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Don't Mess With Texas

America’s energy competition laboratory prepares to build.

Fortnightly Magazine - October 2006

interzonal congestion costs handled through commercially significant constraints. After peaking in 2003, local congestion costs decreased by 40 percent in 2005 as a result of the recent transmission-system upgrades aimed mainly at alleviating local constraints (see Fig. 4, p. 16).

Congestion pricing in ERCOT has been dominating wholesale market design discussions since 2001. Implementation of locational marginal pricing in ERCOT is expected to occur by the summer of 2009. The congestion-pricing model currently in use does not directly assign local congestion costs to those who cause congestion. Rather, local congestion costs are allocated to all market participants on a pro-rata basis in proportion to the amount of load they represent without consideration to who caused the congestion.

In other markets, the Midwest Independent System Operator began locational marginal prices (LMPs) when it opened its wholesale electricity markets in April 2005, and LMP markets already are in place in New York, PJM, and New England. They also are under development in California and elsewhere.

Global Energy has produced LMP forecasts for ERCOT using our LMP Network Database product (see sidebar, “The Technology Behind Calculating LMPs”).

Fig. 5 illustrates nodal prices at each bus using a price contour during one hour of summer peak load conditions. Different colors are assigned different price ranges. In the figure, blue signifies an area where nodal prices are $45/MWh or less, green signifies areas with approximately $50/MWh nodal prices, and red signifies prices of $55/MWh or more. This type of price visualization technique assists in identifying load (red zones) or generation pockets (blue zones), as well as the congestion expected to occur within the region (spanning the red and blue zones).

Figure 6 shows the distribution in nodal prices in ERCOT for the peak hour in 2008. The figure also shows that wide distribution in nodal prices develops from locational differences inside ERCOT. These locational differences are driven by congestion. Fig. 6 reveals prices much lower and much higher than the ERCOT-wide average price. Indeed, it is the locational price signal that is intended to provide market participants better information to use in managing operational and investment-related decisions affecting their asset portfolios.

It is clear from this figure that there are winners and losers, depending on location and whether injecting power into the grid ( i.e., a generator) or removing power from it ( i.e., a load-serving entity). Even within a single utility boundary, the variance in nodal prices can be quite high.

During the past three years, regulators and stakeholders in Texas have been heavily involved in developing the design elements for the Texas Nodal Market (TNM), as originally envisioned by the PUCT in 2003. 5 As laid out by the PUCT, the TNM paradigm aims to reduce local congestion and market gaming opportunities, increase transparency, and make the siting of new resources and transmission facilities more efficient. Originally slated for Oct. 1, 2006, full implementation of the TNM has been delayed by the PUCT. At the same time, PUCT commissioners have confirmed their commitment to the nodal pricing model for ERCOT. Proposed implementation dates