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On May 31 the IMM May 2026 Report for ERCOT Region prepared by Potomac Economics was filed with the Texas Puc was filed in Project 34677.

“In our role as the Independent Market Monitor (IMM), Potomac Economics provides this 2025 State of the Market Report to the Public Utility Commission of Texas (PUCT). This report presents our assessment of the outcomes of the wholesale electricity market in the Electric Reliability Council of Texas (ERCOT). We also recommend changes to improve the competitive performance and operation of the ERCOT markets”

Only one new recommendation has been added since the last report includes the recommendation to improve market performance by redesigning and improving the firm fuel supply service.  Several of the previous recommendations remain in the report while other recommendations are being retired. (See bottom of story for these items.)

Recommend Direction for Future Market Design

“One half of the RA concern is load growth. Having accurate projections of future load growth is critical to interpreting RA calculations. The ERCOT footprint has experienced significant shifts in the past five years with considerable new capacity from wind, solar, and more recently energy storage resources. Project developers have indicated interest in installing a considerable amount of new large load in the form of data centers. The projected load for 2030 (base and adjusted forecast) is between 138 GW and 148 GW with a high scenario value of up to 209 GW. For context, the 138 GW and 148 GW projections reflect increases of 62% to 74% over current peak load over a five year period. There is currently a surplus of capacity in ERCOT for normal weather conditions. However, a 60%+ increase in load cannot be accommodated by current ERCOT does not have a capacity construct and relies almost exclusively on energy and ancillary markets to facilitate investment in new resources to help achieve resource adequacy. Given this reliance, it is essential that shortages be allowed to occur and be priced efficiently by the market.”

The focus of ERCOT’s market design and operations should be to:

1. Avoid out of market actions and procurements that artificially reduce the frequency of ancillary service shortages as these will destroy investment incentives by reducing expected shortage revenues, and

2. Ensure the markets are properly calibrated to perceive and efficiently price shortages.

Recent market design efforts raise concerns in both areas. ERCOT has implemented and/or proposed a patchwork of market elements implemented to fill what are perceived as shortcomings of the market. The various products and proposals below all have a common flaw – they compensate entities outside of the energy and ancillary service markets to provide additional supply or reduce demand during tight conditions. While they are generally motivated by improving reliability, these types of programs will sharply reduce the expected shortage revenues that investors need to justify new dispatchable generation and to retain higher-cost existing generation nearing retirement. These products and proposals include:

• Firm Fuel Supply Service (FFSS). The FFSS program provides an out-of-market payment for qualifying assets to provide electricity and reserves during anticipated tight winter conditions. Without the program, producers would need higher prices to invest in fuel arrangements to provide this level of availability.

• Emergency Response Service (ERS). Provides out of market revenue to increase supply or reduce demand curing winter conditions

• Residential Demand Response (RDR) (NPRR 1296). Pays for demand reductions during peak periods that will reduce expected shortage pricing.

• Forward Capacity Procurement (NPRR 1315). Will facilitate discriminatory out-ofmarket contracting to increase available energy and reserves, which will reduce expected shortage pricing”.

“We encourage ERCOT to focus on determining why the existing market design is not producing revenue signals that will incent suppliers to provide the reliability services covered by these out-of-market programs and look to change the existing market so that these gaps no longer exist. Allowing these types of services/products to undermine shortage pricing in ERCOT will lead to more apparent shortcomings or gaps to fill with additional out-of-market programs.”

“Three changes are needed to address this misalignment: (i) eliminate the required linkage between the ASDCs and the aggregate ORDC, (ii) require that the ASDCs be aligned with the AS methodology instead, and (iii) require ERCOT to re-evaluate its AS methodology.

Additionally, the VOLL underlying the ASDCs is substantially less than the VOLL implied by a 1-in-10 reliability standard. Even if deep shortages are capped at $5000, the lower segments of the ASDCs that price shallow shortages (which are by far the most frequent) could be based on a much higher VOLL. We recommend $35 to $40K per MWh based on recent studies.”

Previous recommendations that remain  from prior years include:

2024-1 – Improve the Procurement and Pricing of Ancillary Services by: (a) Defining ASDCs based on the Marginal Reliability Value of Each Product, and (b) Adopting a Stochastic Risk Methodology for the AS Plan

2024-2 Set Duration Requirement for Non-Spin Reserve Service (NSRS) to One Hour

2024-3 Implement Process to Mitigate Market Power at System and Zonal Levels

2024-4 Establish Real-Time Offer Requirements, Penalties, and Proxy Pricing

2022-1 Implement a Multi-Interval Real-Time Market

2021-2 Implement an Uncertainty Product

2020-3 Reconfigure Load Zones to Reflect Prevailing Congestion Patterns

2020-4 Implement a Point-to-Point Obligation Bid Fee

2019-2 Price Ancillary Services Based on the Shadow Price of Procuring Each Service

2015-1 Transition Away from the 4CP Method of Allocating Transmission Costs

Prior recommendations that are being retired Include:

2023-3 Improve the Procurement and Deployment of ECRS

2023-4 Align FFSS Pricing and Deployment Practices with Market Operations

2022-3 Allow Transmission Reconfigurations for Economic Benefits

2022-4 Change the Linear Ramp Period for ERS Summer Deployments to 3 Hours

2021-1 Eliminate the “Small Fish” Rule