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May 14, 2015

Electricity Market Reform: Why Texas Could be Next


While all eyes have lately been focused on places like New York, California, and Hawaii, last month, the opening bell in Texas for that state’s “electric power market 2.0” began with little more than an energy-wonk whisper. It came as a proposed report outline from the Texas grid operator’s (ERCOT) staff. That may seem insignificant, but ERCOT’s larger rule revisions often start with, and tie directly to, concept reports. So this forthcoming paper could indeed be the starting gun for major new DER market participation.

Just a few days before the ERCOT proposal, RMI, HOMER Energy, and partners released The Economics of Load Defection. It forecasted solar-plus-storage economics outcompeting grid power for increasing and eventually substantial portions of customers’ load in the years ahead. That underscored a growing urgency for changes in distributed energy resource (DER) pricing, utility business models, and/or regulatory structures to allow for better consumer value and grid participation of DERs. ERCOT’s actions, if adopted, should cement Texas’s path toward an integrated grid (see upper path, below).

Texas’s approach is significant for two reasons:

1.  Texas can enable market participation through aggregation: Importantly, this proposal by ERCOT staff suggests very practical and achievable market changes that could create registration pathways for DERs. This would allow the developers of DER projects to register and qualify their assets with ERCOT, including as aggregations of DERs, thus enabling fuller and more profitable DER participation in the wholesale market.

2.  Texas can use pricing to help guide DER operations: The ERCOT market participation models are effectively front-of-the-meter pricing reforms for both export and import.

ERCOT—A fertile market environment

Unless also involved in the hot utility-scale wind or solar project development market in Texas, those in the DER business might not have paid much attention to ERCOT. With all of the market opportunities in California, in the mid-Atlantic grid (PJM), Hawaii, and in New York gaining recent market attention, as well as difficult yet economically attractive regulated utility territory solar markets of Arizona, Colorado, and North Carolina, Texas has been portrayed as the sleeping giant of DER markets. That should now change.

The deregulated market territory of ERCOT covers about 75 percent of Texas’s landmass and about 90 percent of its load. Operating as a grid (the Texas Reliability Entity grid) that is distinct from the other two major U.S. grids (the Western Interconnect and Eastern Interconnect), ERCOT is not bound by FERC jurisdiction, due to minor interstate trade across very limited DC tie-ins to only one other regional transmission organization (RTO), the Southwest Power Pool (SPP). Thus, ERCOT’s market rule-making process is the most flexible in the nation. If something improves electric reliability and market operations, it likely can be done.

ERCOT features 100 percent retail competition in the majority of the population it covers, including around the state’s two largest cities, Houston and Dallas. In these metro areas, utilities as we usually think of them are just “wires-only companies” that own transmission and distribution (T&D) infrastructure, while the companies to whom customers pay their power bills are competitive retail service providers. The latter have historically been basically energy trading firms that compete via varying pricing levels and structures in customer offerings (e.g., free mornings and nights!). 

Exceptions, of course, do exist. For example, the next two largest cities, San Antonio and Austin, are in monopoly T&D and retail service territories of the municipal utilities of CPS and Austin Energy, respectively. In addition, some of the highly populated area west and south of Austin is under the monopoly retail service of the largest cooperative utility in the U.S., Pedernales Electric Cooperative (PEC). Nevertheless, Texas remains a fertile market environment for DERs.

Opportunities for DER market participation

ERCOT’s wholesale open access power market features about six basic products:

  • Day ahead
  • Real-time
  • Regulation (immediate responding resources—energy production up or reduction down)
  • Responsive (or “spinning”) reserve (fast, but slower than regulation)
  • Non-spin (slowest, but still relatively quick, responding balancing power)
  • Emergency Response Service (RES)

* Not counted here as separate products, ERCOT also has energy-related products of medium-term (out to 2 years) congestion futures contracts as well as a day-head congestion market

ERCOT determines market pricing at about 10,000 nodes (locational marginal pricing points (LMPs)), with market participants settled at about 900 settlement points based on nearby LMP averages. A settlement point pricing contour map (simplified to ~150 points instead of ~900 for visual presentation purposes) from ERCOT is presented above.

