Wind power in Texas and the “negative pricing” conundrum

The issue of negative pricing from wind power has been in the news in Texas a lot lately, with some blaming these negative prices for stifling investment in new electric generation. [1]  First: what is negative pricing?  In the competitive market wholesale generators offer their product at differentiated prices based on their marginal cost of production, creating a ‘supply curve’ from which the most cost-effective generation is chosen to meet current demand.  Wind power has almost no marginal production cost and is often a price taker in the market, however at night when demand is low wind has been known to set the price, particularly in west Texas. 

This happens for two reasons: first, there is ample supply of wind in west Texas to meet demand during night-time hours; second, wind in west Texas has limited access to transmission lines to move the electricity into other regions with higher demand.  At the same time wind receives a Production Tax Credit (PTC), which provides a financial incentive for wind generators to produce electricity even when prices are low.  When wind energy sets the price in west Texas, the PTC makes it more valuable for wind generators to pay offtakers to consumer electricity by providing generators with an additional revenue stream. 

This negative pricing affects other power producers in the same region: since their marginal cost remains positive they are forced to choose between losing money or shutting down operations while prices are negative.  Such a choice makes it particularly difficult to invest in new generation given the uncertainty of future  revenues, these negative prices do not affect the bulk of power plant operators or investors.  A report to ERCOT on issues facing investors in new generation to meet reliability needs found that “Negative prices have largely been confined to the ERCOT’s West Zone, while the other 3 zones have not had more than 0.4% of hours with negative prices.” [2]  As I discussed in a blog post for EDF, only 10% of ERCOT’s non-wind capacity is in the West Zone, so investors looking to build new power plants in Texas rarely look to that region, and are only faced with negative pricing 0.4% of the time. [3]

Not only the problem restricted to a relatively remote area, it’s expected to end soon with the completion of a large set of new transmission lines connecting west Texas wind to population centers in the rest of the state.  [4] These lines, commonly referred to as Competitive Renewable Energy Zones (CREZ) will alleviate the congestion that forces wind operators into negative pricing conditions by connecting them with additional demand throughout the state, which, even during the night-time exceeds 20,000 MW – more than twice the amount of wind energy currently on the ERCOT grid. [5]

 

[1] “Texas Windpower: Will Negative Pricing Blow Out the Lights? (PTC vs. reliable new capacity),” Neely, J., November 27, 2012, http://www.masterresource.org/2012/11/texas-negative-pricing-ptc/

[2] “ERCOT Investment Incentives and Resource Adequacy,” p. 20, June 1, 2012, The Brattle Group

[3] “Chasing Red Herring on the Wind,” Meehan, EDF Energy Exchange

http://blogs.edf.org/energyexchange/2012/09/13/chasing-red-herring-on-the-wind-2/

[4] “Negative Pricing: Caused by Congestion, Ending Soon,” The Wind Coalition

Click to access TWC-Negative-Pricing.pdf

[5] “ERCOT – Challenges & Opportunities,” Doggett, T., p.30 http://www.ercot.com/content/news/presentations/2013/ChallengesOpportunities-Mar%202013.pdf

Smart Grid and Infrastructure Security Implications

Image via Washington Post

It’s time for real talk. Existing power generation in Texas is having a tough time meeting the state’s rising power demand. The February 2, 2011 cold snap took the state by surprise and temporarily disabled the Oak Grove coal-fired power plant. The 1.6 GW shortage cascaded across the state and disabled back-up natural gas turbines, forcing the Electric Reliability Counsel of Texas (ERCOT) to issue rolling blackouts across the state. It’s not to say that Texas is unprepared for these kind’s of surprise weather conditions, but current demand management techniques are falling short. ERCOT would like the state’s peaking power reserve margin to sit at 13.75% of the state’s total generation capacity, but this number is pretty idealistic when considering how quickly Texas is growing.

So what’s the solution? Depending on who you ask, integrating a smarter infrastructure with distributed renewable energy sources is the way to go. This means installing new smart grid technologies with renewable power sources like wind and solar and taking dependence off centralized peaking power stations. The US Department of Energy is enthusiastically embracing this modus and has already allocated $4.5 billion in grants to smart grid technologies, along with setting clean energy generation targets to 80% of national generation by 2035. This is good news for Texans, where 10.9 GW of existing wind infrastructure is ready to help offset demand loads, not to mention all that untapped solar potential. So how exactly does a smart grid help?

