By Ann de Rouffignac, OGJ Online
The Texas wholesale electricity market has flaws permitting prices to skyrocket similar to what occurred in California, a state consultant warned.
Texas wholesale prices for certain electricity services have jumped to nearly $1,000 per MWh in the middle of the night on several occasions. State regulators have said such high prices could warrant investigation.
Shmuel S. Oren, a professor at the University of California at Berkeley, warned last summer and again in February the congestion management design of the Texas market could be exploited and proposed reforms to help resolve the problem.
But the grid operator hasn’t implemented the consultant’s proposals that would limit the potential for market manipulation. Congestion occurs when too much power is scheduled to flow in one direction over a transmission line.
Oren said the congestion rules adopted by the Electric Reliability Council of Texas (ERCOT) are “prone to the same type of gaming” that California experienced. A grid operator must manage congestion by paying some generators not to produce power as scheduled to flow in one direction and pay others to step up power production in the other direction to maintain stability of the grid.
The ERCOT market is flawed because entities that schedule power, known as QSEs, can cause congestion by overscheduling generation on the export side of the constraint and underscheduling generation on the import side, Oren said.
He explained gaming occurs when the QSEs offer to turn off power in one zone and increase power in the other to relieve the congestion just created. “This creates a perverse incentive to overschedule fictitious transactions across the congestion prone interface and collect congestion relief revenues for backing off such schedules,” according to the report.
“That’s happening,” Oren said in an interview. “The interzonal congestion costs are very high.” For example, for the market day of Aug. 28 at 1 a.m., the market clearing price that ERCOT would have to pay to turn off power in the south zone was $1,000 per MWh and $499 per MWh to generators in the west zone. Similar instances have occurred for the past several weeks.
Sam Jones, executive vice president and COO of ERCOT, conceded the congestion management system “can promote gaming. I don’t know if there is any gaming going on, but I did notice more congestion west to east” during the week of Aug. 20. Market participants have said high prices are the result of thin trading in a new immature market and predicted they will moderate.
The design flaw, Oren explained, allows the congestion charges to be billed or “uplifted” to all participants in the market, while the party that created the overload receives the congestion relief payment. The amount he gets billed in “uplift” payments is only a tiny proportion of what he receives in compensation for not running his plants, said Oren.
After California generators were discovered collecting a substantial profit on energy that was never produced on Path 26 in 1999, Oren observed in his report to the Texas PUC, the California Independent System Operator created a special zone to correct the problem.
At the PUC’s request, Oren drew up a list of recommendations to correct similar problems in the Texas market. The PUC accepted the proposals, he said, but ERCOT hasn’t implemented the changes yet.
Oren said the ERCOT market subject to potential manipulation is a very small percentage of the total power bought and sold in the region controlled by the Texas grid operator, so there will be little impact on consumers for now. But the market clearing prices that are emerging do “give a price signal” to those negotiating long-term contracts, he said.
The ERCOT market clears similarly to California’s, but Oren said dissimilarities between Texas and California also exist. He said excess generating capacity should shield Texas from California-style blackouts. Moreover, long-term contracts account for most of the power bought and sold in Texas, which should hold electricity prices down, he said.
Oren noted that the California market “worked great” for its first 2 years, until demand caught up with the supply and market failure ensued.
Ann de Rouffignac is a senior writer with OGJ Online (www.ogj.com), the electronic extension of Oil & Gas Journal, PennWell’s weekly magazine of international petroleum news and technology. She may be contacted at firstname.lastname@example.org.