Navigating the Impact of ERCOT’s Changing Market Designs and Subsequent Rising Energy Costs: Leveraging Generators and Batteries for Cost Savings and Risk Reduction

Introduction

In recent times, businesses across Texas have faced a notable surge in energy costs. ERCOT's new Ancillary Service, ECRS (ERCOT Contingency Reserve Service), which was implemented in June 2023, is a significant contributor to this upward trend. This blog post aims to explore the specific impact of ECRS on commercial and industrial consumers and provide strategic solutions tailored for businesses, such as incorporating backup generators and batteries. We will delve into how generators and batteries can be deployed during peak pricing hours, reducing costs for businesses. Additionally, we'll touch upon the forthcoming changes in ERCOT's market structure and the potential implications for businesses, including the belief that the Dispatchable Reliability Reserve Service (DRRS) and the Performance Credit Mechanism (PCM) could lead to huge costs to the market, and how adding backup generators or a Battery Energy Storage System (BESS) can significantly help control utility costs, especially in the face of the market's uncertainty.

Understanding ERCOT Contingency Reserve Service (ECRS)

ERCOT's mission is to ensure the reliability of the Texas electricity grid, and before this summer, there were four market-procured ancillary services: Regulation Up, Regulation Down, Responsive Reserve Service, and Non-Spin Reserve Service. ERCOT and the Public Utility Commission of Texas (PUCT) a few years ago decided these four services were insufficient to provide appropriate levels of reserves to preserve reliability. To address this need, ERCOT added a fifth ancillary service, the first to be added since the market opened in 2002, called ERCOT Contingency Reserve Service (ECRS). ECRS went into effect on June 10, 2023, so it hasn’t been around too long yet, but it’s making a large impact on the market based on ERCOT’s Market Monitor research. ECRS must be dispatchable and ready to respond within 10 minutes to address operational issues. ECRS is purchased in the Day-Ahead Market. This new ancillary service is intended to address unforeseen disruptions like generator failures or sudden demand spikes and to provide a rapid response backup to the grid.

ECRS prices vary by day and by hour. Additionally, these costs are based on the quantity of ancillary services procured by ERCOT and the hourly market clearing price for that service. This is on par with the way the other ancillary services are purchased. ERCOT allocates this new cost to Retail Electric Providers (REPs) on a load-ratio share basis, which will likely pass through this cost to customers based on the customer-specific usage shape or the REP's own specific portfolio’s costs.

The Cost Conundrum for Businesses

Commercial and industrial consumers face unique challenges due to increased electricity costs resulting from ECRS implementation. With the Market Monitor estimating an $8.5 billion increase in costs from just June to August of 2023, it becomes crucial for businesses to strategize and implement solutions to navigate these additional costs effectively. This cost is not only coming from the increased cost of ECRS on market participants but also the increased cost of Energy from having fewer resources available to deliver energy in the real-time market.

Future Changes & Additional Costs from DRRS and PCM

Businesses must also consider the potential impact of the Dispatchable Reliability Reserve Service (DRRS). DRRS is yet another new ancillary service to compensate generators for being available to produce power during relatively brief periods of low supply. Estimates suggest an additional cost of over $900 million per year to the market. DRRS implementation is expected by December 2024 in the ERCOT market.

The Performance Credit Mechanism (PCM) is paid to generators who commit to being available and ready to supply energy during high-demand periods. Generators will be able to sell credits to electricity retailers, which will be obligated to procure the PCM credits. PCM is anticipated to introduce an annual market cost of up to $5.7 billion, a burden ultimately borne by the customers. PCM is expected to be implemented in Q3 of 2025.

Strategic Deployment of Generators and Batteries

To address the impact of peak pricing hours and additional costs borne by these new market changes, businesses can strategically deploy backup generators and batteries. Real-time market monitoring and predictive analytics help identify optimal dispatch times for generators. Batteries offer a dynamic solution by storing excess energy during off-peak hours and releasing it during high-demand periods. The dual approach offered by BESS helps reduce reliance on the grid during costly times and provides an effective hedge against rising costs and volatility in both Energy and Ancillary Service costs.

Amidst the uncertainty of the market, the integration of backup generators or Battery Energy Storage Systems (BESS) emerges as a strategic move for businesses. These technologies not only provide a reliable and cost-effective solution during peak pricing hours but also offer a sense of control and assurance in the face of evolving market dynamics.

Conclusion

As Texas businesses navigate the challenges posed by ERCOT's ECRS (ERCOT Contingency Reserve Service), leveraging backup generators and batteries emerges as a strategic solution for reducing electricity costs. The anticipated changes, including the introduction of the Dispatchable Reliability Reserve Service (DRRS) and the Performance Credit Mechanism (PCM), potentially incurring additional many billions of dollars per year in costs to the market, underline the need for businesses to adopt proactive strategies. By embracing these technologies and deploying generators and batteries strategically, commercial consumers not only gain greater control over energy usage but also enhance the resilience of their energy infrastructure in the face of impending market changes. In an era where cost-effectiveness, operational efficiency, and certainty are paramount, backup generators and batteries stand out as valuable tools for Texas businesses seeking to navigate the uncertainties of escalating energy costs and evolving market structures.