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The Best Little Nodal Market in Texas

Sweating the details for 2009.

Fortnightly Magazine - September 2007

The Electric Reliability Council of Texas (ERCOT) introduced wholesale market competition in 1996, following the organizational change of ERCOT from a pure reliability council to an independent system operator (ISO) the same year. This makes ERCOT one of the earliest adopters of competitive electric markets. Senate Bill 7 (S.B. 7) brought about the most fundamental change to the market, opening competitive retail markets by January 2002.

The restructured retail markets use a zonal flowgate model to handle congestion. Since 2002, this system has been hotly debated as local congestion (handled through extensive use of out-of-merit order capacity that is uplifted to the entire market) has become very costly for the system. To bring more efficiency into the planning and dispatching of units in ERCOT, the Public Utility Commission of Texas (PUCT) adopted Substantive Rule No. 25.501 as developed under the market redesign rulemaking proceeding (Project 26376), setting forth a nodal wholesale-market design.

Stakeholders and regulators in ERCOT are trying to work out the details of implementing this market, now not expected to begin in December 2008. Table 1 below presents a history of the major events shaping the ERCOT market.

Texas Nodal Market Design

Congestion pricing in ERCOT has dominated wholesale-market design discussions since 2001. As mentioned earlier, local congestion costs— representing about 82 percent of total congestion costs in the region—are allocated to all market participants on a pro-rata basis in proportion to the amount of load they represent without consideration to the congestion causer. To achieve a more efficient allocation of local congestion costs in ERCOT, the wholesale-market redesign initiative calls for the application of locational marginal pricing (LMP).

During the past few years, Texas regulators and market participants have been involved heavily in developing the design elements and implementation plan for the Texas Nodal Market (TNM), as originally envisioned by the PUCT in 2003. 1 As laid out by the PUCT, the TNM paradigm aims at reducing local congestion and market-gaming opportunities, increasing transparency, and making the siting of new resources and transmission facilities more efficient. In August 2003, immediately after the initial approval of the market redesign rulemaking, ERCOT formed a stakeholder group known as the Texas Nodal Team (TNT), to design the elements of the TNM and develop the nodal market Protocols and the cost-benefit analysis of the TNM in compliance with the PUCT order.

The cost-benefit analysis study was completed and posted on Nov. 30, 2004, and the PUCT approved the final TNM Protocols on March 30, 2006. The PUCT also stressed its interest in moving forward with the now planned 2009 implementation. The TNM as articulated in the PUCT’s Substantive Rule 25.501 and described in the TNT documents and the TNM Protocols will represent a change from the current wholesale-market design in several ways, described below.

• Locational Marginal Pricing. LMPs will be implemented in ERCOT to ensure direct congestion cost assignment using nodal prices for generators and zonal prices for load. As

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