By Vikram Janardhan, Bob Fesmire,
William L. Rutz, ABB Inc.
The Texas Electric Choice Act, signed in 1999 by then Gov. George W. Bush, cleared the way for the deregulation of the state’s electricity market. A pilot market is being inaugurated following bumpy market trials in May, June and July. At press time, there were 30 organizations certified as
Qualified Scheduling Entities (QSEs) to participate in the restructured Texas market. Many questions abound, however, about how these organizations will make money and what information technology (IT) capabilities they will need to support their profit strategy.
A market unlike any other
The Electric Reliability Council of Texas (ERCOT) presides over a unique market that has a number of key differences with others in North America. First, with the exception of two DC interties to the Southwest Power Pool, ERCOT is an electrical island, a private power grid that does not fall under the jurisdiction of the Federal Energy Regulatory Commission. Second, under Texas’ deregulation scheme, the ERCOT ISO will not handle market settlements; it will not create a central power exchange or an auctions market for wholesale power; and it will not create a scheme for financial transmission rights (FTRs) unless congestion charges exceed $20 million in a given year. Congestion management costs will be recovered by socializing the uplift charges, and the market will rely primarily on bilateral contracts. Estimated at around $16 billion, ERCOT is second only to California in market size.
A QSE has several fundamental responsibilities in the ERCOT market. Each QSE must: balance its load obligations with generation; either self-provide or pay for required ancillary services; make mandatory bids into ERCOT’s balancing energy market (BEM); submit its schedules and bids using ERCOT’s communication protocols; and respond to ERCOT notification and deployment messages. In addition, a QSE may make bids, above the minimum requirements, into several balancing energy and ancillary service markets.
Unlike most other ISOs that use spreadsheet-based formats for communications with QSEs, ERCOT has adopted XML (eXtensible Markup Language), a relatively new protocol, and has unveiled a Web-based portal, which supports selected communication functions. However, many market participants have found the portal cumbersome in a commercial environment. As a result, 24 of the 30 QSEs have elected to either procure or implement IT systems to send and receive the XML-based messages on an automated basis.
QSE systems that enable ERCOT communications have a lot riding on them. ERCOT requires a large amount of information to be submitted on a next-day and next-hour basis while notifications and deployments from ERCOT are unscheduled. QSE systems must facilitate the QSE’s business processes while supporting ISO communications.
Arbitrage of the uncertain
QSEs have essentially three ways to make money in the ERCOT market: from differences between scheduled and actual loads via the BEM and the ancillary services market; from adjustments made to their load/generation balance in near-real time under the Regulation Market; and by responding to unforeseen events such as outages. To get an idea of how these opportunities arise and the IT systems QSEs need to address them, let’s step into the shoes of a QSE for one day’s cycle of activity.
Base schedule. It’s January 2002, and the Texas retail energy market has opened to full competition. Your first task is to submit a base schedule to the ISO for tomorrow’s load and generation based upon the needs of the retail energy providers you represent and the capacity of the generation assets under your control. This forecast must be made in 15-minute intervals and include specific values for each of the transmission zones in the state.
You need a unit commitment package (with security-constrained capability if you schedule assets in different congestion zones) that will allow you to optimize your generation on the basis of the cost curve for each unit and the balancing of power imports with native generation.
Opportunity 1: Participate in Balancing Energy Market. During the day, the ISO compares the collective load and generation forecasts from all market participants against what is actually happening on the grid. When imbalances or congestion points are identified, the ISO clears the next-hour BEM in which you have placed bids. The ISO then pushes XML messages to QSEs with balancing energy awards instructing them to ramp up or down. The ISO pays you on the basis of the market clearing price and your ability to respond to these requests in a timely manner (within 10 minutes).
The catch is that the ISO sends these signals in a zonal portfolio-you must treat each of the service zones in which you do business as an island and adjust loads and generation independently for each. The ISO also sends congestion notification signals to relieve bottlenecks between zones and within a single zone. In the case of intra-zonal congestion, the ISO commands specific generation units to ramp up or down on the basis of costs per MW figures supplied by QSEs for each of their generation facilities.
As a QSE, you can profit from contracts that match load obligations with supply from your own generators, and you can further contract to supply other loads or purchase power from other QSEs. The contracts can be very long-term or can be as short-term as next-hour.
If ERCOT markets follow the experience of other ISO market start-ups, the Balancing Energy Market may prove highly volatile in the early going. The volatility may be ERCOT-wide or it may be local (due to congestion). In such a situation, the QSEs with the most flexible generation stand to profit by exploiting temporary price spikes.
You need a portfolio management system that can make balancing energy bids, receive balancing energy awards, and allocate the ISO deployment signals using the most efficient manipulation of load and generation. You need the ability to do this for each zone independently, and of course, you need to do it quickly. You must also develop cost/MW figures for each of your units, keeping in mind that units with lower cost are more attractive to the ISO for congestion management.
Opportunity 2: Participate in the Regulation Market. In order to keep the load and generation in balance, the ISO must make small adjustments in generation very quickly. As a QSE, you have the opportunity to bid supply assets into a Regulation
Market, which the ISO operates for frequency-control purposes.
You need an IT platform to facilitate the process. In addition to handling the data communications for the ISO to control your supply portfolio, you’ll also want to monitor the process and integrate it with your overall operations planning. Regulation deployment signals are sent on a portfolio basis, so your IT system must instantly allocate the net up/down signal to generators that you control. The system must also follow ERCOT’s unique schedule ramping formulas.
Opportunity 3: Respond to Unforeseen Events. Lightning temporarily outages a transmission circuit; a baseball game goes twelve innings; a software glitch causes the HVAC system in a 40-story building to shut down. Any of these unpredictable events could have potentially serious implications for the ISO’s efforts to balance system load, and present QSEs with a sudden opportunity. Whether realized via the BEM or the Regulation Market, gains achieved as a result of unforeseen events will be predicated on your ability to respond quickly.
You need an IT platform that allows you to understand immediately what options are available to you; understand the costs associated with those options; and execute any of them rapidly.
Form follows function
When it comes to succeeding in the ERCOT market, it’s evident that a QSE needs to have IT tools at its disposal to respond quickly-and intelligently-to changing market conditions, to maintain a precise understanding of one’s costs, and to apply that understanding to decisions made in an automated, real-time environment. But there is an important distinction to be made: the IT investments a QSE makes and indeed its very participation in adjustment markets should be driven by the company’s overall profit strategy, not the other way around. The QSE’s IT platform is a tool, and should be regarded as a means to an end, which is in turn determined from a business-rather than strictly technological-standpoint. A QSE with an opportunistic stance on balancing energy and ancillary markets, and with the right generation and IT systems can position itself for success in the Texas market.
Janardhan, group marketing manager, can be reached at firstname.lastname@example.org. Fesmire, direct marketing manager, can be reached at email@example.com. Rutz, project manager, can be reached at firstname.lastname@example.org.