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Winds of Change in Texas

Rising gas prices spark a rush to wind farms, straining grid capacity and raising larger issues about market design.
Fortnightly Magazine - April 1 2003

staff want to change that. As noted in a staff memo, "The current system of payment to generators to relieve local congestion is very generous and does not provide the right incentives for generators to provide deliverable energy." The staff noted inefficiencies "because the unhedged cost of replacing the undeliverable energy to the other side of a local constraint inflates the cost of deliverable energy in ERCOT."

Last summer the commission established the market design rulemaking proceeding to address these issues. In January, Commissioner Brett Perlman asked for comments to address questions of whether ERCOT should change its congestion management model, and if so, to which type. Many parties, including the Coalition of ERCOT Market Participants (a group including TXU, LCRA, and CenterPoint Energy), are against radical changes to the present ERCOT model. As LCRA indicated in its response to the questions posed, "The viability of ERCOT's current model is demonstrated by ERCOT's performance in comparison to other markets. There have been more retail switches in ERCOT than other markets, ERCOT has a strong reserve margin, and wholesale prices are near marginal cost. All of these indicate a healthy market."

The commission's staff, working with consultants from the University of California, Berkeley (led by noted market expert Schmuel Oren), has now developed what some call a "nodal when you need it" proposal that would assign local congestion to generators deemed responsible for causing the congestion. 5

The MOD memo noted "a flaw in the ERCOT market design whereby market participants could engage in the 'DEC game'-that is, when market participants can schedule resources in such a way to create congestion and profit from the relief of that congestion." Citing West Coast problems, they added, "Local congestion rose dramatically in California years after a zonal model was implemented, so local congestion costs in ERCOT that are already substantial could dramatically increase in the future if not corrected now." 6 MOD's proposal also suggested that their model could later segue into LMP, a move that prompted a lot of questions and was seen as rather utopian by some industry representatives.

The Zonal ERCOT Model, aka ZEN, supported by LCRA and South Texas Electric Cooperative, proposes to transfer ERCOT's market to a more "granular" market. Currently, the ERCOT market design is actually Zonal ERCOT Nodal, but without unit-specific bidding. ZEN eliminates portfolio bidding and uses unit-specific bidding. 7 Also, the debatable day-ahead market could be incorporated into the current Zonal Design without LMP.

Then there's the LMP-based-on-PJM model, which is more granular and results in clearer price signals (notably favored by PUC Chair Rebecca Klein) so that generators and transmission actually site in better places. Notably, PJM's model is being looked at by FERC for its overall SMD design.

Evolution, not Revolution

Some argued it was simply premature to change ERCOT from zonal management of transmission congestion to a method based on nodal LMP. Citing extreme costs to ERCOT, wholesale market participants, and, ultimately, retail customers, the Coalition of Market Participants says it is "essential and mandated by public interest considerations" for the commission to