ERCOT Stakeholders Address High Prices in "Load Pockets," irresolvable problems

Ten months after implementation, ERCOT continues to grapple with unforeseen difficulties arising from the nodal market. As you may already be aware, the nodal market began operation in December of 2010. Previously, ERCOT was operating under what is known as a “zonal market,” a less-complex form of wholesale market. The nodal market differs from the old zonal market in the way that it instructs generators to produce electricity. In the nodal system, ERCOT dispatches generation considering both the lowest total cost and the greatest relief of bottlenecks within the transmission system. The goal is to deploy the lowest-cost combination of generators that the capacity of the grid will allow.

The ERCOT stakeholder process is currently struggling with how to resolve situations in which ERCOT’s systems cannot calculate the most efficient way to relieve certain transmission bottlenecks. Early in the year, ERCOT identified that this is a particular problem in the Lower Rio Grande Valley. Due to constraints unique to this geographic area, the Lower Rio Grande Valley is plagued by persistent transmission congestion, while it has a high population and little power generation to serve it. Such an area is known as a “load pocket,” and load pockets have posed problems for other nodal system operators in the more established wholesale markets of the Northeast.

You can read more about ERCOT
in the special report from the
Texas Coalition for Affordable Power.

The problem is that, in a nodal system, load pockets can produce very high wholesale prices. The reason has to do with a special concept known as “shadow pricing.” The “shadow price” is the price of relieving the transmission bottleneck in an area. Relieving that congestion can be complicated, however. Due to the physics involved in the flow of electricity, not all power plants can relieve bottlenecks equally. In order to relieve transmission constraints, ERCOT must sometimes dispatch more generation than the actual amount by which the relevant transmission line is overloaded. The shadow price reflects the cost of deploying that additional generation to relieve the constraint. Because of shadow pricing, wholesale prices can actually exceed the highest priced offer in the market.

You will recall that ERCOT has a standard offer cap of $3,000/MWh. However, as noted above, shadow prices resulting from bottlenecks can greatly exceed the standard offer cap. As a result, ERCOT has in place another cap, called the “Shadow Price Cap,” which had been set at $5,000/MWh. When there is congestion on the grid, it is the shadow price cap that acts to limit wholesale prices.

Early this fall, ERCOT stakeholders agreed that certain bottlenecks are “irresolvable.” While the constraint in the Lower Rio Grande Valley is the only confirmed irresolvable constraint, there has been talk that there may be others in the market. In order to address this situation, ERCOT stakeholders worked through a holistic solution to impose a lower shadow price cap for irresolvable constraints. The purpose is to provide additional protections to consumers in a load pocket who would otherwise risk exposure to prolonged high prices. That solution uses a complex formula that in current market conditions would result in a shadow price cap at $2,000/MWh. In a further complexity, if a hypothetical peaking power plant in the area earns $95,000 per MW cumulatively in a given year, the shadow price cap would drop to $500/MWh. At the beginning of the following calendar year, the price would raise back up to $2,000/MWh until the hypothetical peaking power plant again earned $95,000 cumulatively over the year. The idea behind dropping the price to $500/MWh is that there is no benefit to increased payments to generators for congestion caused by constraints that are irresolvable, once generators are permitted to earn a reasonable margin.

In the past month, the South Texas Electric Cooperative (“STEC”) detailed their concerns about this solution to the ERCOT Board. While STEC agreed with a lower shadow price cap for irresolvable constraints, they expressed concern with raising the shadow price cap each year back up to $2,000/MWh. As discussed above, there is no benefit to a higher shadow price cap for irresolvable constraints because higher prices can do nothing to incentivize a solution to a problem that is not able to be solved. In other words, there is no adequate market solution for irresolvable constraints and a higher shadow price cap does not provide any benefit to consumers in these situations.

The Technical Advisory Committee (“TAC”) considered STEC’s concerns at two separate meetings. While TAC adjusted some small parts of the holistic solution, it largely left the solution intact, including the return to a $2,000/MWh shadow price cap each year even if the cap had dropped to $500/MWh the previous year. We voted against the holistic solution, because STEC’s proposed modification offered a greater level of protection for consumers in a region where regular market forces and the state of the grid have proven insufficient to meet consumers’ demand. The Board met on October 18, 2011, but declined to consider the holistic solution as recommended by TAC. STEC’s appeal of TAC’s decision will be heard before the Board in December of this year.

-- Chris Brewster

Mr. Brewster is an attorney at Lloyd Goseelink who represents cities at ERCOT. You can find out more about ERCOT and the deregulated market in The Story of ERCOT, by the Texas Coalition for Afforbable Power and the Steering Committee of Cities Served by Oncor. The link can be found here. 

Electricity

Texas Market Still Not Matching Pre-Dereg Levels

Here’s the good news. The most recent federal data from the United States Energy Information Administration shows that residential electricity prices in Texas have dipped below the national average. That means Texans are saving on their electric bills, at least in comparison to the rest of the nation.

