Texas, long known for its unwavering commitment to single energy markets, made an essential move toward adopting capacity mechanisms into its power market in early March 2024.

The Public Utility Commission of Texas (PUCT) provided input on a Performance Credit Mechanism (PCM) proposal submitted by ERCOT. Their feedback suggested a cautious advancement of PCM while calling for increased stakeholder participation.

PCM was approved by the Public Utility Coordinating Team in 2023 as a performance-based incentive mechanism designed to encourage power generation companies to supply electricity during periods of peak demand. Texas currently uses scarcity pricing mechanisms as incentives for power plants during supply shortages, encouraging long-term investment in electricity sources.

Scarcity pricing’s distinguishing feature is transparent price signals, which encourage both generators and consumers to react simultaneously, thus avoiding power outages and maintaining the reliable operation of the system. This approach not only reduces the operational costs of the power system but also lowers socioeconomic costs. Furthermore, it supports flexible power sources like energy storage units or rapid ramp-up units and encourages demand response by consumers, thus stimulating participation in spot markets.

ERCOT uses reliability forecasts and standards to establish Performance Credits (PCs). ERCOT then distributes these credits via bidding or bilateral transactions in the forward market. Retailers then acquire these commitments from generators as PCs in times of supply or demand shortages. ERCOT then measures whether generators fulfilled their commitments during peak periods with the highest reliability risk – similar to how ERCOT measures a capacity market model works.

Texas’ transition towards a capacity mechanism marks an essential shift in its energy market strategy, intended to strengthen reliability while considering the changing dynamics of production and consumption of energy resources.

Texas’ proposed Performance Credit Mechanism (PCM) incorporates several design parameters that differ significantly from traditional capacity markets in the US. Two notable changes:

1. Shift in Capacity Compensation Calculation Base: The traditional basis for capacity compensation calculations has been modified, shifting away from combined cycle gas turbine plants and towards single cycle gas turbine plants – signaling a move toward peaking gas units that better suit markets with high proportions of renewable energy sources.

2. Renewable and Short-term Storage Limitations: Due to their inability to meet continuous dispatchability requirements, large-scale renewables, run-of-river hydro without regulation reservoirs, short-term storage (less than 4 hours), demand response, and renewable demand response may not qualify as eligible participants in PCM due to being too intermittent in operation; instead only thermal power units and medium to long term storage solutions would benefit from participation.

China introduced in November 2023 its coal electricity capacity pricing mechanism that bases capacity prices on recovering a certain proportion of fixed costs associated with coal power units. Prices of electricity are determined through market mechanisms that consider supply and demand, fuel cost fluctuations, and other factors in the power market. Coal power units failing to deliver their stated maximum output per dispatch order face deductions in their capacity fees. Units that experience three monthly capacity fee deductions within a calendar year forfeit eligibility to receive capacity fees. This unique mechanism draws inspiration from Texas’ performance requirements while offering an innovative solution to address operational indices.

As renewable energy sources expand rapidly, utilization hours for coal and gas power units continue to decline, making it more challenging to recover fixed investment costs through energy-only markets. Furthermore, insufficient investments into capacity mechanisms or early exits of capacity units can compromise system security; compensating capacity units has become a widespread challenge across power markets worldwide.

Texas and China demonstrate how capacity mechanisms have advanced globally as adaptive strategies of the power industry attempt to balance renewable energies while still guaranteeing grid reliability and financial viability. Texas’ proposed PCM, with its specific design adjustments, showcases Texas’ nimble approach to capacity compensation that accounts for changing energy environments; China’s capacity pricing for coal electricity provides insight into maintaining operational and financial stability during periods of energy transition; together, these developments mark significant steps forward toward solving the complex puzzle of compensating capacity with shifting paradigms.