United States: Cost-Benefit Analysis Of ERCOT's Future Ancillary Services (FAS) Proposal

Last Updated: January 5 2016
Article by Samuel A. Newell, Rebecca Carroll, Pablo Ruiz and Will Gorman

This report was prepared for the Electric Reliability Council of Texas (ERCOT).

Executive Summary

We were asked by the Electric Reliability Council of Texas (ERCOT) to evaluate the economic benefits of its proposed Future Ancillary Services (FAS) design. ERCOT proposed FAS to efficiently maintain grid reliability as inverter-based generation displaces traditional generation and as new technologies offer new ways to provide ancillary services.

The essential differences between FAS and ERCOT's Current Ancillary Services (CAS) design are that FAS unbundles ancillary services and fine-tunes service requirements to system conditions and resource capabilities. FAS unbundles CAS's Responsive Reserve service (RRS)—the service used to arrest frequency decay and restore frequency to 60 Hz in the event of the two largest contingencies—into three distinct services: Fast Frequency Response, Primary Frequency Response, and Contingency Reserve, as described in Section II.B. These services enable new technologies and more load resources to provide valuable services that are compatible with their capabilities.

Both of these broad changes—unbundling services and fine-tuning requirements—represent good market design in that they increase the possible ways to meet reliability objectives, and they avoid procuring more reserves than necessary. Our analysis informs the nature and magnitude of FAS's benefits, which ERCOT and stakeholders can compare to the implementation costs of FAS. We focused primarily on the economic benefits but, for completeness, we also describe reliability benefits and costs. We did not translate reliability benefits into measures of economic savings.

The reliability benefits of FAS include:

1. After a contingency, FAS will more readily arrest frequency decay by deploying very fast resources providing FFR1 (e.g., advanced batteries). This saves other frequency response (FFR2) providers in reserve in case a larger contingency occurs shortly thereafter.

2. FAS recognizes the relative effectiveness of different types of responsive reserves (PFR and FFR) through an "equivalency ratio," which depends on hourly system inertia. In FAS, the equivalency ratio is recognized in the AS market clearing engine. This allows for a tighter procurement of frequency responsive reserves but avoids the reliability risk of substituting less effective resources for more effective ones, which is a current practice under CAS.

3. FAS rates providers of frequency response based on their past performance. This mechanism ensures that the system always has as much capability as intended and provides incentive for resources to improve their performance. In contrast, CAS allows all qualified resources to provide up to 20% of their maximum capacity towards RRS, irrespective of their performance in past events.

4. FAS separates replacement reserves from other frequency reserves. This allows for more effective procurment from a larger pool of resources that can be available in 10 minutes. This leads to faster frequency restoration following a contingency event and faster replacement of frequency response resources so they can prepare for the next event.

5. FAS ensures that regulation reserves are spread among at least four resources, which improves the system response acuracy and reliability.

The economic benefits we quantified are the production cost savings from a more efficient commitment and dispatch, as FAS enables the most economic resources to meet a more finelytuned set of requirements. We estimated the savings by first comparing the quantities of each AS product needed under CAS and FAS designs—and we found that FAS requires less generation spinning and held for reserves. We then estimated the cost savings resulting from FAS's reduced quantities.

The quantities of ancillary services needed depend on AS design and system conditions. We analyzed three scenarios that ERCOT and stakeholders had requested: (1) a 2016 Current Trends scenario that reflects expected market and system conditions for next year; (2) a 2024 Current Trends scenario based on ERCOT's 2014 Long-Term System Assessment (LTSA) scenario (developed in 2013) with additional wind and gas resources; and (3) a Stringent Environmental scenario from the same LTSA with increased wind and solar generation and a $45 per ton price of CO2 allowances. This scenario was originally envisioned as a system stress case in which responsive reserve requirements increases as a result of renewable generation displacing thermal generation and lowering system inertia. However, it did not prove to have lower system inertia and correspondingly higher reserve requirements as anticipated. System inertia actually increased in most hours because coal generation was displaced by not only renewable generation but also combined-cycle (CC) generation, which has nearly twice the inertia per MW as coal.  As a result, we chose not to evaluate the Stringent Environmental scenario further. (An alternative scenario with low load growth and enough renewable generation to displace both coal and combined-cycle generation might have had lower inertia and greater requirements for responsive reserves, but we did not construct such a scenario).

