Special Report: ERCOT Congestion

We are a consultant with experience with financial power. We constantly monitor all components of power price inclusive of basis. Recognizing and understanding the risks involved with power delivery is at the heart of this offering.

At the end of December 2010, ERCOT switched from a zonal jurisdiction to a nodal one, joining the practice for other U.S. jurisdictions. The change was made to provide transparency to where power is sent from generators, identifying constraints that occur so costs may be allocated. ERCOT offered the following comparisons in its decision to change:

Zonal vs. Nodal
Several limitations exist with the current zonal model:

Zonal Market

• Insufficient price transparency

• Resources grouped by portfolio

• Indirect assignment of local congestion

Nodal Market

• Improved price signals

• Improved dispatch efficiencies

• Direct assignment of local congestion

http://www.ercot.org/about/wc/zvn/index.html

Zonal map of ERCOT:

Nodal map of ERCOT:

Nodal pricing has two pieces: Trade Hub and Load Zone. Trade Hubs are the same as Zonal, with Load Zone nodes added to identify delivery costs to end-user. If there is no constraint to delivery then there’s no change in cost. However, should there be obstacles to delivery (congestion) and a more expensive path required, then Trade Zone pricing will be an additional cost. The difference between the Trade Hub and Load Zone is the “basis”, i.e., the cost of congestion. Algorithms provide the price of congestion and any additional costs are identified and assigned.

Most congestion is an insignificant cost that loads usually elect to “pass-through.” However, occasionally there are extraordinary delivery costs that are noticeable enough to raise the question of risk that might be managed. The possible answers to “spikes” in cost include the following:

• REPs will offer to lock basis for a set cost, assuming the risk. Does the cost make sense financially?

• Loads may have an onsite generation that may be operated at a cost less than the congestion charge.

• Loads may have storage on site that may be drawn upon at a cost less than the congestion charge.

• Loads may have the optionality to reduce usage.

• Loads may have variations on the practices listed above at a cost less than the congestion charge.

Basis (congestion) is a financial response to the physical constraints of power delivery. It is also a business within itself. Congestion Revenue Rights (CRR) is a significant piece of this business regarding transmission congestion.

Congestion Revenue Rights

A Congestion Revenue Right (CRR) is a financial instrument that results in a charge or a payment to the owner when the ERCOT transmission grid is congested in the Day Ahead Market (DAM). CRRs may be used as either a financial hedge or a financial investment. When used as a hedge, a CRR locks in the price of congestion at the purchase price of the CRR. When purchased as an investment, it may be used as a financial tool to speculate whether the congestion rent will be greater than the purchase price.

The main purposes of the ERCOT CRR market are to:

• Support a liquid energy market by providing tradable financial instruments for the hedging of transmission congestion charges

• Allow market participants to eliminate or greatly reduce the cost uncertainties resulting from transmission congestion charges

• Encourage competitive energy trading, where the costs of congestion might otherwise be an impediment

  http://www.ercot.com/mktinfo/crr
  
  Managing congestion risk has many paths with the objective of mitigating such risk. One way is for a third party to counsel and/or manage alternatives that monetize existing assets (onsite generation, storage, etc.) or design a strategy to enable such monetization. Another path is getting a quote from the REP to lock basis at some price. Deciding the advisability of such locks requires analysis as it equates to the cost of insurance.
  Examples of congestion risk and how they can be managed should help this discussion. It is often the case that congestion risks aren’t reviewed unless there’s some “spike” that increase costs to a meaningful amount. (It is seldom that basis is a credit, but not often) As these spikes are one-offs, the damage is done and knee jerk responses often occur without meaningful answers. Such eventualities incited us to have this discussion.

  
  Below is a table presenting the basis for each zone from January 2020 through August. Please note that prices are benign save for the ones highlighted in yellow. They’re from West and South zones, which are typically the ones most susceptible to spikes. Why? Isolated loads, weather extremes, generation outages, unexpected events, among others.

August Clear: Please note this is in MWh.

Houston – $0.02
North – $0.19
South – $26.65
West – -0.05

Looking at the South zone, we can see that August basis was $26.65, a number that is near energy cost, and an obvious problem. Looking at locking basis so this thing doesn’t remain a threat means deciding whether a lock is any better. Quotes will likely be the REP’s price that they can manage economically. It will likely range $3 - $5 as this would be charged each month, so 3 x 12 = 36 or 5 x 12 = 60. Whatever the quote is, you now have the means to determine the cost of insurance. There are REPs who can beat competitors because of their assets and location. Looking for this is a worthwhile pursuit.

The bottom line is transparency. Knowing that another risk exists helps in managing all risks. Eventually, storage will be available that will help resolve this issue to some extent. More infrastructure will help as well. It will be a changing landscape, so staying abreast is important.