The encyclopedia · Strategy & Leadership · Strategic decision · 2014–2021
ERCOT priced scarcity itself so Texas generators get paid when they're needed most
After 2011's blackout, Texas added an operating reserve demand curve that prices shrinking reserves — and raised the cap to $9,000/MWh.
Electric Reliability Council of Texas (ERCOT) · Public Utility Commission of Texas
The solution
Texas runs an energy-only wholesale market: generators earn from energy sales alone, with no separate capacity payment. After the February 2011 freeze caused rotating outages, regulators and ERCOT looked for a way to make reliability pay without inventing a capacity market.
Their fix, phased in from June 1, 2014, was the Operating Reserve Demand Curve: a mathematically defined real-time price adder that grows as operating reserves shrink toward zero. ERCOT also raised the maximum offer price to $9,000/MWh, letting prices reflect true scarcity during tight hours.
The design makes the value of spare capacity legible. When reserves are ample the adder is zero; when the grid is close to blackouts the price spikes, rewarding whichever plant is standing by and paying for future investment without a capacity subsidy.
Why it worked
- The adder prices a good — reserves — that had no explicit market price
- A transparent scarcity price finances new plants without a capacity auction
- The mechanism is automatic, so no regulator has to pick winners in a crisis
- Raising the cap to $9,000 let prices tell the truth in rare tight hours
What can be applied
If a market can't pay for reserves or reliability, add a transparent price for it rather than a separate subsidy; the price signal finances the investment.
Aftermath
The ORDC adder became a core part of ERCOT price formation. After Winter Storm Uri in 2021 the PUC kept scarcity pricing but amended the adder's parameters under a more conservative operating posture, and the independent market monitor concluded that energy and ancillary-service revenues were sufficient to maintain the fleet and support investment in new resources.
Sources
- REMINDER: Implementation of NPRR568, NPRR591, and NPRR598
- ERCOT: Texas PUC mulling artificial inflation of power prices to boost grid reliability
- Market Report from ERCOT Independent Monitor Finds Sufficient Generation Investment
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