For the remaining scenarios, ERCOT staff determined hourly requirements of each service based on PLEXOS simulations they conducted under our direction. We found that FAS requires less thermal generation spinning to provide Primary Frequency Response (PFR) since it enables efficient substitution of load resources and new technology providing Fast Frequency Response (FFR). This substitution results from:

  • Incorporating a PFR-FFR equivalency ratio into the market clearing engine
  • Removing the 50% limit on participation of Load Resources that exists for Responsive Reserve Service under the CAS design
  • Introducing the FFR1 product to enable new technologies

On average, we found PFR reductions (compared to Gen-RRS under CAS) of approximately 9%: 140 MW in 2016 and between 129 and 186 MW in 2024, depending on how much new technology or additional Load Resources enter to provide FFR. In addition to these savings in meeting frequency responsive needs, we also found savings in providing replacement reserves. Fine-tuning requirements to system conditions allows 756 and 790 MW less non-spinning capacity to be held in reserve in 2016 and 2024, respectively. (These PFR and non-spin reductions differ under alternative assumptions discussed below).

We estimated the economic savings from FAS's reduced AS quantities, analyzing two separate and additive components of the production cost of providing ancillary services: day-ahead energy opportunity costs, which reflect the cost of committing and holding (often inframarginal) capacity in reserves, considering only the expected value of real-time prices across all possible real-time system conditions; and real-time option value foregone, considering the volatility of real-time prices around the expected value. It reflects the cost of holding reserves and losing the option to change operations as different real-time conditions are realized. The real-time cost also accounts for the possibility of committed providers experiencing a forced outage and having to replace their capacity with other resources on short notice.

We estimated day-ahead cost savings using the PLEXOS model to simulate unit commitment and dispatch in FAS vs. CAS. PLEXOS approximates day-ahead as opposed to real-time conditions since it does not simulate the distribution of unexpected conditions that can occur in real time. In our 2016 simulations, FAS's reduced procurement of PFR reduces day-ahead production costs by $9.1 million per year because less combined-cycle capacity must be committed, avoiding startup costs and displacement of lower-cost coal generation. In 2024, day-ahead production costs decrease by $1.2 million per year without new technology and $3.4 million per year with new technology providing additional FFR. Simulated savings are less in 2024 than in 2016 because higher assumed net loads cause coal to become fully inframarginal, so marginal changes in CC commitment affect coal generation minimally. As for differences in replacement reserves between CAS and FAS (i.e., with less Contingency Reserve under FAS than Non-Spinning Reserve under CAS), they have little effect on day-ahead production costs since they are provided mainly by offline resources.

We estimated real-time optionality savings separately, by analyzing historical capacity offers into ERCOT's AS markets. Ancillary service providers bear real-time costs when they commit their capacity for reserves because they are, in effect, restricting their participation in the real-time market and foregoing potential real-time revenue. We assume that capacity offers into the AS markets are a direct representation of these real-time opportunity costs. To estimate the associated cost of each AS on a system-wide basis, we compute the area under the offer curves to arrive at an average cost per MWh for each daily hour (1 through 24) in each month in 2014. We then conservatively apply those average costs to the hourly quantities of similar services procured in each future scenario.1 We found that, with its lower quantities of PFR procured, FAS saves $3.2 million in real-time opportunity costs in 2016 and between $3.3 and $4.8 million in 2024, depending on the amount of new technology participating. In addition, with its lower quantities of replacement reserves procured (i.e., with less Contingency Reserve under FAS than Non-Spinning Reserve under CAS), FAS saves $9.2 million in real-time opportunity costs in 2016 and $11.2 million in 2024.

