefits all customers, not just those who participate in these programs, by reducing wholesale market prices and the need for unintentional load reductions. In light of these public policy benefits, all retail customers should bear the costs of the PRD program by allowing T&D service providers full cost recovery through their delivery rates.
The Texas Utilities Commission has exclusive authority over T&D service providers; it can make the little PRD client a reality.