Recent History of Electricity Market Restructuring in Texas

1
Recent History of Electricity Market
Restructuring in Texas

• Ross Baldick and Hui Niu
• The University of Texas at Austin
• January 25, 2010

2
Outline

• Regional entities,
• Texas and the Electric Reliability Council of
  Texas (ERCOT),
• Milestones in Texas electricity restructuring,
• Resource and demand statistics for ERCOT,
• Market characteristics and components up to
  November 2010,
• Principal revisions to the zonal market prior to
  decision to change to nodal market,
• Lesson learned,
• The nodal market,
• Conclusions.

3
Regional EntitiesResponsible for reliability of
the bulk transmission system

• Electric Reliability Council of Texas, Inc.
  (ERCOT) (Texas Regional Entity, TRE),
• Florida Reliability Coordinating Council (FRCC),
• Midwest Reliability Organization (MRO),
• Northeast Power Coordinating Council (NPCC),
• ReliabilityFirst Corporation (RFC),
• SERC Reliability Corporation (SERC),
• Southwest Power Pool, Inc. (SPP),
• Western Electricity Coordinating Council (WECC).

4
Source North American Electric Reliability
Corporation. Available from www.nerc.com/fileUpl
oads/File/AboutNERC/maps/NERC_Regions_color.jpg.
5
The Electric Reliability Council of Texas (ERCOT)

• One of eight regional entities (formerly
  reliability councils) in North America
• responsible for maintaining reliability in
  ERCOT region,
• regional entities under authority of North
  American Electric Reliability Corporation (NERC)
  for purposes of reliability.
• ERCOT formed in 1970.
• Covers most of Texas
• will not discuss the rest of Texas in detail.

6
Regulatory jurisdiction

• Most electricity entities in ERCOT are under
  economic regulatory jurisdiction of the Public
  Utility Commission of Texas (PUCT).
• In other states, and in the non-ERCOT part of
  Texas, economic regulation is typically through
  both
• The Federal Energy Regulatory Commission
  (wholesale trade), and
• The relevant state Public Utility Commission
  (retail).
• Split of jurisdiction complicates restructuring.

7
Milestones in Texas electricity restructuring
1995-2005

• 1995, amended Public Utility Regulatory Act
  provided for wholesale competition involving
  non-utilities, principally independent power
  producers.
• 1996, ERCOT Independent System Operator (ISO)
  formed.

8
Milestones in Texas electricity restructuring
1995-2005

• 1999, Senate Bill 7 enabled retail competition
• Integrated investor-owned utilities required to
  functionally unbundle into
• generation, sells energy at wholesale,
• transmission and distribution, regulated by
  Public Utility Commission,
• Retailer, sells to consumer of energy.
• Generation resources competing in wholesale
  market.
• Retailers competing in retail market to serve
  customer load.
• Transmission and distribution remain as regulated
  entities receiving cost of service payments.

9
Milestones in Texas electricity restructuring
1995-2005

• 2001, ERCOT ISO became the single control area
  operator
• Scheduling process established where Qualified
  Scheduling Entities (QSEs) submitted balanced
  specification of generation to meet specified
  demand, the schedule,
• Balancing market established to cope with
  deviations of actual from scheduled generation
  and demand,
• If result of schedule would overload transmission
  constraints, then re-dispatch necessary,
• All costs of re-dispatch to relieve transmission
  constraints due to initial schedule were
  uplifted (charged) to market participants.

10
Milestones in Texas electricity restructuring
1995-2005

• 2002, retail market began.
• 2002, effects of inter-zonal transmission
  constraints represented in wholesale prices so
  that only re-dispatch costs due to local
  transmission constraints were uplifted.
• 2002-2005, hundreds of millions of dollars of
  local re-dispatch costs uplifted.
• 2005, decision to change to a nodal wholesale
  market as of circa 2009, eventually delayed to
  December 2010.

11
Resources and demand growth in ERCOT 1996-2002
Source NERC
12
Resources and demand growth in ERCOT 1995-2003

• 30 increase in generation capacity from 1995 to
  2003
• Significant growth in independent generation,
  mostly efficient combined-cycle,
• Relatively smaller increases in generation
  capacity since 2003.
• 20 increase in demand from 1995 to 2003.
• 2.5 increase in miles of transmission from 1995
  to 2003
• More new transmission than in other regions.

