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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


Rising gas prices spark a rush to wind farms, straining grid capacity and raising larger issues about market design.

When the Public Utility Commission of Texas (PUCT) was drafting rules to encourage the use of renewable energy, it took pains to guard against the chance that power producers would fail to reach the state's target of 400 megawatts (MW) in installed new renewable generation capacity by Jan. 1, 2002. The commission needn't have worried.

In reality, the opposite happened. A spike in natural gas prices starting in the fall of 2000 helped launch a virtual explosion of wind farms in Texas in 2001, as power producers discovered that wind power could serve as a hedge in the fuel mix.

Yet this embarrassment of riches came with its own problems. Lacking the sorts of locational price signals common in PJM, New York, and Eastern electricity markets, builders had constructed nearly 1,000 MW of new wind capacity in West Texas, on the wrong side of a 500-MW transmission constraint in the Pecos River area. That left wind plants partially stranded, lacking full access to load centers farther east. 1

As one legislative aide said last December, it might be easier just to move Dallas out west to the desert, than to move all those windmills.

All this new wind power created transmission congestion in the western part of the state, and the costs for clearing that congestion-now being uplifted to load-are estimated at $20 million per year. Why did this wind boom catch regulators by surprise? And why did power producers build in the "wrong" place? Some have wondered (including the PUCT) whether the problem might lie with the wholesale market design in the Electric Reliability Council of Texas (ERCOT), which operates the grid in most of the state and that has relied heretofore on a California-style zonal method for clearing congestion.

Indeed, ERCOT's zonal model appeared to have created the same pattern of phantom local congestion as seen in California. Insiders saw happening in Texas the same infamous "Dec game" as occurred in California, which allowed bidders to schedule resources in ways known to create congestion and then to submit decremental bids to the ISO to accept lucrative payments to withhold energy to relieve that same congestion.

Yet it may prove difficult to reverse ERCOT's market design and move to an East Coast model. While power producers in Texas likely would welcome the change (they already understand the PJM market), a shift might force retail suppliers and load-serving entities to spend money to remake software tailored to the ERCOT model.

To fix things, the PUCT's Market Oversight Division (MOD) appears to have embraced a third alternative for managing congestion-based neither on the old ERCOT zonal model, nor on PJM's bid-based and security-constrained nodal model, which features locational marginal pricing (LMP) with prices calculated after the fact. The middle way that the MOD has proposed for Texas would seek to relieve congestion through a system of flow gates and through a purely physical optimization of grid use. It would control congestion by attempting