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. 

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.

Will the the state's $640 million electricity market overhaul bankrupt businesses?

Will some electric providers go belly-up after ERCOT switches over to a complicated new system in December? It’s a possibility says Austin-based energy expert Chris Brewster.

Speaking this week during the Gulf Coast Power Association’s fall conference, Brewster, a principal at the Lloyd Gosselink law firm, noted that some retail electric providers may have a difficult time managing around the risks of the new market design known as “nodal.” The new system, which will dramatically change how the state’s wholesale electricity spot market operates, goes live on December 1.

Chris Brewster

If some REPs don’t default outright, they may attempt to push unexpected costs down onto their customers, said Brewster. He predicted the reaction to the new nodal system may be similar to what occurred in 2008, when several mismanaged REPs attempted to pass unexpected transmission costs onto customers even though they had fixed-rate contracts. Brewster noted that several components of the new nodal system, including the so called “day-ahead market,” do not have analogous counterparts under the state’s current zonal system.

Brewster represents consumer interests at ERCOT, also known as the Electric Reliability Council of Texas. The organization plays a key role in the Texas electricity market, as it has responsibility both for managing congestion on transmission lines and for overseeing some wholesale power transactions.

With the new nodal system, ERCOT will change how it performs both functions. Under the existing system, ERCOT oversees the electricity market it in four broad zones of the state. With the new nodal system, ERCOT will manage it at thousands of separate geographical points, or nodes.

Although supported by large generation companies, independent reports have shown that nodal systems in other states have not lowered electricity prices or eliminated the manipulation of electricity markets. Moreover, the nodal transition in Texas is years behind schedule and so far over budget that it will cost more than twice as much as a similar system in California. It's now budgetted to cost around $640 million, after initial cost estimates of less than $100 million.

You can read more details of Brewster’s comments in an article by Elizabeth Souder, of the Dallas Morning News.

-- R.A. Dyer

Eventful Week for the Power Grid: nuke shutdown, price spikes, new usage record

The South Texas Project: "human error" apparently caused the partial shutdown of the nuclear reactor on Friday.

It’s been an eventful few days for the Texas power grid. Since last week, prices have spiked in the wholesale electricity market, one of the units of a major nuclear plant tripped off due to “human error,” and Texans broke another record for energy usage. Given the comparatively high electric prices already paid by Texans and concerns over continuing problems with the deregulated market, the developments merit examination.

Here they are, in no particular order:

*On Monday, wholesale electricity that more typically sells for less than $30 per megawatt-hour spiked to more than $2,000. That’s an increase of more than 7,000 percent. Prices also spiked several times to the $1,000 level. A price spike for $2,200 is especially startling, given that the regulatory cap is set at $2,250. That is, the wholesale prices legally could not have gone much higher. In most other jurisdictions the caps are set no higher than $1,000 per megawatt hour.

*According to the organization that manages the power grid, the Electric Reliabiilty Council of Texas, a new record for statewide power use was set on Monday. It was the fourth new usage record in as many weeks. ERCOT reported that the new record was broken at about 4 p.m., when demand spiked to 65,715 megawatts. The usage spike came just as the spot market price was spiking to $2,200 — probably not a coincidence.

*Unit 1 of the South Texas Project apparently tripped off on Friday. The event, first reported in a trade journal SNL Power Daily, was apparently caused by human error. “The NRC said in its Aug. 23 event report that the unit experienced an automatic reactor trip that was caused by an inadvertent turbine signal initiated during testing,” reported SNL's Jay Hodgkins, citing the U.S. Nuclear Regulatory Commission. The publication reported that power was restored by Monday. It’s unclear whether the outage contributed to the price spikes, although that seems likely.

*In response to the loss of a major unit on Friday, ERCOT activated the first stage of its emergency response procedure to prevent blackouts. That means that some industrial consumers that previously agreed to have interruptible service lost their power. It was the third time this year that ERCOT has gone to that stage of its emergency response procedures. The major unit that went down was probably the nuke (as referenced in the SNL Energy article) although ERCOT won’t say for sure. That's because such a disclosure would violate ERCOT's rules for competitive information.

The developments are unsettling, especially given that wholesale prices tend to trickle down to residential consumers. A dysfunctional wholesale market can lead to higher home lighting bills. Already Texans pay more than consumers in Oklahoma, Louisiana and Arkansas. Prices also remain higher than the national average. Prior to deregulation, Texans paid below the national average.