13
Market characteristics and components up to Nov.
2010

• Day-ahead decentralized scheduling by market
  participants of generation and load,
• Centralized balancing energy market run by
  ERCOT to deal with deviations from schedule,
• Zonal transmission constraint management,
• Centralized day-ahead ancillary services market
  run by ERCOT,
• Capacity adequacy,
• Generation inter-connection policy,
• Transmission planning,
• Wind and renewables,
• Market power,
• Retail restructuring.

14
Day-ahead scheduling by market participants

• Day-ahead bilateral scheduling of generation to
  match demand
• no day-ahead centrally dispatched energy market,
• bilateral contracts arranged over-the-counter,
• flexibility to adjust schedules without penalty.
• Qualified Scheduling Entities submit balanced
  schedules of generation and load to ERCOT ISO
• about 95 to 97 of energy.

15
Balancing energy market

• Deviations between scheduled and actual
  generation and between scheduled and actual
  demand are called imbalances.
• ERCOT ISO ran balancing energy market to provide
  for these imbalances and also to re-dispatch
  generation whenever there is transmission
  congestion
• ERCOT divided into zones,
• market clearing prices differ by zone when
  there are binding transmission constraints
  (congestion).

16
Balancing energy market, continued

• About 2 to 5 of total energy transacted through
  balancing energy market
• most energy transacted bilaterally with limited
  price discovery, so difficult to understand the
  going rate for electricity,
• limited volume in balancing energy market
  possibly limits opportunities for entry of
  independent generators (but independent
  generation has grown significantly).

17
Transmission constraint (Congestion) management

• Multi-thousand buses and multi-thousand
  transmission lines of ERCOT system approximated
  by a simplified equivalent for balancing energy
  market
• Four zones for 2002 and 2003 five zones for
  2006 four zones for 2008, 2009, 2010,
• Three equivalent transmission constraints for
  2003, six for 2006 five for 2008, 2009, 2010
  called Commercially Significant Constraints
  (CSCs).
• Model updated annually with buses shifting from
  one zone to another and CSCs changing.

18
Congestion management2008 zonal model
North Zone
West Zone
South Zone
Houston Zone
Source ERCOT, Available from www.ercot.com/news
/press_releases/2007/nr09-19-07200820Congestion
20Zones
19
Congestion management,continued

• Zonal congestion management
• Generators are exposed to prices in balancing
  energy market that reflect the average effect of
  location in zone on CSCs,
• Allows bidding of portfolio of generators in
  zone, rather than unit specific at each bus,
• At some buses, zonal prices can deviate
  significantly from efficient prices.
• Local congestion within a zone is cleared
  (flows kept at or below limits) using
  resource-specific information and re-dispatch
  instructions.

20
Ancillary services

• Needed in addition to energy to
• Operate system,
• Ensure that there is enough capacity committed to
  operate system reliably.
• ERCOT ISO operates day-ahead ancillary services
  markets for
• Regulation Down and Regulation Up (frequency
  regulation),
• Responsive Reserves (similar to spinning
  reserves in other jurisdictions),
• Non-Spinning Reserves,
• Replacement Reserves (as needed).

21
Ancillary services,continued

• Market participants are assigned obligations for
  ancillary services based on share of demand
• Can self-provide or procure through ERCOT
  ancillary services market.
• Initial implementation had day-ahead sequential
  markets for the ancillary services (AS)
• Each ancillary service acquired separately in
  sequential auctions,
• Inefficient procurement because services are
  related,
• Updated implementation considered Regulation,
  Responsive, and Non-Spinning Reserves
  simultaneously in day-ahead AS market
• (Nodal implementation co-optimizes AS and
  energy.)

22
Capacity adequacy

• Reserve margin
• (generation capacity peak load)/(peak load).
• ERCOT reserve margin obligations historically
  15.
• Reserve margin approximately 34 in 2002
• Resource growth, mild summer, and economic
  slowdown.
• Reserve margins have been falling, may fall
  further due to demand growth and slower
  generation growth, but many new projects proposed
  recently, including wind and coal.

23
Capacity adequacy,continued

• Reserve margin obligations reduced by ERCOT to
  12.5 in 2002, but increased again in late 2010.
• No installed capacity (ICAP) market or other
  mechanism to enforce capacity obligation
• Also the case in the nodal market.
• Contrasts to Northeast US markets where
  additional payment to generators for capacity
  that is designed to result in capacity adequacy.

24
Generation inter-connection

• ERCOT has a standard inter-connection agreement
  to facilitate inter-connection of new generation.
• Generation pays only for the shallow costs of
  inter-connection and not (directly) for the
  deep costs of upgrades to allow delivery of
  energy to market.
• Has helped to encourage considerable new
  generation, but poses problems for transmission
  planning.