Now, comes the bad news: relative to the rest of the nation, Texans received a better deal before we deregulated our electricity markets.

According to the federal data, Texans so far this year have paid electricity rates that are 2.59 percent below the national average. But in 1999, the year the state legislature adopted the retail electric deregulation law, we Texans got an even better deal — paying 7.48 percent less than the national average. The same was true in 1998, when we paid 7.38 percent less; and in 1997, when we paid 7.24 percent less.

In fact, during the entire decade prior to the adoption of the deregulation law, Texans paid residential electricity rates that were 6.4 percent lower than the national average. In the decade since deregulation took effect, Texans paid 8.72 higher than the national average.

Some may note that in Texas there exists areas both with and without deregulation, and that the state’s higher-than-necessary average prices shouldn’t be blamed on deregulation, but rather on prices paid by those living outside deregulation. According to this argument, inflated prices paid by Texans living outside deregulation have skewed calculations for average prices overall.

But here again, the federal data shows this assertion to be incorrect. Data from the US EIA shows that Texans living in areas outside deregulation paid consistently less than the national average for residential service and consistently less than Texans subject to deregulation. This is true for every year in which data exists to make a comparison. You can check out the graph, above, showing the pricing data for the years 2002-2009.

A recent analysis by the Texas Coalition for Affordable Power shows that all these high prices don’t come without consequences. The total estimated cost to the Texas consumer economy from these long years of above-the-national-average electricity prices exceeds $15 billion.

-- R.A. Dyer

Geoffrey Gay receives Glink Private Practice Local Government Attorney Award

CHICAGO -- In a ceremony held September 13 at the Chicago Hilton in Chicago, Illinois, the International Municipal Lawyers Association (IMLA) awarded the Marvin J. Glink Private Practice Local Government Attorney Award at the 76th Annual Conference to Geoffrey Gay of Austin, Texas.


Award recipient Geoffrey Gay

This award was established to honor the memory of a longtime IMLA member, Marvin J. Glink. It recognizes a private practitioner who, as part of a private practice, represents a local government and who exhibits those qualities that made Marvin Glink one of the truly remarkable lawyers working on behalf of public clients. In addition to the traditional qualities of excellence in the practice of law, the award seeks to recognize a practitioner who has provided outstanding service to the public, and who possesses an exemplary reputation in the legal community, the highest of ethical standards, and who is devoted to mentoring young lawyers and educating lawyers in local government law.

Geoffrey is the Principal and Chair of the Energy and Utility Practice Group for Lloyd Gosselink Rochelle and Townsend. He is an active local government practitioner and serves as the General Counsel for the Texas Coalition for Affordable Power, the Atmos Cities Steering Committee and the Oncor Cities Steering Committee. His nominator stated, “Geoff is an unbelievably effective negotiator and creative strategist. His efforts have saved Texas cities millions of dollars annually. In addition, Geoff and his firm go the extra mile to provide the assistance necessary to help city officials become more persuasive advocates for the interests of cities and the public.”

Founded in 1935, the International Municipal Lawyers Association (IMLA) is a nonprofit, nonpartisan organization consisting of approximately 3000 local governments and attorneys throughout the United States and Canada. IMLA provides a wide range of services and programs to its membership, including comprehensive educational programs, legal research, professional publications and legal advocacy on behalf of its members in the United States Supreme Court, as well as federal and state appellate courts.

Independent Market Monitor Issues 2010 State Of The Market Report

In August, the Independent Market Monitor (“IMM”) – a position intended to be a wholesale market watchdog and created by law in 2005 – issued its annual State of the Market Report for 2010. This year’s report was unusual in that it addressed the final year of operations under the old, zonal market design. Thus, the report highlighted inefficiencies and other issues with that market design that will not recur in future years, since in late 2010 the market transitioned to a nodal system.

The 2010 State of the Market Report contains comparative
 data on wholesale market prices for each of ERCOT's four
zones, and ERCOT as a whole. As this table illustrates, prices
increased in all zones from 2009 to 2010. Note the extraordinary
prices of 2008 -- they resulted from very high natural gas prices
and congestion on the grid, resulting in especially high prices
in the North, South, and Houston zones.

However, the report is notable for its conclusion that wholesale energy prices increased on average in 2010, going from $34.03 per MWh in 2009 to $39.40 per MWh on a load-weighted average basis. The report attributes a 16% increase in natural gas prices for much of this increase.

Despite this general price increase, the IMM again argues that wholesale prices in ERCOT are too low, and have been sufficient to support new investment in power plants in only one the last four years. That year was 2008, a year in which, as the report admits, ERCOT suffered from high prices resulting from inefficient congestion management between the North, South, and Houston zones. The experience of that summer, in which prices neared $4,000 per MWh at times and caused the default of a number of Retail Electric Providers (“REPs”) should in no way be viewed as any kind of “success” for the market.

