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October 30, 2012
Brattle Consultants Present Options to Public Utility Commission of Texas for Changes to ERCOT Market Design

Consultants at The Brattle Group have proposed two options for changes to the Electric Reliability Council of Texas (ERCOT) market design to encourage more generation development. The proposed options were presented October 25th by Brattle principal Sam Newell at a public workshop before the Public Utility Commission of Texas (PUCT). Brattle consultants have developed two options for achieving higher reserve margins than an energy-only market, based on a composite of stakeholders’ proposals. These proposals come in response to ERCOT’s current energy-market design, which will not attract enough investments to meet the current target reserve margin and reliability objectives. The two options recommended by Brattle are: 1) an energy-only market with support from demand response; and 2) a Texas capacity market. The first option would leave ERCOT’s energy-only market intact for incumbent generators, and would create a separate demand response-only capacity market. The proposed option would promote demand response to support reliability without suppressing energy prices and displacing investment. The second option recommends a full three-year forward capacity auction with a transition period through 2017. Elements of the proposed capacity market include: a single region-wide market; no minimum offer price rule, but rather a “statement of principles;” resource obligations and incentives aligned with resource adequacy value; capacity payment and penalty structure complemented with continued strong capacity scarcity pricing in the energy market; and cost allocation based on causation. The two options presented were each evaluated for reliability, economic efficiency and cost, regulatory stability and investor risk, and implementation complexity. Either of the two options presented, if implemented, would require action by spring 2013 in order to maintain the current 13.75% target reserve margin through 2015, according to Brattle’s findings.