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Trial and Error in Texas


A hard year puts deregulation to the test.

Fortnightly Magazine - January 2009

The industrial community in Texas, particularly the oil and gas sector along the Gulf Coast, had been using distributed generation, cogeneration and waste-heat recovery technology for decades. Put it all together and it created an ideal market for deregulation.

In 1999, then-Gov. Bush signed Senate Bill 7, Texas’s deregulation statute, and it took effect in January 2002. The wholesale market was created first, followed by retail competition. Industrial customers had lobbied hard for retail choice, and their robust participation was anticipated. Smaller customers initially were slow to switch providers, but by early 2008, 67 percent of residential customers had either switched to a different REP or to a new rate package with their existing provider. Deregulation was looking like a success.

However, underlying flaws in the relationship between wholesale and retail markets were about to emerge.

“I’ve been ranting for more than a decade about dynamic pricing and demand response, and how if you reduce barriers in retail markets to entry you’re going to get this array of products and services,” Kiesling says. “I’m not happy about it, but I’m willing to admit that even I oversimplified things. It’s not that easy.”

Wind Buffets the Markets

“Wind is an uncontrollable resource,” says Dan Jones, the independent market monitor for ERCOT. “It’s a piece of the supply mix unlike anything we’ve traditionally had.”

In other words, it blows when it wants to. A strong wind can push thousands of megawatts onto the grid, and then drop off to almost nothing. Although modern forecasting systems can model wind generation patterns with a great degree of accuracy, ERCOT’s rudimentary forecasting methods didn’t prepare the market for ebbs and surges in wind power coming from the flatlands—culminating in a dangerous frequency sag when wind generation didn’t deliver as expected on Feb. 26, 2008.

Moreover, ERCOT’s zonal model didn’t correlate to the actual location of generation and congestion. The result was several weeks of tremendous volatility and price spikes in the spot market. At times, electricity prices in southern Texas almost doubled those in northern Texas.

“We got a good dose of what the limitations on the system are,” Jones says. “Even though we had the same model for the first seven years of the system, we obviously knew problems needed to be solved. It was just a matter of time before something like that occurred. We put in some changes, but the ultimate solution is to get the market redesign in place.”

In 2006, Texas passed California to become the national leader in wind power generation. The Texas deregulation scheme provides significant incentives for renewable power development, and the state’s wind resource is sufficient for it to become a competitive energy source. But the development has happened so fast that wind generation already has exceeded transmission capacity  (see Figure 1, “Winds of Change”) . Because most wind turbines in the state are constructed in the vast, sparsely populated regions of West Texas and the panhandle, there simply aren’t enough wires to move the power to market. The result is congestion in regions with comparatively light infrastructure.