Factors affecting ERCOT – The shifting power market in Texas

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A few weeks ago, ZE held a public webinar on the Electric Reliability Council of Texas (ERCOT) market. As one of the business analysts responsible for building this presentation, I performed a fair amount of research on a market that has undergone many structural changes in recent years.

We will run a series of three articles to provide you with an overview of our findings from this webinar, including information on its history, key features, influencing factors and future expectations.

“Everything’s bigger in Texas”

As the second largest state in America, Texas is a unique territory consisting of diverse geography and climates. From near desert-like conditions in the interior to humid subtropics along its southern coast, Texas has a wide range of temperatures and weather patterns.

Of course, like most things in Texas, electricity production and usage is much larger than other states. With more than 26 million people, Texas makes up about 10% of total US electricity consumption, according to EIA figures. In 2011, the state of Texas alone accounted for a whopping 376 TWh of electricity consumed.

A transitioning market

Like many other markets in North America, ERCOT became an Independent Systems Operator (ISO) in 1996 after FERC Order 888/889. Initially, ERCOT was structured as a zonal market consisting of four different regional zones.

In 2003, as per PUC order 26376, the ERCOT market began its move from a zonal to nodal market structure. The idea was to convert the four zones into more than 4,000 nodes which would (in theory) improve pricing signals, dispatch efficiencies and management of congestion.

This change took many years of planning, research, budget overruns and was marked by an official implementation on December 1, 2010.

Features of the ERCOT Nodal Market

As a nodal market, ERCOT now consists of 4,000+ nodes across Texas. Some specific ERCOT features include:

  • High-granularity pricing data for all of the nodes
  • A nodal LMP based on the cost of generation and the amount of congestion
  • Congestion Revenue Rights that work as a mechanism for managing congestion between nodes
  • Ancillary service markets to manage reserve systems

Two years on

It’s been about two years since ERCOT shifted from a zonal to nodal market design and our team was curious to see how prices would compare to before.

Below (Figure 1) is a shifted comparison between zonal prices from 2008-2010 and nodal prices from 2010-2012. The two years of data for both nodal and zonal was aggregated into a monthly basis to show seasonality:

Figure 1: ERCOT zonal vs. nodal pricing aggregated by month of year. (Graph created in ZEMA)


It’s interesting to see that prices in general are lower after the nodal implementation. As well, we measured a decrease in price volatility. In 2011, there was an especially large price spike during the hot summer month of August, which accounts for the jump in the aggregated price for nodal. With only two years of nodal data so far, it’s still a bit premature to make any concrete judgments but the nodal implementation seems to be providing lower, more stable prices.

Along with a macroscopic look at the ERCOT market, our team delved deeper into some specific areas that industry players may be interested in. In the next installment of this Market Analysis, we will analyze Congestion Revenue Rights in the ERCOT market.

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