By Ann de Rouffignac
HOUSTON, Sept. 19, 2001 — Texans have paid as much as $500/Mw for electricity services during relatively low demand periods that industry veterans say should cost less than $10/Mw.
Prices for so-called ancillary services, such as keeping generation available in case a plant goes down unexpectedly, reached $500/Mw at 7 a.m. Sunday Sept. 9 and stayed at that level for most of the day, according to price data posted on the Electric Reliability Council of Texas (ERCOT) web site.
On Sept. 6 for delivery on Sept. 7, prices were $33/Mw for each hour ending from 1 a.m. through 10 a.m. On Aug. 20, the price for next day’s delivery reached $57.20/Mw for each hour from 3 p.m. through 9 p.m.
The ancillary services market differs from the real-time or balancing energy market where the grid operator buys electricity for dispatch or pays generators not to dispatch power. Prices in the real-time market have traded as high $1,000/Mw-hr.
The grid operator provides markets in ancillary services but most are purchased through bilateral contracts. ERCOT specifies the amount of ancillary services that load serving entities must have on hand, regardless of price, noted the Public Utility Commission of Texas in a Sept. 5 report.
Ancillary services cannot be cost effectively stored. The fact utilities or retailers that serve customers can arrange for these services in separate bilateral contracts, instead of buying them in ERCOT’s market, could provide some price responsiveness, the report said. But there is no secondary market for trading these contracts.
The high prices can prevail because buyers cannot avoid buying ancillary services or reduce the amount they buy in response to price. “High prices for ERCOT-procured ancillary services will lead to high prices for ancillary services in the bilateral market,” the PUC report predicted.
The higher than expected prices in ERCOT’s ancillary service markets could be the result of a so-called ‘hockey stick’ bid pattern, according to the PUC. The ‘hockey stick’ bid pattern is created when generators offer on a regular basis small amounts of ancillary services at extremely high prices.
Sometimes the high bids are chosen, especially in a thin market. The high prices would then set the market clearing prices for other lower priced ancillary services bid into that market, the PUC said.
Shmuel Oren, a professor at the University of California at Berkeley and consultant to the Texas Public Utility Commission, said he observed evidence of the “hockey stick” bidding pattern in the Texas market, as well as California and New England.
The PUC Market Oversight Division said it is concerned market power and bidding patterns will drive up prices. “Experience to date in the new ERCOT market confirms that these concerns are justified given the observed bidding patterns,” the PUC report said.
PUC officials presented a series of proposals to rein in the ancillary services market to the ERCOT board Tuesday. But, according to PUC officials, the board was “unable” to adopt the staff recommendations. ERCOT must give the PUC its final report on rules for operation of the wholesale market in early October.