PUC Adopts Ancillary Services Study, Maintains Conservative Operations

by Rick Arnett

On December 19, 2024, the Public Utility Commission of Texas (“PUC” or “Commission”) adopted its Ancillary Services (“AS”) Study—a document controlling the Electric Reliability Council of Texas’ (“ERCOT”) AS acquisition policy for the upcoming two years. ERCOT acquires AS—generation capacity produced by certain eligible generators—in the “day ahead market.” By “withholding” AS capacity from the “real time market,” ERCOT reserves generation that may be necessary to address operational reliability events in the proceeding operating day. ERCOT, for example, deploys AS if a transmission line or powerplant failure leads to systemwide frequency concerns.

After Winter Storm Uri, the 87th Texas Legislature required the Commission to “evaluate whether [AS] will continue to meet the needs of the electricity market in the ERCOT power region.” The Commission determined AS acquisition is sufficient—and made two other significant AS policy decisions detailed below.

ERCOT confirms—and maintains—recent “conservative operations”

During the AS Study process, ERCOT confirmed a recent shift in its operational posture. After Winter Storm Uri, ERCOT initiated “conservative operations” and, thus, acquired AS quantities necessary to avoid emergency “Watches.” Before Winter Storm Uri, ERCOT acquired AS quantities necessary to avoid load shed, or blackout events. The Steering Committee of Cities and Texas Coalition for Affordable Power (collectively, “Cities”) argued (1) ERCOT’s conservative posture is unnecessary and inflates consumer costs, and (2) ERCOT’s AS acquisition procedures are ambiguous and require supporting cost analysis.

First, compared to an Energy Emergency Alert (EEA) event—protocols implemented prior to a load shed event—a Watch is much less significant. Indeed, a Watch does not actually require ERCOT operational responses to address reliability concerns. Acquiring greater quantities necessary to avoid Watches, however, results in higher consumer costs. As such, ERCOT should only incur and pass to ratepayers AS costs necessary to avoid Watches. Second, ERCOT’s AS objectives are ambiguous and, without supporting cost analysis, may subject consumers to unnecessary costs. Cities therefore urged ERCOT to produce cost analysis related to competing AS acquisition objectives. Otherwise, neither the Commission nor ERCOT stakeholders can compare and ultimately select the most efficient AS acquisition policy.

The Commissioners directed ERCOT to continue conservative operations—until ERCOT produces cost analysis necessary to compare competing operating postures. ERCOT will now develop cost analysis related to various operating postures before 2027, when the Commission will update the AS Study. In 2027, cost analysis may compel ERCOT to adjust its operating posture to a less conservative, more consumer-friendly, approach.

PUC broadens the scope of AS objectives

The Commissioners directed ERCOT to develop the Dispatchable Reliability Reserve Service (DRRS)—ERCOT’s most recent AS—in a manner that both promotes operational reliability and resource adequacy initiatives. As set forth above, ERCOT generally acquires AS for near-term operational reliability initiatives. Resource adequacy initiatives, in contrast, are long-term reliability goals that seek to incentivize additional dispatchable generation such as natural gas facilities.

Cities argued that resource adequacy initiatives are outside the scope of AS policy and could possibly inflate DRRS costs. Nonetheless, in large part due to ongoing resource adequacy concerns, the Commissioners directed ERCOT to develop DRRS in a manner that preserves “optionality”—i.e., the ability to deploy DRRS for operational reliability and resource adequacy. ERCOT stakeholders, including Cities, will now determine to what extent DRRS should serve as a resource adequacy initiative.

Rick Arnett is an Associate in the Firm’s Energy and Utility Practice Group. If you have questions or would like additional information related to this article or other matters, contact Rick at 512.322.5855 or rarnett@lglawfirm.com.