Additionally, the report again concludes that the ERCOT wholesale market performed competitively in 2010, with no evidence that generators were withholding power or engaging in similar manipulative behavior.

-- Chris Brewster

Fed Report: ERCOT Could Use More Authority to Protect Against Blackouts

A joint federal report is the latest to examine
the February rolling outages in Texas.

Although previously rare in Texas, rolling blackouts have now occurred twice since the state deregulated its electricity markets. The most recent outage occurred on Feb. 2, when 1.3 million customers suddenly lost power. Not surprisingly, questions have been raised.

For instance, why did so many of the state’s power plants fail? During the most difficult point of the crisis, approximately one-third of the total generating fleet within ERCOT was unavailable. And did the blackouts expose problems in the wholesale energy market, where prices spiked dramatically?

A new report by the combined staff of two federal organizations attempts to answer some of those questions, while also making recommendations for reform. Released in August, the report finds no evidence of market manipulation during the blackouts and concluded that gas curtailments played little if any role. But the federal staffers also found that the ERCOT organization could use additional tools to protect against blackouts.

The organizations behind the two-inch-thick document are the Federal Energy Regulatory Commission and the North American Electric Reliability Corporation — FERC and NERC for short. Their report joins other expert examinations of the February blackouts, including those from the Texas independent market monitor, from a federal grid reliability organization, and from a private consultant from Oregon.

Among the key findings of the latest report:

•  By communicating with generators and requesting them to come online earlier, ERCOT could have more promptly exposed mechanical issues experienced by generators. This could have prevented some of the failures.
• The typical design of generating facilities in the southwestern United States may have contributed to large number of units shutting down. Unlike generation facilities in the colder climates, southern generating units were built so that many of their auxiliary systems are exposed to the ambient air. Frozen sensing lines, frozen equipment, frozen water lines, frozen valves, blade icing, low temperature limits, and transmission loss caused the loss of 22,805 MW of generation.
• Although natural gas is an important fuel source for the state’s fleet of electric generators, natural gas curtailments did not appear to play a major role in the outages.
• FERC and NERC found no evidence of market manipulation during the event. This conclusion was similar to earlier findings by the state’s independent market monitor.

FERC and NERC also issued recommendations:

• ERCOT should consider rule revisions to allow it to reject scheduled outages by generating units.
• ERCOT should increase its extreme-weather requirements for generation reserves. ERCOT also should have the ability to direct generating units to initiate operational warming prior to forecasted cold weather.
• ERCOT should have the ability to verify a generators’ preparedness for cold weather, including the units’ operating limits and potential fuel needs.
• Generators should take steps to ensure they are prepared for severe cold weather events, including designing temperature parameters for existing units, using heat tracing equipment to inspect the units, and maintaining the unit’s thermal insulation. States in the Southwest should examine whether they need rules to compel generators to submit winterization plans.
• State legislatures should adopt minimum uniform standards for the winterization of natural gas production and processing facilities. Regulatory authorities also should determine whether critical natural gas facilities should be exempted from rolling blackouts.

The NERC and FERC staff compiled their data by conducting site visits with various entities involved in the outages. Staffers also toured facilities and conducted interviews with operations personnel and company executives. You can read their report here.

-- Daniel Gonzales and R.A. Dyer

Mothballed Plants to Ease Blackout Worries

ERCOT is taking steps to help gaurd against blackouts during the ongoing heat wave.Responding to record high electricity demand and the scorching heat, the state’s grid operator this week arranged for four mothballed generating units to temporarily come back online to guard against blackouts.

Operated by NRG Energy and Garland Power & Light, the old gas-fired units will be available through October. The Electric Reliability Council of Texas, the organization that manages the grid, said the gas plant operators will be paid to defray their fixed costs and fuel expenses.

“We don’t know if, or how much, these units will be needed, but if needed, the cost will be minor when divided by the 23 million consumers in the region and when compared to the much higher costs and problems from statewide rolling blackouts which these units will help avoid,” said ERCOT CEO Trip Doggett.

PUC Chairman Nelson has called for ERCOT to consider all options to protect grid reliability.Besides improving reliability, the move also could ease pressure in the state’s wholesale spot market for energy, where prices have spiked during the heat wave to $3,000 per megawatt/hour. That equates to about $30 per kilowatt/hour — or more than 600 times the lowest electric rates in the state’s retail market.

Spot market prices do not directly impact home utility bills but can indirectly impact them over time. Doggett said the NRG and Garland units will not displace operational units already bidding into the spot market. Nonetheless, it’s likely the added capacity will ease pricing pressure, especially as other units go down for unplanned maintenance.

In a letter last week, PUC Chairman Donna Nelson called upon ERCOT to take action to reduce the possibility of blackouts. “Look at all available options,” she wrote.

Ray Schwertner, Garland Power & Electric’s Utility Director, said his organization stood ready to help. “As a member of ERCOT, we want to be responsive to their needs, as well as the needs of the citizens of Texas,” he said.