25
Transmission planning

• Over 900 miles of new transmission installed
  between 1996 and 2003.
• Over 400 miles of new 345 kV transmission built.
• Many projects planned and built to relieve
  constraints
• However, new generation can typically be built
  much faster than transmission,
• McCamey area in West Texas has had more wind
  generation than the transmission capability to
  export the power.

26
Wind and renewables

• Renewable portfolio standards together with
  Federal subsidies (Production Tax Credits, PTC)
  have resulted in considerable new wind in West
  Texas.
• Current plans for 5 billion transmission
  expansion to support transmission of
  approximately 11 GW of new wind power capacity
  from West Texas to demand centers
• At 40 capacity factor (average production as
  fraction of installed capacity), cost is 20/MWh,
• off-peak energy price below 40/MWh.

27
Wind and renewables

• Fuel cost of wind is zero,
• Variable operation and maintenance costs are near
  zero,
• Subsidies make the effective production cost
  negative!
• When available wind exceeds the transmission
  capacity to move power from West to North Texas,
  competition can drive the West Zone price
  negative!
• Other zonal prices sometimes reach thousands of
  dollars per MWh!

28
Market power mitigation for local congestion

• Offer cap of 2,250/MWh currently for energy
  (increased over last few years)
• Offer and transmission limits set zonal prices.
• Market solution to local congestion
• Local congestion can be resolved by three or more
  unaffiliated resources,
• No single resource is essential to solving
  congestion.
• Typically no market solution for local
  congestion
• Prices mitigated based on verifiable costs.

29
Retail restructuring and the Price-to-beat

• 6 reduction in rates put in effect January 1999
  for residential and small commercial customers of
  investor-owned utilities.
• Retailer affiliated with former integrated
  utility must sell at or above the price-to-beat
  to its residential and small commercial
  customers
• Until 40 of customers move to competitors,
• Or January 2007 (so, all expired now).
• Adjusted to reflect change in fuel costs
• Avoid wholesale price exceeding retail rates.

30
Retail restructuring and the Price-to-beat,
continued

• Chosen to allow competitive retailers to undercut
  the price-to-beat
• Foster competitive retailing.
• Many customers, particularly non-residential have
  switched from their affiliated retailer.
• Retail prices increased in years to around 2008
  or, and then declined somewhat, reflecting
  changes in gas prices and possibly other issues.

31
Summary of market designs
Source Public Utility Commission of Texas
32
Revisions to ERCOT market prior to decision to
change to nodal
33
Three significant revisions to ERCOT market

• Direct assignment of congestion.
• Relaxed balanced schedule.
• Simultaneous selection of ancillary services.

34
Re-dispatch cost, congestion cost, and congestion
rent
Capacity K
Source of relatively cheap generation
Demand center, limited generation
Zone A
Zone B
Price
Price
Export from Zone B to Zone A
Source Joskow and Tirole, 2003
35
Zonal re-dispatch cost andcongestion rent

• Suppose schedules would result in flow of level
  K1 from zone B to zone A
• Need to arrange for re-dispatch so that flow is
  only at level of transmission capacity K.
• In initial implementation of ERCOT (and other)
  markets, cost to re-dispatch schedules to make
  feasible was uplifted to all market
  participants.
• Incentive to over-schedule and then get paid to
  relieve congestion
• Similar to inc. and dec. game in California.

36
Zonal re-dispatch cost andcongestion rent

• 20 million in zonal re-dispatch costs
  (additional payment for feasible dispatch
  compared to scheduled) within 15 days.
• System changed in 2002 to charge congestion rent
  for zonal congestion together with financial
  rights to hedge
• Prices differ by zone,
• Transmitting from one zone to another incurs
  difference in zonal prices,
• No longer rewarded for over-scheduling!

37
Zonal re-dispatch cost andcongestion rent,
continued
Congestion rent
Re-dispatch cost
Source ERCOT
38
Zonal re-dispatch cost andcongestion rent

• Inc. and dec. game shifted to intra-zonal
  congestion
• but limited by market power mitigation.

39
Local re-dispatch cost
Source ERCOT
40
Relaxed balanced schedule

• Initial implementation intended that Qualified
  Scheduling Entities schedule generation resources
  to meet forecast demand
• min-ISO philosophy,
• only a fraction of energy is traded at
  transparent prices in balancing market.
• From November 2002, requirement relaxed
• Somewhat greater amount of energy traded in
  balancing market,
• Texas Competitive Energy went bankrupt in 2003
  after relying on balancing market for all its
  retail obligations.

