Texas Electricity Market to Experience the Biggest Change in a Decade.

On Dec. 1, 2010, the Texas electricity market will experience the largest change since the deregulated market opened nearly a decade ago. However, this change is poorly understood by most consumers, as well as a large number of industry insiders. The change is a conversion from a Zonal to a Nodal market and the electric industry has spent hundreds of millions of dollars over the last six years to prepare for it.

The Electric Reliability Council of Texas (ERCOT) is at the center of this change, and will have spent a half a billion dollars on Nodal.   The electric industry combined will have spent much more than that.

ERCOT is an independent system operator (ISO), the enabler of deregulation, and responsible for reliability of the electric grid for 85 percent of the state’s electric load and 75 percent of the land area of Texas. This means ERCOT manages electric power for 22 million Texans.   It includes 40,000 miles of transmission lines and more than 550 generation units. ERCOT also manages financial settlements between companies and administers customers’ switches between retail providers of electricity. (See powertochoose.org)

So why are we spending this money and making changes to something as important as our state’s electric grid? The short answer is that an order was signed by the Public Utilities Commission (PUC) of Texas on April 5^th, 2006 for ERCOT and the market to switch from Zonal to Nodal. But what was the logic? 

Is ERCOT leading the nation in this switch? Quite frankly, no. Many other ISOs have already switched to a Nodal market. California was the latest to switch just last year. Also, New York, New England, PJM (mid-Atlantic states) and MISO (Midwestern states) have switched. In some instances a Nodal market is referred to as enabling LMP, locational marginal pricing. It is also important to note these ISOs have many unique needs and thus their implementations of a Nodal model are different.

In our Zonal market, Texas is divided into four zones for congestion management (CMZs). Electricity is priced at connection points between the four zones: West, North, South and Houston. Wholesale electricity is priced in dollars per megawatt (MW) hour in those four zones. In our Nodal market, electricity will be priced at 8,000 nodes.   Nodal is designed to improve price signals, improve dispatch efficiencies, and create direct assignment of local congestion. Will there really be 8,000 different wholesale electricity prices? I think not, but there will probably be a clustering of similar prices in groups of nodes around the grid.

In the Zonal market congestion in the grid cannot be assigned ownership so we all pay for increases in pricing due to congestion between zones. In a Nodal market local congestion costs can be assigned, because Zonal congestion simply goes away and all congestion in the grid is local. Additionally, ERCOT will dispatch every five minutes from individual resources as opposed to the Zonal market where portfolios run by qualified scheduling entities (QSEs) are dispatched every 15 minutes. So these are examples of greater granularity and more transparency that are intended to provide a more efficient market and a more reliable grid.

Other major changes include the creation of a Day Ahead Market for energy (DAM), dropping the Transmission Congestion Rights (TCR) market for a Congestion Revenue Rights (CRR) market.    There will be monthly and annual CRR auctions. CRRs might be the most complex part of the ERCOT market. Basically, you can procure a CRR for a MW amount from a point of injection to a point of withdrawal on the grid. Regardless of the generation source, the holder would pay or be paid 100 MW times the LMP difference between the injection and withdrawal settlement points. Shift factors will be actual whereas now they are averaged in each zone. Instead of a balancing energy market priced by zone, we’ll have an LMP market priced at nodes.

Many things are not changing, including: major components of the retail market, black start planning of generation, the renewable energy credit (REC) program, treatment of transmission and distribution losses, and unaccounted for energy (UFE).

I hope this gives a taste of the complexity and importance of the switch to Nodal. The design decisions were all developed in an open process so that everyone in industry and representatives of all consumers, industrial, commercial and residential, had a chance to be heard. The design of the new business models, systems and operating and market procedures became ERCOT protocols in a process managed by TAC (Technical Advisory Committee). The protocols were then approved by the ERCOT Board and later by the PUC in publicly noticed meetings. In the end the intention is to bring savings to consumers and a level playing ground for a great competitive market in ERCOT.

Mark Armentrout is a former Chairman of the Board at ERCOT and can be contacted at markarmentrout@texasinstitute.org

For a glossary of ERCOT terminology see: http://www.ercot.com/glossary