ERCOT Zonal Market in Theory and Practice

1
ERCOT Zonal Market in Theory and Practice

• Eric S. Schubert
• Market Oversight Division
• Public Utility Commission of Texas
• December 10, 2004

2
Definition of Zonal and Nodal Prices (1)

• Nodal Each point has its own energy price
• Zonal One energy price across a large area
• Substantive Rule 25.501 (Texas Nodal)
• Resources would have nodal prices
• Load would have zonal prices

3
Definition of Zonal and Nodal Prices (2)
Zonal
Nodal
NE
N
W
H
S
Commercially Significant Constraint
4
Summary of Presentation

• Which model to use zonal or nodal?
• Basic assumptions of zonal model
• Elements of original ERCOT zonal market design
• Experience of operating zonal model
• Possible remedies to current problems

5
Which Model to Use Zonal or Nodal? (1)

• Debate in ERCOT and SPP in 1999-2000
• How much of the network needs to be modeled?
• Theoretical rather than empirical
• Working wholesale markets at the time
• Nodal PJM (1999), NYISO (1999)
• Zonal CAISO, NEPOOL

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Which Model to Use Zonal or Nodal? (2)

• Zonal Min ISO
• Market decisions have small impact on reliability
• Decentralized commitment and dispatch process
• Nodal Max ISO
• Market decisions have large impact on reliability
• Centralized commitment and dispatch process
• Is the transmission grid more like life in
  Manhattan or West Texas?

7
ERCOT Chooses Zonal Market Design

• Zonal was an easier starting point in 2001
• ERCOT was moving to a single control area
• ERCOT never had been a power pool
• Gave QSEs ability to manage their plants close to
  real-time
• Clearing prices seen in the bid stack
• Market participants, not ISO, have large range to
  make decisions

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Basic Assumptions of Zonal Model

• Local congestion is random and infrequent
• Zonal prices are sufficient for siting resources
• Adjusting the number of CSCs and load zones will
  be systematic and timely
• Market decisions have a small impact on
  reliability
• Decentralized dispatch process works
• Decentralized unit commitment works

9
Elements of Original Zonal Model (1)QSE Bids
and Offers

• Balanced schedules that bind a few hours before
  real-time deployment
• Portfolio offer curves
• ISO RT balancing energy market
• Must offer requirement in the form of OOMC and
  OOME to meet immediate reliability needs

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Elements of Original Zonal Model (2)Day-Ahead
Energy Market

• Bilateral market in DA energy
• ERCOT procures residual AS in DA
• No centralized unit commitment

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Elements of Original Zonal Model (3)Settlement
and Local Congestion

• Direct assignment of congestion rents
• Only on key lines (CSCs)
• Rest is uplifted
• Commission had targeted limits on uplift
• Directly assign congestion rents on all lines if
  congestion is significant
• In 2001, Commission set the significant
  threshold level at 20 million

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Elements of Original Zonal Model (4)Settlement
and Zones

• Load zones not stable by design
• CSCs are determined yearly
• ERCOT stakeholders determine CSCs
• Thresholds on congestion costs determine
  candidates
• Load flows studies by ERCOT look at potential
  zonal boundaries
• New CSCs must produce zones that are
  sufficiently competitive
• Flowgates (TCRs) as hedges for energy flows
  between zones

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Elements of Original Zonal Model (5)Entry and
Exit of Resources

• Expedited permitting of resources
• Resource Adequacy
• No explicit resource adequacy mechanism
• Commission reviewing issue (Project 24255)
• Reliability Must-Run (RMR) units Substantive
  Rule 25.502
• Load Resources
• Loads Acting as Resources
• BULs

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Elements of Original Zonal Model
(6)Transmission and Retail

• Socialized cost of transmission grid
• Statute Postage stamp payment of TCOS
• Commission Generation interconnection
• Retail market
• Retailers unbundled from transmission and
  generation
• Zonal settlement of load

15
Experience of ERCOT Zonal Model2001-2004

• Local congestion is systematic and frequent
  (2001-2002)
• Inefficient siting dispatch of resources (2002)
• Adjusting number of CSCs and load zones is
  problematic (2003)
• Portfolio dispatch hinders real-time operations
  (2003-2004)
• Decentralized unit commitment may be inefficient
  (2004)

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Local Congestion is Systematic and Frequent
(2001-2002)

• Zonal congestion August 2001
• Local congestion March 2002
• Local congestion through August 2004

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Inefficient Siting and Dispatch of Resources
(2002)

• Uneconomic and confusing dispatch
• Cheaper units OOMEd or restricted
• Inc and Dec instructions at same bus
• Lack of transparency in the market
• Siting generation
• McCamey (Wind rush)
• Generator pocket in northeast part of ERCOT

18
Adjusting CSCs and Load Zones is Problematic
(2003)

• Annual adjustments only
• Slow and political process
• North-Houston (STP goes down)
• DFW area (OOMC uplift)

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Portfolio Dispatch Hinders Real-Time Operations
(2003-2004)

• Portfolio ramp rates complicate dispatch
• ERCOT has to guess how QSEs will deploy their
  resources
• Portfolio system can be gamed

20
Decentralized Unit Commitment May Be Inefficient
(2004)

• Oversupply of capacity operating at any given
  time
• Suppliers fail to offer their excess energy in
  the balancing energy market
• The market can suffer from an inefficient
  undersupply of committed capacity.

21
Potential Remedies for Five Problems in ERCOT
Wholesale Market

• Direct assignment of congestion rents on all
  transmission lines
• Resource-specific offer curves
• Centralized unit commitment in day-ahead market

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Questions?