-- R.A. Dyer

Consumer workshop scheduled for Houston

May 15th – mark it on your calendar. That’s the date of a public workshop scheduled in Houston devoted specifically to consumer rights under the state’s electric deregulation law. Sponsored by state Rep. Sylvester Turner, the first annual “Consumer Rights Electricity Workshop” will provide a forum to discuss products, pricing, social services and cost-cutting measures. Turner’s office also promises discussions “on consumer rights, (on) how to effectively advocate for policy changes, and … of important electricity issues the state will face in the 2011 legislative session.”

When it comes to electricity issues, the 2011 session should be a contentious one. That’s because both the Public Utility Commission and the Electric Reliability Council of Texas, which operates the power grid, are now both under special legislative review. At the same time, residential electricity consumers continue to pay rates above the national average after enjoying a long history of below-average rates before deregulation.

Rep. Turner’s consumer workshop is tentatively scheduled for 9 a.m. to 3 p.m. at the CWA Union Hall in Houston. The address is 1730 Jefferson Street. For more information contact Cory Henrickson in Rep. Turner's office. His email address is cory.henrickson@house.state.tx.us.

-- R.A. Dyer

Generators seek proposal to hike prices

A proposal designed not to limit the price of electricity – but to actually increase it during certain periods — could face Public Utility Commission scrutiny in 2010, according to some market watchers.

Extremely costly to consumers, the proposal would create a process whereby generators would receive payments for their wholesale power that would be substantially higher than prices dictated by the market. The process would kick in during periods when wholesale power on the ERCOT grid is running in relatively short supply.

Cities and other consumer representatives have argued against the policy, and it was rejected during proceedings earlier this year at ERCOT. But it retains support both from electric generators and by the Independent Market Monitor of the ERCOT market, leading many to believe that the PUC will take up the issue again this year.

The IMM and industry groups say the price supports are needed to encourage the further development of generation in Texas. Cities and consumer groups have noted the fundamental inconsistency of price supports within the context of the state’s deregulated market, a market supposedly based upon the premise that competitive forces should dictate prices.

Cities also note the extreme cost of the proposal — up to approximately $750 million per year, by some estimates. The expense would obliterate any supposed savings industry advocates have claimed will come from the nodal market redesign, or from improved ERCOT operations. The proposal also would put further upward pressure on retail prices — that is, the electricity prices customers actually pay — which have remained consistently above the national average ever since the state’s transition to deregulation.

-- R.A. Dyer

Wind farms to pick up some reliability costs

A contentious new measure that will require wind generators to install devices that help control voltage levels on the grid has been approved by the ERCOT Board of Directors.

The devices produce what is known as "reactive" power, which is different from the “real” power used to light homes and businesses. But while not actually consumed by end-users, reactive power must always be present on the grid in order to maintain voltage levels and reliability. Another characteristic of reactive power is that it does not transport well, which means it must be produced near where it is needed.

Unlike traditional generators and even wires companies, very few wind farms are equipped with full reactive power capabilities. As a result, other parties end up making up the difference. When regulated wires utilities (like Oncor, for example) provide these devices, the cost gets shifted to all their customers in the form of higher transmission rates. Since reactive power cannot be transported effectively, the wires companies are the only market participants with the ability to place reactive devices in close proximity to wind farms.

Protocol Revision Request (“PRR”) 830 — which was adopted during the November ERCOT board meeting — requires that wind generators provide full reactive capability on par with requirements for traditional generators. Cities Served by Oncor supported the measure, arguing that it fairly allocated a portion of the cost of maintaining the integrity of the grid to wind generators. Wind developers opposed the PRR, and a coalition of such generators is widely expected to appeal to the PUC.

ERCOT faces "special purpose review" in 2010

ERCOT, for the first time in its nearly 40-year history, faces review by the Sunset Advisory Commission. Consumer groups, industry representatives and other stakeholders are expected to provide input for the review, which will then become the basis of legislation that could lead to dramatic changes for the organization.
Created in 1977, the Sunset Advisory Commission is a legislative body charged with reducing waste in state government by assessing the continued effectiveness and necessity of agencies. It is made up of five members appointed by the speaker of the Texas House of Representatives and five members appointed by the lieutenant governor, who presides over the Senate. The chair of the Sunset Advisory Commission is state Sen. Glen Hegar, Jr., of Katy.

ERCOT has already submitted a self-evaluation report to the Sunset Commission staff, which is expected to issue its preliminary findings in mid-April. The public will then get a chance to comment on those findings during a public hearing in May, and the Commission will amend the report and take a final vote in July. This final report (which will include changes ordered by the Sunset Advisory Commission) will form the basis of legislation that is expected to be filed for the 82nd Texas Legislature that convenes in January, 2011.

