The Texas grid operator under-procured about 3.7 GW of energy reserves, an error that resulted in lower power prices, according to industry participants.

The mistake, revealed by the Electric Reliability Council of Texas (ERCOT) in July, has frustrated market participants, said an owner of battery assets.

An ERCOT spokesperson noted in an email that the state’s grid held up through an unusually hot summer.

“We would have a different conversation if we didn’t ride through the summer in the way that we did,” said Maria Faconti, a partner in K&L Gates’ power practice.

Texas regulators, specifically the Public Utility Commission of Texas (PUCT), have not decided whether to adjust ERCOT’s reserve-procurement requirement.

On 27 July, ERCOT announced it discovered issues with the probabilistic model it used to determine the minimum quantities of ERCOT Contingency Reserve Service (ECRS), which can be ramped up within 10 minutes of being called, and Non-Spinning Reserve Service, which can be deployed within 30 minutes. This resulted in lower procurement quantities than appeared to be required by the 2026 Ancillary Services Methodology.

“Several errors in how the forecast-error inputs were processed and aligned within the model, together with issues in the optimization, caused the model to use a lower level of net load uncertainty than it otherwise should have, which lowered the resulting 2026 quantities” by an average of around 3.7 GW each hour, the grid operator said.

ERCOT, however, noted that the state’s grid had not experienced reliability issues and said it would not revise the August Ancillary Service quantities. It narrowly increased Non-Spin procurement beginning in September. The grid operator has not determined what 2027 levels will be.

Generation frustration

Asset owners have criticized ERCOT’s error and its unwillingness to correct it, noting that ancillary service quantities have a direct impact on power pricing, the battery asset owner said.

“You have a market that is supposed to instill confidence in buyers and sellers, and their math was wrong, and they don’t want to go back and fix it,” the owner said. “It just doesn’t compute.”

The owner noted that the 3.7 GW in under-procured reserves is equivalent to more than 5% of ERCOT’s load, making the shortfall significant, particularly for owners of peaking gas plants and batteries, which derive a significant share of their revenues from their ability to provide flexibility.

“You wonder why there are low prices and why batteries are not returning a lot of money,” the owner said. “Now you know why. This is the reason why batteries have underperformed.”

The owner said ERCOT should be held accountable for the error and ensure future compliance with reserve requirements. “There has got to be some penalty for violating state law,” he said.

ERCOT has requested a good-cause exception to the PUCT to continue procuring at currently posted levels through year end, while narrowly increasing non-spin procurement for certain hours, primarily at nighttime, beginning this month, the grid operator told this news service via email.

“ERCOT’s experience operating at the currently posted quantities over the first half of 2026 indicates the system can continue to operate reliably at those levels for the remainder of the year,” the email stated.

PUCT “will determine what actions, if any, are required to address ERCOT’s request for a waiver from rules related to the methodology it follows to determine the quantity of ancillary services it buys for each hour of the year,” a spokesperson for the commission told this news service.

“The PUCT has not conducted a backcast analysis of what energy or ancillary service prices would have been given a different quantity of purchased ancillary services,” the spokesperson added.

On 3 September, PUCT’s market analysis division submitted a report recommending that the commission grant ERCOT’s good cause exception to deviate from the approved 2026 ancillary services methodology. The PUCT’s commissioners are scheduled to consider the request at its 11 September meeting.

PUCT is the state regulator that oversees ERCOT and sets many of the rules governing the Texas electricity market.

Panda precedent

Following the so-called Winter Storm Uri in February 2021 that spurred blackouts and hundreds of deaths, ERCOT became more conservative in its procurement approach, Faconti said.

“There was a lot of criticism that they were over-procuring,” Faconti said. The fact that the state made it through an unusually hot summer has made some question whether ERCOT should “relook at their procurement strategy and maybe not be as conservative as in the past,” she added.

If procurement levels are not reduced and ERCOT is forced to ramp up reserves to meet them, power generators could benefit from higher energy prices.

A Jefferies equity research note published last month referred to this as a “modest possibility.”

“While potentially glaring to some that key reserves have been missed in recent months, [the] question remains on just [whether this will] push ERCOT now to procure less reserves going forward,” the note said.

On the other hand, generators and battery owners are unlikely to benefit from any penalty imposed against ERCOT, according to Faconti.

“It would be very difficult to sue ERCOT over this,” she said, noting that any costs imposed on ERCOT would be borne by ratepayers. “The PUC, the Texas legislature, even the courts, I envision protecting those entities, given the under-procurement did not cause an issue.”

Any litigation against ERCOT would be complicated further by precedent set in the case of ERCOT v Panda, she continued.

In that case, Panda Power Generation Infrastructure Fund, a merchant power developer, sued ERCOT for publishing allegedly misleading Capacity, Demand, and Reserve (CDR) reports in the early 2010s, suggesting power scarcity in the state, spurring Panda to invest roughly USD 2.2bn in new power plants. Panda sued ERCOT in 2016 for fraud, negligent misrepresentation, and breach of fiduciary duty. In 2023, the Texas Supreme Court ruled that ERCOT holds sovereign immunity and that the PUC has exclusive jurisdiction over these kinds of disputes.

Shortsighted shortfall?

Although ERCOT’s under-procurement error might seem like a win for ratepayers in the form of lower power prices, the owner of battery assets warned that Texas risks becoming a less attractive market for power generators and battery companies.

“It provides less credibility to the ERCOT marketplace at a time when ERCOT and the power industry need to be credible,” the owner said, adding that few new battery projects will be built in the state in 2029.