Combining day-ahead and real-time opportunity costs, we find total annual benefits of $21.5 million per year in 2016 and between $15.7 and $19.4 million per year in 2024 under Current Trends, depending on the participation of new technology. Assuming the annual benefits found for the study years of the analysis persist at similar levels for ten years, the cumulative benefit would be on the order of $200 million, before discounting.

However, the benefits of FAS depend on how FAS and CAS are each defined. Our analysis was based on CAS and FAS specifications that were current in the spring of 2015. But since ancillary service market rules continue to change, we analyzed two sets of alternative assumptions reflecting recent developments. One set of these assumptions increased the benefits of FAS and the other set decreased them. The ERCOT Board recently approved an amendment to CAS that would reduce the average Non-Spinning Reserve procurement from 1,931 MW to 1,464 MW in 2016 and from 2,000 MW to 1,464 MW in 2024. These reductions in CAS requirements reduce the savings attributable to FAS's tighter replacement reserve requirements by $6.4 million in 2016 and $8.4 million in 2024. On the other hand, in mid-September 2015, North American Electric Reliability Corporation (NERC) released new standards that reduced the Minimum PFR requirement from 1,240 MW to 1,143 MW. The Minimum PFR change has a greater effect in FAS than CAS due to FAS's recognition of the equivalency ratio between FFR and PFR resources as well as the removal of the 50% limit on Load Resource participation. PFR procurement savings increase from 140 to 220 MW in 2016, resulting in $6.9 million additional savings, and from 129 to between 207 and 266 MW in 2024, depending on the participation of new technology, resulting in $2.8 to $3.4 million additional annual savings. When both the NSRS and PFR changes are applied together, however, the results are similar to the savings reported in our original analysis.

While actual benefits are uncertain, we believe the general magnitude of our estimates to be robust. Our estimates reflect a simple fact: efficient procurement by FAS reduces the quantities of ancillary services needed, which will save money as long as ancillary services are costly to provide (i.e., their price is positive). Furthermore, our estimates are conservative in several ways: (1) in our CAS cases, we determined reserve requirement on a day-ahead basis, while CAS requirements are actually determined more than a year in advance, which significantly increases the quantity of reserves procured; (2) we applied average rather than marginal costs to estimate real-time opportunity costs; and (3) we did not attribute economic value to the reliability benefits of FAS.

With respect to the cost of implementing FAS, we understand that ERCOT has estimated a onetime cost of $12 to $15 million. These costs are very small compared to the estimated benefits of roughly $20 million per year. If discounting 10 years of benefits at 7.5%, their present value would be $137 million. The net present value accounting for implementation costs would be over $120 million, and the benefit-cost ratio would be approximately 10.

We do not know what costs stakeholders might incur in adjusting to FAS, but we expect any such costs could be minimized by ERCOT providing enough lead time to avoid interfering with most power supply contracts.

Some stakeholders have raised concerns about FAS's dynamic requirements imposing ongoing risks on load serving entities. Dynamic requirements (which could be adopted under either FAS or an enhanced CAS) will create uncertainty about the required quantities of ancillary services. However, we expect that the market will develop ways to financially manage those risks more efficiently than maintaining non-dynamic requirements at sufficiently high levels to meet reliability criteria under all system conditions. (Again, our benefit-cost analysis assumed that even CAS incorporates dynamic requirements; if we had not, our net benefit estimates would have been higher.)

In summary, we found that FAS is good market design, and it offers economic benefits on the order of 10 times the implementation costs. FAS will also improve reliability and provide greater flexibility for meeting reliability needs as system conditions and resource capabilities evolve.

To continue reading this update, please click here


1 Applying the average cost is conservative since the marginal cost on the offer curve is a more economically relevant measure of the change in cost associated with marginal changes in quantities, and the marginal cost is about 4 times higher than the average cost in this case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.