ERCOT MARKET DRIVER ALERT: Missed forecasts and low reserves leads to scarcity pricing in ERCOT on 07/07/21
by Gaby Flores on Jul 29, 2021
Summertime market volatility is in full force in ERCOT and in this Market Driver Alert, we break down a particularly volatile day on July 7th. Demand was high when supply was low, leading to scarcity price adders going into effect and the locational marginal price (LMP) at Hub North spiking to over $900. In this blog post, we will use a combination of market data from ERCOT and generation data from our partner Live Power in various Yes Energy products (PowerSignals, QuickSignals, DataSignals) to analyze what led to these market conditions.
To set the stage for what happened on July 7th in ERCOT, temperatures were approaching 90 degrees Fahrenheit across the state. The screenshot below shows the temperature in Fahrenheit across various weather stations in the evening peak hours (source: National Weather Service). What happens when there’s not enough supply to meet that demand? Let’s find out.
When operating reserves (i.e., back-up supply) can’t keep up with load, scarcity price adders can go into effect, which is what happened on July 7th. The basic concept is that as reserves (back-up supply) tighten, the cost of those reserves goes up (i.e., the financial incentive for generators to operate). The screenshot below is the operating reserve demand curve, which provides a visual representation of this concept (source). We saw this go to the extreme during the cold snap in February when the cost of electricity in ERCOT reached the market cap of $9,000/MWh day after day. On July 7th prices didn’t go quite that high (they maxed at $972), but we did see scarcity price adders go into effect.
There are two types of scarcity adders that can go into effect: the real-time online reserve price adder (ORPA) and the real-time online reliability deployment price adder (ORDPA). Both of these adders kicked in during the evening peak hours on July 7th. The red line in the chart below is the LMP at Hub North (including both price adders), the green line is the ORPA, and the blue line is the ORDPA. As you can see below, the ORDPA was a much bigger contributor to the high prices on July 7th, as compared to the ORPA. What led to these scarcity price adders going into effect? Let’s dive in.
The first red flag on July 7th was that load came in much higher than forecasted during the evening peak hours. The smooth blue line below is the actual load in ERCOT and the dotted blue line is the original load forecast. The load forecast error (actual minus forecasted) reached its peak of 5,000 MW at 5:45 pm.
The second red flag was that wind came in much lower than forecasted during the time when load came in higher than forecasted. In the chart below, the smooth purple line is the actual wind generation in ERCOT compared with the dotted purple line, which is the original wind generation forecast. The wind forecast error reached a low of -2,000 MW in the evening peak hours on July 7th.
Wind is only a portion of the supply stack in ERCOT. To get a better sense of the supply in ERCOT on July 7th we need to look at the physical response capacity, which is closely tied to the scarcity price adders. The physical response capacity represents the additional capacity across all generating units in ERCOT that can be reasonably dispatched to meet demand, beyond what is currently generating. Note, the physical response capacity does not include wind farms or nuclear plants, meaning ERCOT does not rely on wind or nuclear generation to solve system reliability concerns (source). The physical response capacity takes the High Sustained Limit (HSL) for each unit, discounted by the Reserve Discount Factor (~2%), subtracts out the Non-Frequency Responsive Capacity at the unit (i.e., electricity needed to operate the unit), and then subtracts out the actual output at the unit. This is an oversimplification of a complex equation, but this gives you a high-level sense of how this number is calculated. When the physical response capacity approaches 3,000 MW (like it did on July 7th), that is a signal that scarcity price adders will soon go into effect (which they did) if the reserves tighten any further.
One of the ways that ERCOT solves the issue of thin reserves and high demand is through Reliability Unit Commitment (RUC) alerts. ERCOT uses the RUC process to ensure that there is sufficient generation capacity in the right locations in order to meet load and reliability metrics. There is a daily RUC process (DRUC) that occurs after the day-ahead market and before the adjustment period (14:30-16:00) and an hourly RUC process (HRUC) that runs every hour at the beginning of the operating period to true up the DRUC. The daily RUC process ensures that there is enough resource capacity (in addition to ancillary service capacity) to meet load in the right locations for the next operating day. Conversely, the hourly RUC process calibrates the daily RUC in real-time (source).
On July 7th ERCOT used the RUC process to ensure that forecasted load was met in the right locations. The following eight power plants were cleared in the RUC process on July 7th: Graham, Handley, Lake Hubbard, O W Sommers, Sim Gideon, Stryker Creek, Trinidad (TX), and V H Braunig. Our partner Live Power monitors the real-time generation at all but two of these plants (Handley, Trinidad TX) thus we can see with the Live Power data whether these plants followed through on their RUC commitments.
The first table below are the RUC alerts issued by ERCOT for the Live Power monitored plant Sim Gideon on July 7th, which had cleared RUC commitments from 2 pm through the end of the day.
The second screenshot below is the cleared RUC commitments for the Live Power monitored plant V H Braunig over that same timeframe (2 pm - end of day). Using Live Power data in Yes Energy, we can see if each of the plants followed through on their RUC commitments or if they further contributed to the tight reserves.
The screenshot below shows the Live Power generation data for the plant V H Braunig / Arthur Von Rosenburg in green, compared with the Live Power generation data for Sim Gideon in purple, alongside the real-time LMP at Hub North with scarcity adders. The white horizontal arrow denotes when both plants had cleared commitments in the RUC process. As you can see below, both V H Braunig and Sim Gideon met their RUC commitment. Having access to the RUC alerts in Yes Energy allows traders to know which generators are called on when reserves are thin and the Live Power data in Yes Energy shows traders which generators actually follow through on their RUC commitments. This allows traders to be better prepared when similar market conditions appear/occur in the future.
In summary, the volatility in ERCOT on July 7th seems to have been due to the market being short 2 GW of wind and underestimating demand by 5 GW. As a result, ERCOT called on 6 GW of reserve capacity and Live Power was able to provide visibility into 2 GW of that capacity as plants responded in real-time. Market data from ERCOT (e.g., RUC alerts, LMP data, load data, and wind data), alongside real-time generation data from our partner Live Power data helped unpack what happened on July 7th. Having access to all of these crucial datasets in Yes Energy allows traders to be better prepared when similar market conditions occur in the future.