Competitive retail service providers pay market pricing based on four different load zone prices (West, South, North, and Houston), and there are four other load zone prices, including for Austin Energy, PEC (via the Lower Colorado River Authority), and CPS.

So with ~900 settlement points viable for generators, but just 8 points available for pricing to most loads, the geographic pricing optionality for generators to make in their siting decisions dwarfs that of loads and the DERs that sit on the premises of those loads. Yet there’s an opportunity present in those ~900 settlement points. e-Lab’s Rate Design for the Distribution Edge advocated locational granularity (i.e., geographic variability) as one of three vectors for increasing rate sophistication to promote more optimal grid deployment of DERs. ERCOT’s new rules may begin to rebalance this situation, yielding greater geographic pricing options for DERs.

Proposed DER market participation

ERCOT staff has proposed registration pathways that will allow individual DERs—and, more likely, DER aggregators—to more easily qualify and register in the wholesale market. ERCOT’s new effort isn’t about a completely new market structure, but is about augmenting existing market products to be accessible to substantially more market participants.

ERCOT has proposed three market participation types, of which one would be selected upon registration with ERCOT:

  • 1. DER Minimal
  • 2. DER Light
  • 3. DER Heavy

1. DER Minimal

DER Minimal is basically “business as usual” though with some improvements in current rules. ERCOT has already made some intriguing progress on DER participation in the ERCOT wholesale market, and in fact “minimal” for ERCOT may be ahead of other ISOs/RTOs in some respects. It’s thus fair to say they’re already past the “1.0” state of electricity markets. Notably, they already have created the following ways for DERs to earn revenue by participating in the “front-of-the-meter” ERCOT wholesale market.

  • Load Resource (LR)—Available to >100 kW, albeit suited to loads that can afford and manage the ERCOT registrations by themselves. These loads can participate as an independent market participant and are often quite large (many MWs).
  • Aggregated Load Resource (ALR)—A market participant type created in 2014, ALR allows a mix of different residential and commercial loads to be aggregated and registered as a single resource, primarily for demand response into the real-time energy market and non-spin. 

2. DER Light

The proposed DER Light registration type allows for improvements in aggregation platforms, likely opening up better two-way distributed resource (e.g., storage) participation. Notably, geographically varied pricing opens up substantially, from load zones to LMP-based pricing.

3. DER Heavy

The most progressive registration type proposed, DER Heavy should build upon the advancements of DER Light and further open up DER market participation, including within the two fastest grid balancing markets, regulation and responsive reserve. Also, geographically varied pricing may grow further in optionality, with perhaps greater geographic specificity than exists anywhere in the ERCOT market today

The near-term road ahead

While more technocratic and less stomach-turning than legislative politics or PUC filings, rule making within the nonprofit ISOs/RTOs, including ERCOT, involves a lot of back-and-forth rule design vetting, clever solution brainstorming, and review and re-review by various working groups and committees.
The measures of success from this original scoping by ERCOT staff to new cemented rules will largely depend on intelligent and thoughtful information sharing of businesses interested in DER market opportunities. It’s a fair assumption that if rule promulgation is solely left to parties that don’t intend to make money via DERs (e.g., current TX coal plant operators), the outcomes are likely to be underwhelming. So if businesses would like their distributed energy solutions to get their fair slice of the ~70 GW peak load, ~350 TWh annual total-load-and-growing ERCOT market, come on down to Texas and share your expertise during this critical rule-making period.

Dan Seif and Chad Blevins are senior consultants with the clean energy consultancy and law firm, The Butler Firm, PLLC in Austin, TX. Chad Blevins is the Chair of ERCOT’s Emerging Technologies Working Group. Dan Seif is a coauthor on The Economics of Load Defection.

Credits: Image 1: Shutterstock. Slide 1 Source: RMI and Texas. Slide 2 Source: ERCOT Slides 3–5 Source: The Butler Firm

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