Evolution, not Revolution

1
Evolution, not Revolution
Jerry Ward TXU Energy Project No.
26376 Rulemaking Proceeding on Wholesale Market
Design Issues in the Electric Reliability Council
of Texas   Open Meeting Workshop on Congestion
Management January 14, 2003
2
I came to praise LMP, not to bury itPJM Works
!ERCOT Works !ERCOT and PJM are different in
many areas but they both manage to solve the same
problems in different ways with some uplift.
3

• The ERCOT market was designed around retail
  choice.
• The wholesale market exists to serve the retail
  market.
• The ERCOT market was designed to facilitate
  bilateral contracts.
• Research indicates that a bilateral market
  results in lower wholesale prices than a gross
  pool-type market

4
ERCOT WORDS TO DESIGN BYIn theory, practice and
theory are the same.In practice, practice and
theory are different.
5

• What problem are we trying to solve?
• Local Congestion
• Also interesting but not Congestion Model issues
  
• Day-Ahead Market
• Transmission Planning Problems

6

• What are we solving if
• The objectives of Senate Bill 7 are being
  achieved
• Goals targeted by FERCs Standard Market Design
  (SMD) are being achieved
• Costs of LMP (the Nodal Model) are expected to be
  near 500 million which significantly exceeds the
  benefits received and
• Stable, accurate zonal price signals are being
  sent, which will ensure that new generation is
  properly sited.

7

• The Zonal Model is successful in solving
  competitive congestion and providing price
  signals for construction of new generation.
• The Nodal Model is more granular than the Zonal
  Model but it only slightly increases the accuracy
  of price information (i.e., to the third decimal).

8

• What is Local congestion?
• In ERCOT, Local Congestion occurs when there is
  too much or too little generation in an area for
  the load in the same area and there is no
  competitive solution.

9
Too Little Generation
Transmission
Transmission
Can the generator offer any price he wants to?
10
Too Much Generation
Transmission
Transmission
Can the generator bid any price he wants to?
11

• LMP (the Nodal Model) does not add competition
  where none exists!
• Therefore, LMP does not solve Local Congestion in
  ERCOT.

12

• Day-Ahead Market
• A day-ahead market is not dependent on the Nodal
  Model (LMP)
• A day-ahead market should not impede the ability
  to make bilateral contracts (voluntary)

13

• Evolution vs. Revolution
• Revolution
• High cost
• Uncertain outcome
• Evolution
• Less risky bite size changes
• Recommended by successful markets (PJM)
• Better able to prioritize and adjust to reality

14

• Evolution of Competitive Congestion Management
• (Zonal Congestion)
• Started with Zonal Model without direct cost
  assignment
• Switched to Zonal Model with direct cost
  assignment
• Result It Works!

15

• Evolution of Non-Competitive
• Congestion Management
• (Local Congestion)
• To Decrease Generation
• Originally No Charge
• Now Charge Decremental Cost by Category of
  Unit

16

• Evolution of Non-Competitive Congestion
  Management
• (Local Congestion)
• To Increase Generation
• Originally 18 Heat Rate x Natural Gas Price
• Now Incremental Generic Cost by Category
  of Unit

17

• Future Evolutions
• More generic catagories or unit specific costs
• Reliability Must-Run (RMR) becomes cheaper and
  more restrictive
• Wind generators are not paid OOME Down above an
  allocated maximum amount
• Generators in Generation Pocket Areas (GPAs) are
  not paid OOME Down
• Improve ERCOT planning process
• RMR exit strategy

18

• In Summary
• To paraphrase ERCOTs Monte Jones analogy of
  the ERCOT Retail Market as trying to change a
  tire on a moving car, implementing a complete
  redesign of the ERCOT Wholesale market would be
  like changing a tire on a moving car with 5,000
  lug nuts, and the tires not flat!