2009 power prices in ERCOT’s West zone: a mix of wind power, natural gas prices, transmission constraints, and (inefficient) congestion management practices

Michael Giberson

ERCOT reached a new peak load record last week, beating the record set just a week before. Boone Pickens is backing off a little from earlier ambitions to build the world’s largest wind power facility near Pampa, Texas. The Wall Street Journal reported recently that low natural gas prices are limiting interest in new renewable power projects. (It seems like such an obvious point that I wonder why they bothered to publish it. In any case, what has changed since they reported the same idea last October?)

Seems like a good time to follow up on earlier posts on wind power and electric power prices in ERCOT’s west zone.

In 2009 so far, power prices in ERCOT have been very low, averaging in the $22 MWh – $32 MWh range, with the West zone at the low end of that range and the Houston zone at the upper end. [All price data from the ERCOT website.] The main factor responsible for low ERCOT power prices has been low natural gas prices, but wind power is the primary reason pushing prices even lower in the West.

Natural gas fueled generators are typically the units that are “on the margin” in ERCOT, meaning the units available to adjust up or down in response to changes in demand and therefore the units most likely to be influencing the price in ERCOT’s balancing energy market.  Over the first 6 months of 2008, with natural gas prices beginning near $7 per million BTU and peaking mid-year over $13) average power prices in the West zone were about $55 MWh and Houston zone prices were over $87 MWh.  This year has seen NYMEX natural gas prices drifting from just over $4 per million BTU in January, down below $3.50, and back to about $3.85 recently.

Wind power output is up in 2009, due largely to significant wind power capacity additions in 2008 and early 2009. (2009: 2,300 MW average output; 2008: 1,916 MW)  To some extent wind power output lowers energy prices statewide.  But when wind power output is high, current transmission limits mean that not all of the power generated in the West zone can readily flow east and south where much of the state’s power consumption takes place.  Transmission limits are easily reached these days, given existing wind power capacity, so the effect of wind power on prices has been intensified in the West.

But negative prices are, surprisingly, less frequent in 2009. (Less than 14 percent of the time in 2009, compared to over 19 percent of the time during the first six months of last year.  The outcome is contrary to my projection earlier this year.)

As explained here before, negative prices in ERCOT’s West zone emerge largely due to the federal Production Tax Credit and Texas state subsidies available to wind power producers, which provide the producers incentives to continue to supply power even when they have to pay the ERCOT market to take the power away.  The subsidies lead to some economic waste in that some cheap, slow-moving baseload generators will be induced to shut down and restart much more frequently than otherwise, even though it would be cheaper overall for the wind generators to curtail instead. (But it is hard to put a good number on this economic waste because analysis of the relevant subsidies for various energy sources and associated externalities becomes very complex very quickly.)

Frequency of Negative prices by Month, ERCOT West, 2008 and 2009

2008

2009

Jan

8.61%

12.53%

Feb

18.82%

11.53%

March

33.33%

15.66%

April

20.63%

23.06%

May

19.62%

12.50%

June

16.46%

7.19%

Jan-Jun

19.55%

13.77%

What has happened in 2009 is that much more of the congestion created by high levels of wind power output in the West has been managed using reliability procedures instead of market-based procedures. Nothing sinister going on here (probably), just a result of the way the ERCOT zonal market design works (or not) to handle congestion of the transmission grid.

The zonal market design limits market-based methods for congestion management to a select number of so-called “commercially significant constraints.”  When other transmission elements become congested, operators must take recourse to non-market methods to manage the grid.  A line between the West zone and the South zone has become frequently congested this year, but no West-to-South lines are currently monitored as part of the market.  When the line approaches its limit, ERCOT operators identify a generator that can relieve the West-to-South line and then pays the generator to curtail production.  The cost of these reliability-based processes is averaged out to all consumers ERCOT-wide.

The reliability-based curtailment of power output in the West zone reduces the likelihood of congestion on the West-to-North zone elements that are part of the zonal market, which reduces the downward pressure on price in the West zone.  Without this out-of-market curtailment going on, power prices would be a lot lower on average in the West zone, and probably would be negative more often as well.

I haven’t found ERCOT data showing just how extensive this out-of-market curtailment is, but reportedly in some months this year the amount of intra-zonal congestion management has been many times the amount of market-based congestion management.  ERCOT updates its list of “commercially significant constraints” each year, and is beginning the review process for the next update, so maybe they’ll add the West-to-South line to the zonal market.  Perhaps also, data on congestion management practices will become available as part of that process.

A better solution than updating the zonal market list of constraints is to shift to a nodal market design, something that ERCOT expects to do in 2010.  A nodal market design automatically includes effectively all transmission elements as part of a market-based approach to congestion management.  The result is that congestion is more likely to be managed efficiently, and transparent price signals better reflect the value of power at different locations on the grid.

NOTE: Link to post charting ERCOT West prices, January-June 2009, including data on frequency of negative prices.

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2 thoughts on “2009 power prices in ERCOT’s West zone: a mix of wind power, natural gas prices, transmission constraints, and (inefficient) congestion management practices

  1. I once asked a CAISO official “Who are you to decide what is Commercially Significant to me and my unit?” I was there with a group encouraging conversion to nodal pricing, about a month before the crisis struck. It took only nine years… 😉

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