Texas Nodal – The Next Step in Electricity Deregulation in Texas

Prior to 2002, generation, transmission, and sales of electricity in ERCOT were regulated.  Electric companies were vertically-integrated regulated monopolies based on geographic boundaries.

In 2002, the electricity industry in many areas in ERCOT was deregulated and a competitive market was created.   The vertically-integrated companies that existed prior to deregulation were broken up into power generation companies (PGs) which own and operate power plants, retail electric providers (REPs) which resell electricity to the final customers and handle the billing, and transmission and distribution (T&D) companies which remain regulated by the Public Utility Commission.   Not all areas of ERCOT were deregulated.  Municipally-owned utilities (such as Austin Energy) and customer-owned cooperatives (such as Bluebonnet Electric) were not required to deregulate but are allowed the option of entering the competitive market.  Also, some areas of Texas were judged to have insufficient room for competition and are therefore still regulated. [1]

In the retail market, deregulation resulted in a plethora of choices for most customers.  For example, in the 77002 zip code in Houston, 168 different plans are currently offered from 32 different retail electric providers, with different prices, contract terms, renewable energy content, and sign-up incentives. [2]

I am curious about the changes that are about to occur in the wholesale market [3].   The original (and still current) wholesale market is structured as a zonal market.  In this structure, ERCOT is divided into transmission congestion management zones as shown in the map below [4].

According to ERCOT, this model has problems with poor price transparency and indirect assignment of congestion costs, resulting in economically non-ideal dispatch of power plants and few tools for ERCOT to relieve congestion on the transmission system.  Consequently, ERCOT is preparing for a move to a new market structure later this year.   The new market structure is a nodal market, as shown in the map below [5].  ERCOT says the new structure will be able to directly assign the costs of congestion on the transmission system to the power plants that cause the congestion.  This is expected to result in clearer price signals to the market and improved dispatch of power plants.

One of the new concepts in the nodal market is the Locational Marginal Price.  The LMP is set by the highest accepted bid by any power plant at the node.  As I look at the nodal map, it appears that there are a large number of nodes between the wind generators in West Texas and the major cities.  My impression is that this will handicap the wind generators in comparison to other generators that are located closer to the major cities.  According to the published schedule, trial runs of the nodal market structure should currently be underway, and Texas Nodal is currently scheduled to go live on December 1, 2010.  We’ll see what happens!

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