The Continuing Evolution of
the ERCOT Market Design:
Nodal and Beyond
presented at
The University of Texas School of Law
Gas and Power Institute
September 24, 2010
Houston, Texas
Mark Bruce, Principal
Stratus Energy Group
Overview
1. Key Elements of the ERCOT Nodal Market Design
2. ERCOT Nodal Market Outcomes to Watch
3. Post-Nodal Market Design Changes
4. CREZ Implementation and Wind Integration
5. Beyond Wind and Nodal: Other Emerging Technology Impacts
6. Long-Term Resource Adequacy
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1. Key Elements of the ERCOT Nodal Market Design
Locational Marginal Pricing:
The transition from a zonal market clearing methodology to a locational marginal pricing methodology should
provide more accurate and geographically specific price signals where generation and transmission solutions
provide the greatest value to the system. LMP pricing should also generally lower wholesale electricity prices
across ERCOT by paying each Resource within a zone its nodal price, rather than paying all Resources within a
zone the highest price accepted within that zone for each interval.
Unit-Specific Security-Constrained Economic Dispatch (SCED):
The transition from zonal portfolio dispatch to unit-specific dispatch while respecting the Real Time physical limits of
the system should tend to optimize the economic deployment of Resources to meet demand by centralizing the unit
dispatch decision-making and basing such decisions strictly upon locational shift factors and unit-specific energy
offer curves.
Voluntary Day-Ahead Market:
Today’s zonal market is largely a bilateral market; roughly 5% of all energy is procured in the Balancing Energy
market, which is similar to a spot market. The nodal market design includes a Day Ahead Market which will operate
in addition to the bilateral and Real Time markets. The additional of a Day Ahead Market should enable greater
price transparency and dampen Real Time market volatility.
Co-optimization of Energy and Ancillary Services:
In today’s zonal market, ERCOT procures Energy and Ancillary Services independent of one another. In the nodal
market, ERCOT will procure Energy and Ancillary Services at the same time and will consider whether Ancillary
Services can be provided by units which are already committed to providing Energy. This will likely result in more
efficient dispatch of Resources as ERCOT will be less likely to command a Resource to start up just to provide
Ancillary Services.
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1. Key Elements of the ERCOT Nodal Market Design
Transition from zonal pricing
mechanism to Locational Marginal
Pricing (aka LMP or “nodal pricing”)
A fundamental aspect of the Texas
Nodal Market transition is the move to a
more granular energy pricing
methodology.
The figure at left illustrates the four
congestion management zones used
today by ERCOT. The zones are
defined by certain transmission
elements known as Commercially
Significant Constraints, or CSCs.
As ERCOT accepts offers and instructs
generators to increase or decrease
production on either side of the CSCs to
manage the congested interfaces,
prices are cleared for the entire zone.
While generally reflective of the cost of
energy dispatch at key points on the
system, the zonal price clearing
mechanism can sometimes inflate
prices by failing to more granularly price
energy at low-cost resource injection
points in uncongested areas within each
zone.
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1. Key Elements of the ERCOT Nodal Market Design
Persistent transmission congestion can produce widespread high prices under the zonal market model. The same
system conditions under a nodal market model, however, may produce high prices which are much more localized and
less persistent.
The figures below were produced by Potomac Economics, the Independent Market Monitor for the ERCOT Region.
The distribution of average prices during the extreme North to South congestion event of late Spring 2008 are shown
for both the actual zonal model results (left) and simulated nodal market results for the same event (right).
Potomac Economics estimated that during the few weeks of this particular persistent congestion event, use of the nodal
market model would have reduced the annual cost of energy for Texas consumers between $87-175 million.
Source: Potomac Economics, ERCOT 2008 State of the Market Report, pp. 85-86.
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2. ERCOT Nodal Market Outcomes to Watch
Accuracy of price signals
A key task of nodal systems is produce correct prices at Resource nodes and Load Zones. Accurate price signals are
necessary to provide the right incentives for units to commit and de-commit from the market as the need for energy
and ancillary services at various points on the power grid changes throughout the course of an operating day.
Efficiency of SCED solutions
A fundamental reason the Public Utility Commission of Texas ordered the nodal market conversion was to capture the
promised efficiencies of centralized, unit-specific dispatch of generation Resources, as exemplified on the previous
page.
Participation in Day Ahead Market and convergence between Day Ahead and Real Time pricing
The new Day Ahead Market for energy and ancillary services is voluntary, not mandatory. While there are compelling
incentives for Resource owners to participate (such as certainty of unit commitment and price), there are also some
risks to that participation (such as Resource Imbalance charges for renewable generators). Market watchers will be
looking for robust participation in the Day Ahead Market which should, in turn, result in convergence between Day
Ahead and Real Time pricing. Consistent and wide divergence between the two will be a sign that the market is not
optimizing system dispatch.
Separation between gas and power prices?
Since the beginning of the ERCOT single control area in 2001, there has been a consistent relationship between the
prices of natural gas and wholesale power. Because the capacity of solid fuel units (nuclear, coal, and lignite) is
roughly equal to system minimum load, natural gas-fired units have typically been on the margin for most operating
hours. The significant penetration levels of wind generation are changing this formula and market participants may
soon witness extended periods where gas and power prices diverge.
The test: fuel-adjusted, delivered energy price to Texas consumers
For the nodal market to be judged successful (and for ERCOT and the PUCT to avoid the ire of the Texas Legislature)
the retail price of electricity – adjusted for fuel costs – needs to fall. This is the key test of the nodal market.
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