It’s all about information feedback. By giving the power generators insight into how electricity is being consumed and where the faults lie, we collectively gain more control over how we use electricity. Smart grid  is often touted as a self-healing technology, in that it can respond to system outages much quicker than the existing electro-mechanical infrastructure. In addition, smart grid is expected to combat the rising cost of energy. By 2050, utilities are expected to increase by up to 400% of current prices. With smart grid in place, we can expect these to increase by about 50%. Not bad. However, an underdeveloped smart grid network could have catastrophic consequences for national security.

In 2010, the US media revealed that uranium enrichment plants in Iran had been catastrophically damaged by a very complex computer program known as Stuxnet. The malicious code was specifically engineered to damage industrial control systems and SCADA networks. These networks can be found in the oil and gas industry, water management,  power generation, etc. In the case of the Iranian enrichment facilities, the code was able to gain control of the uranium centrifuges and effectively destroy them before operators realized something was awry. The truly alarming thing about Stuxnet, though, is that it was operational and in the open for a full year before anyone realized it. The code is designed to install and exploit system back doors, known as rootkits, and can be installed on any media plugged into infected hardware. That means a flash drive plugged into a corrupted system becomes an infectious vector for other industrial infrastructure. Like a smart grid network. Stuxnet is kind of like the bull in the china shop. It’s very capable of causing a lot of damage, but it isn’t too particular about what it breaks. That means any existing industrial control system can be implicated.

There isn’t solid proof as to who designed Stuxnet. The United States has been implicated, as well as Russia and Israel. However, it is an extraordinarily complex piece of work and is almost assuredly the product of a technologically developed government. This would make Stuxnet the first form of cyber-warfare that is capable of targeting entire infrastructures. Scary stuff, especially if your entire electric infrastructure is tied to an integrated smart grid system.

It’s often said that no network is impenetrable, but good people are doing a lot of pioneering work to make sure that the bad guys can’t get in. Smart grid is a very promising avenue to bringing electricity generation into the future, but we need to be confident that we’re not unnecessarily introducing vulnerabilities into existing infrastructure.

Texas Population Growth and Future Energy Demand

Photo:  Austin, TX Downtown Skyline

Forbes has released their annual list of fastest-growing cities in the U.S.  For the third consecutive year in a row Austin came out on top.  The Austin metro region grew at a 2.8% clip in 2012 bringing our regional population to 1.8 million people.  Austin has been roughly doubling in size once every 20 years since its founding in 1839.  The second and third fastest-growing cities on the list were Houston and Dallas.  San Antonio came in at #9 on the list.  Texas overall added 427,000 people to the state’s population from August 2011 to July 2012 bringing our state population to 26 million.  Texas is growing at a staggering rate of more than 1,000 people per day.  With Texas metros growing at such a breakneck pace, the challenge for Texas going forward will be to keep up with our state’s future energy demand [1][2].

Photo:  ERCOT Operations Center

The Electric Reliability Council of Texas (ERCOT), the state’s grid operator, recently released a study showing that Texas will struggle to keep pace with future energy demand especially during peak demand times for energy.  Peak energy demand in Texas occurs from 3 p.m. to 7 p.m. during the summer months.  ERCOT’s method of tracking whether the state will be able to cover its current and future energy needs is based on a reserve margin metric.  Reserve margin is a useful tool that measures how much extra generation capacity will be available based on what the anticipated future peak energy demand will be.  ERCOT’s reserve margin goal for the Summer of 2013 is 13.75%.  However, with total generation capacity expected to be 74,633 megawatts (MW) and peak demand expected to be 65,952 MW during the Summer of 2013, ERCOT will fall short of its goal with a reserve margin of only 13.2%.  ERCOT’s reserve margin is expected to decline to 10.9% by 2014, and it will eventually fall to just 2.8% by 2022.  ERCOT’s strategy going forward will be focused on introducing new market incentives for power plant operators across the state to build new generation capacity.  ERCOT will also focus its efforts on encouraging energy conservation through demand response initiatives [3].

Energy conservation efforts such as Austin’s Pecan Street, Inc. smart grid demonstration project is a great example of how Texas’ booming metros can reduce overall peak energy demand.  Pecan Street’s smart grid demonstration project is leveraging a $10.4 million DOE grant as well as resources from the University of Texas at Austin, Austin Energy, and a consortium of industry leading high tech companies.  Pecan Street is studying the benefits of integrating rooftop solar, energy storage, electric vehicles, natural gas, smart appliances, and home energy management networks to manage peak energy demand within neighborhoods and also to help customers reduce their monthly utility bills.  Pecan Street’s smart grid demonstration project has grown to include 600 residential homes.  Lessons learned from Pecan Street’s research projects will go towards helping cities across the state and country better understand how to satisfy future energy demand when facing rapid population growth [4].

