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December 23, 2015
Report by Brattle Economists Finds ERCOT’s Future Ancillary Services Market Design Provides Economic Benefits and Improved System Reliability

A new report authored by Brattle economists evaluates the economic benefits of the Electric Reliability Council of Texas’ (ERCOT) proposed Future Ancillary Services (FAS) design. The report finds that FAS offers economic benefits on the order of 10 times the implementation costs, will improve system reliability, and will also provide greater flexibility for meeting reliability needs as system conditions and resource capabilities evolve.

ERCOT proposed FAS to efficiently maintain grid reliability as traditional generation is replaced by wind and solar PV generation and as new technologies (e.g., advanced batteries) offer new ways to provide ancillary services.

The authors find that the two essential features of FAS—unbundling of services and fine-tuning of hourly requirements to system conditions—represent good market design in that they increase the possible ways to meet reliability objectives, and they avoid procuring more reserves than necessary.

To assess the economic benefits of FAS, the authors compared the production costs of meeting ancillary services requirements under FAS to the current design. Requirements depend on system conditions, which the authors and ERCOT staff simulated in the PLEXOS model across a range of future scenarios. The authors estimated production cost impacts of holding reserves by analyzing two separate and additive components: day-ahead energy opportunity costs, considering expected real-time prices as modeled in PLEXOS; and real-time option value foregone, considering the volatility of real-time prices around the expected value. They estimated the real-time component based on analysis of historical data.

After combining day-ahead and real-time opportunity costs, the authors calculate total annual benefits of $21 million in 2016 and between $16 and $19 million in 2024, depending on the participation of new technology. They conclude that if benefits persist at such levels for ten years, the present value would be $137 million, which is 10 times the estimated one-time implementation cost of $12 to $15 million.

The report, “Cost-Benefit Analysis of ERCOT’s Future Ancillary Services (FAS) Proposal,” is authored by Brattle Principal Sam Newell, Associate Rebecca Carroll, Senior Associate Pablo Ruiz, and Research Analyst Will Gorman. It is available for download using the link below.