That the Sunset Advisory Commission is even reviewing ERCOT is unusual. Traditionally the Sunset Commission evaluates only state agencies, such as the Public Utility Commission — and not quasi-governmental non-profit corporations, such as ERCOT. But state Rep. Burt Solomons, chair of the House State Affairs Committee, pushed to include the ERCOT review in legislation adopted during a brief special session in 2009. Solomons had expressed displeasure with some of ERCOT’s spending practices — specifically citing the over-budget nodal transition — and also said that conducting a Sunset-style review in 2010 made sense, given that the PUC and the Office of Public Utility Counsel also were undergoing the Sunset process.

Typically, state agencies come up for Sunset review once every 12 years and agencies under such review are automatically abolished unless the Texas Legislature adopts legislation to continue them. But because ERCOT is not a state agency, lawmakers will not need to pass a new bill to maintain its existence. Another distinction between the ERCOT “special purpose review” and more typical Sunset reviews is that the cost of the ERCOT evaluation will be paid for by ERCOT itself — and therefore passed onto electric ratepayers. With other Sunset evaluations the cost is paid by tax dollars.

Besides Chairman Hegar, the other lieutenant governor appointees to the Commission include Sen. Juan “Chuy” Hinojosa of McAllen, Sen. Joan Huffman of Lake Jackson, Sen. Robert Nichols of Jacksonville, Sen. John Whitmire of Houston and public member Charles McMahen. Sens. Huffman, Nichols and Whitmire and public member McMahen were newly appointed by Lt. Gov. David Dewhurst in October. On Nov. 9 House Speaker Joe Straus appointed Rep. Dennis Bonnen of Angleton to serve as vice chairman for the Commission. He also appointed as new members Rep. Rafael Anchia of Dallas, Rep. Bryon Cook of Corsicana, and public member Lamont Jefferson. House members serving existing terms are Reps. Linda Harper-Brown of Irving and Carl Isett of Lubbock.

-- R.A. Dyer

The 4-1-1 on Emergency Interruptible Load

The Emergency Interruptible Load Service (“EILS”) program pays participants including political subdivisions to be available to reduce demand in emergency load situations — that is, when energy is running perilously short on the grid. This is not a peak-load reduction program but rather serves as an emergency response to prevent rolling blackouts. Emergency situations have historically occurred infrequently in Texas, but may potentially occur at anytime, and in fact, may be more likely in “shoulder” months in which high demand is not anticipated and so generation is off-line for scheduled maintenance.

The EILS program is part of ERCOT’s multi-step strategy for handling these potentially serious shortage situations. Under ERCOT’s Level 1 emergency response, the organization dispatches all available generation, issues a media appeal, and attempts to acquire maximum available power across the direct current (DC) ties that connect ERCOT with adjacent grids. Under its Level 2A emergency response, ERCOT deploys Load Acting as a Resource (“LaaRs”), which is another form of interruptible service. EILS, ERCOT’s Level 2B emergency response, is triggered when the grid frequency drops to 60 Hz. (Dropping to frequencies much less than 60 Hz can pose a threat to grid stability.) When grid frequency goes below 59.8 Hz, ERCOT deploys its Level 3 emergency response, which is to shed firm load via rolling blackouts.

In order to be eligible to bid into the EILS program, a load resource must have at least 1 MW of load that can be curtailed with ten-minute notice at any time during the committed hours. ERCOT has divided the day into four periods for the purposes of the EILS program, which allows resources to bid for a specific time frame. The load resource must have 15-minute interval metering or other statistically valid samples of its load that are acceptable to ERCOT. The load resource must be represented by a Qualified Scheduling Entity (“QSE”), (the QSE must have operations capable of receiving verbal commands 24/7.) In the event of the program being deployed, ERCOT will notify the QSE starting the ten-minute period, and the QSE must notify the load resource. The resource must keep its committed load offline until it is released by ERCOT. After ERCOT has released a resource, it is required to return to service within ten hours.

There is no minimum clearing price in the EILS program. Load resources bid for a specific MW (must be at least 1 MW) for a specific time period (one of the four daily periods) for each contract period (three per year). If accepted, the resource receives payment for being available to curtail its load regardless of whether it is called upon to do so. The resource does not receive additional payment if it is called upon to curtail.

-- Pat Jackson