Introducing Pecan Street, Inc.

[1]  Austin is America’s fastest-growing city: http://www.bizjournals.com/austin/blog/morning_call/2013/01/austin-is-americas-fastest-growing-city.html

[2]  Forbes; “America’s Fastest Growing Cities”:  http://www.forbes.com/sites/morganbrennan/2013/01/23/americas-fastest-growing-cities/

[3]  Future electric outlook shows improvement:  http://www.ercot.com/news/press_releases/show/26358

[4]  Austin’s Pecan Street, a Smart Grid ‘City Bloc,’ Adds PV Solar and EVs:  http://www.pecanstreet.org/2011/10/austins-pecan-street-a-smart-grid-city-bloc-adds-pv-solar-and-evs/

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].  

---

[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

The Generation and the Transmission

Texas recently hit a milestone: as reported in the New York Times on their “Green, Inc.” blog, early in the morning on March 5, 19% of the electricity in the ERCOT grid was wind-generated. The article, Setting Wind Power Records in Texas” goes on to describe how one of the greatest challenges associated with the developing wind power is ensuring access to the electric grid. While the absence of transmission is a constraint in many areas, Texas has been further out front than many areas in making sure we invest in the transmission lines to make greater wind development possible.

Having been in New York during the blackout in the summer of 2003, I can easily remember that the next few months featured many articles and exposes on the poor condition of much of our national electricity infrastructure. Following 9/11, more policymakers began to worry about the vulnerability of the grid as a national security matter. While the odds of a cascading blackout like in 2003 are incredibly low, such “black swan” events severely disrupt lives and economies.

Major Challenges: Growth, Deregulation, and Adding New Generation

The 2002 National Transmission Grid Study from the Department of Energy describes many of the present and future challenges for grid management. Largely built a century ago by vertically-integrated utilities, interconnection slowly grew in order to help transfer power during periods with heavy loads. (3)

One of the greatest challenges is the sheer growth in demand – DOE estimated in 2002 that peak summer demand and capacity would grow by almost twenty percent per year for the next ten years. (4) As grid operators have struggled to meet this growth and changing usage patterns, “bottlenecks” have grown, causing many more near-overloads and forcing the purchase of more expensive local sources, increasing the price of electricity for consumers. Deregulation brought many changes in the different businesses and actors directly involved in grid operations and management.

According to a study by Electric Transmission Texas, there are three additional challenges to incorporating wind power: the fact that both wind availability and load are variable and constantly changing; conditions in one part of the grid affect operations in other areas; and “[t]he power system has to be continuously prepared to withstand the sudden failure of any generator or transmission line.” (5)

The National Response

Investment in new transmission fell steadily from the 1970s to 2000, so that at the time of the DOE study, only 6 percent growth in the transmission system was expected, in contrast to the 20 percent growth in load. (7) The American Recovery and Reinvestment Act (ARRA) last year provided $11 billion for different transmission-related activities. Almost half of the funds went to the Office of Electricity Delivery and Energy Reliability at the Department of Energy; the rest went to the federal Power Marketing Authorities such as ERCOT for modernizing the grid. Much of the focus is on “smart grid” technology to increase the flow of information between individual consumers and the grid. This month, an additional $100 million was made available for more transmission-related projects. Some ARRA funds to stimulate growth in the wind industry have gone to fund studies on how to incorporate large amounts of wind power in transmission; one of the grants came to UT.

Texas has been ahead of the national curve on dealing with the challenge of providing additional transmission for wind projects. The Public Utilities Commission approved a plan to add 18,500 MW of transmission lines to for wind power in ERCOT through the Competitive Renewable Energy Zone 2 (CREZ 2) in 2008. A year later, it awarded $5 billion in contracts to build the lines. However, in January, a Texas court delayed the project by siding with the City of Garland, who claims that they could construct the lines more cheaply than private contractors. Hopefully, this dispute can be resolved quickly – it can be difficult to secure funding for new renewable energy projects unless there are transmission lines in place or forthcoming.

As described in the DOE study, the grid is “an interstate highway system for wholesale electricity commerce.” (xi) Large-scale investment to improve the capacity and reliability of transmission can increase energy security, reduce the cost to consumers, and increase the return on investment in renewable energy sources and smaller-scale “distributed generation” facilities. But only if the investment is done well. Transmission lines are expensive; line-losses increase as electricity travels hundreds of miles from generation to distribution, and as a town in California learned the hard way last week, there are significant environmental and scenic consequences.  Short-sighted or uncoordinated efforts are missed opportunities.

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!