41
Simultaneous selection of ancillary services

• In initial implementation, ancillary services
  (AS) were acquired in sequential markets
• inefficiency because several of the services are
  related (and related to energy),
• price reversal where higher value ancillary
  services are priced lower.
• Simultaneous auction implemented to acquire
  regulation and spinning and non-spinning reserves
  in one auction instead of in sequential auctions
• But energy still separated from AS.

42
Lessons learned

• Uplifting re-dispatch costs is an invitation for
  over-scheduling
• anticipated in protocols.
• Balanced scheduling requirement limits trade
  opportunities, liquidity, and price transparency.
• If closely related services, such as related
  ancillary services, are procured in separate
  markets then inefficiencies can result.

43
Lessons learned,continued

• Frequent protocol revisions,
• Multi-year hedging of congestion,
• Transmission planning,
• Operational inefficiencies,
• Load response,
• Retail competition,
• Motivation for change to market design.

44
Frequent protocol revisions

• Only the largest participants can keep track of
  the changes.
• Entry barrier to small market participants.

45
Multi-year hedging of congestion

• Changes in zonal boundaries make it difficult to
  hedge congestion over multiple years
• The simplified zonal congestion model aimed at
  facilitating the market by simplifying the
  representation of the transmission system
  presented to the market,
• But the need to update the approximation prevents
  multi-year financial instruments and makes
  multi-year planning difficult.
• Entry barrier to new generation located near zone
  boundaries.

46
Transmission planning

• Generator inter-connection policy has facilitated
  new generation.
• But has allowed new generation to be built
  without putting adequate transmission in place
• McCamey area in West Texas,
• Until 2006 or so, more wind generation than local
  transmission capacity to export,
• In Spring 2008, partly due to maintenance
  outages, more wind generation than West-to-North
  capacity to export.

47
Operational inefficiencies

• Portfolio bidding of resources by zones and
  flexibility to change schedules
• Designed to facilitate market operations,
• Difficulties for system operation since ERCOT
  does not know which resources in a zone will
  actually be used,
• So, until real-time, ERCOT must guess about which
  resources will be used when it analyzes local
  congestion.

48
Load response

• Market allows for bidding of loads into ancillary
  services and other markets
• Loads acting as resources.
• Characteristics of loads do not match those of
  traditional generation resources and have had
  difficulty meeting performance criteria.
• Limits amount of demand that can actively
  participate in the market
• Issue of limited demand participation is ongoing
  problem in electricity markets.

49
Retail competition

• Price-to-beat enabled retail competition by
  setting prices for formerly regulated entities
  that allow the competitive retailer to undercut
  them.
• Transition measure for retail market.
• Price-to-beat no longer applies.

50
Motivation for change to the market design

• Local re-dispatch costs have been significant
• Zonal market model does not capture enough of the
  transmission issues.
• Many of the new combined-cycle units have been
  utilized less than expected
• Day-ahead scheduling process has not apparently
  led to independent combined-cycle being fully
  utilized.
• These and other reasons led to a PUCT decision to
  change the wholesale market model to being more
  similar to that in the Northeast United States,
  Midwest ISO, and California.

51
The nodal market

• In December 2010, ERCOT began a day-ahead market
  based on central dispatch and locational marginal
  prices
• Each generator can offer its capacity to be used
  to generate energy, or provide for ancillary
  services, or a mixture of energy and ancillary
  services (or can schedule),
• All energy and related ancillary services
  acquired in a single day-ahead auction run by
  ERCOT.
• Also has a real-time market, having a similar
  role to the previous balancing market, but with
  nodal representation.

52
The nodal market

• Financial transmission rights will be available
  of up to two years term
• Still inadequate for longer-term hedging,
• Typical energy contracts can be for decade or
  longer terms.

53
Conclusion

• Review ERCOT electricity market up to November
  2010,
• Describe three of many changes,
• Lessons learned,
• The nodal market.

54
References

• This is an updated version of Lessons Learned
  The Texas Experience, Ross Baldick and Hui Niu,
  presented at the Bush School Conference on
  Electricity Deregulation Where to from here?
  April 4, 2003, and appearing as Chapter 4 of
  Griffin and Puller, Editors, Electricity
  Deregulation Choices and Challenges, The
  University of Chicago Press, 2005.