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