What a Nodal Market Means for Texas and ERCOT

What a Nodal Wholesale Market Means for Texas and ERCOT 

First, before I get into Texas’ electricity market, let me first explain a little bit about the Energy Reliability Council of Texas (ERCOT), the organization responsible for the management of this market.  ERCOT evolved from the Texas Interconnected System in 1970 and is considered an Independent System Operator (ISO).  ISOs were originally formed through the direction of the Federal Energy Regulatory Commission and charged with coordinating and managing the electrical power system to ensure reliable and efficient operation of the electrical power system within a region or an individual state.  Power generation companies within ERCOT generates the majority of the electricity load in Texas (approximately 85%) and currently have about 80 GW of generation capacity that provides electricity for over 22 million customers and represents an annual market of about $34 billion[1].  

In 2003 the Public Utility Commission of Texas asked ERCOT to create a nodal wholesale market in order to improve market and operating efficiencies (i.e., reduce local transmission congestion costs) by using more rapid and detailed pricing and scheduling  (i.e., better price signals for locating generation and transmission) of energy services.  The current price tag for development of the nodal market is about $538 million. Additionally, ERCOT will also develop a day-ahead energy market, which should also increase the overall efficiency of the market[2].

The Current Market – Zonal

The current zonal-based market determines the price of electricity (paid to the generators) every 15 minutes, this price is also known as the market-clearing price because it the price that balances the supply and demand of electricity.  In the zonal market the grid is organized into congestion management zones.  These zones are meant to increase the reliability of the system because often the generation of electricity takes place far from the point of consumption, which can cause congestion of the transmission lines (i.e., they cannot carried all the power being generated) and reduce the reliability of the system.  To avoid congestion ERCOT can “balance” the source of generation – thereby reducing congestion, but only between zones and not within zones.  This balancing of generation may actually require the cheaper generator to curtail their production, which then increases the price of electricity paid by the end user.  Nodal markets are able to address congestion within a zone – this means that the price of electricity should decrease while the reliability increases[3]. 

The Nodal Market

Unlike the current zonal market, the nodal market calculates transmission costs from the point of generation from several thousand delivery points or nodes across Texas.  Nodal pricing should help provide a more detailed and accurate picture of transmission and generation, which will enable the market to better reveal areas of more expensive electricity (e.g., congestion) and thereby reduce costs and encourage more efficient transmission solutions or dispatch (i.e., using the least expensive generator).  The nodal system will also improve market and operating efficiencies by increasing the rate that the market-clearing price is calculated – reducing the time from 15 to 5 minutes[4] . 

A principal reason for transitioning to the nodal market is to saving money.  A cost-benefit analysis by the PUCT calculated that electricity consumers would save $5.6 billion during the first 10 years of operations due to increased market efficiencies.  Since the Texas electricity market began the process of deregulation there have been some difficulties during the transitions, but the nodal system should help ensure that ERCOT continues to provide cost-effective and reliable electricity market[5].  

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[1] http://www.puc.state.tx.us/about/commissioners/nelson/present/pp/NodalMarket_082109.pdf

[2] http://nodal.ercot.com/about/news/2010/0129c.html

[3] http://www.window.state.tx.us/specialrpt/energy/app1/

[4] http://www.window.state.tx.us/specialrpt/energy/app1/

[5] http://www.puc.state.tx.us/about/commissioners/nelson/present/pp/NodalMarket_082109.pdf