What is Electricity Congestion?
When discussing electric service, the term congestion comes up from time to time. While it may sound simple in concept, congestion can be a complicated subject and definitely has an impact on the price a customer pays for energy in ERCOT. Additionally, there is often more than one approach a customer can take regarding how congestion is treated on their bill. But, what is congestion? And what is the best approach for dealing with it? That can vary based on a number of circumstances.
The word “congestion” appears many times in ERCOT documents, but it is never actually defined. In many ways it is a term of art. This is an important concept to remember as the word “congestion” may have many different uses and definitions based on whatever contract or market document you may be reviewing or using.
In simple terms, congestion is when a portion or line segment of the ERCOT transmission grid becomes overloaded with electric power Overloading can cause a wire to retain heat, stretch and come in contact with other wires or structures. This can lead to shorts, reduced system integrity and possible wire breakage.
In order to maintain system integrity and safety, ERCOT may direct certain generators to either cut back or increase their production or may alter some system switching capability to help alleviate the congested segments. If generators are asked to adjust their dispatch levels, ERCOT will pay them for providing these services. These costs are passed on to end users in the market.
Under ERCOT’s nodal market design, if there is no congestion there is only one market price per zone. If congestion exists, each generation node on the system will have its own market price. The difference between the average market price of power within a zone (represented here as the Zonal Hub Price) and the average price of power at each end use node zone (represented here as the Zonal Load Zone Price) becomes the “cost of congestion” passed on to end use customers.
Why is Congestion Important?
Congestion costs are generally low, but at times can become a significant part of your energy purchase. How you treat these costs in your contracting is important. Congestion costs can be included in your energy rate or treated as an add-on to your energy rate. Which is best? That depends on a number of factors. Your Retail Electric Provider (REP) is going to be charged for congestion based on actual system conditions and prices at the time of usage. The REP can fix these costs by entering into contractual arrangements with other market players to cover all congestion costs for a fixed fee. This is really a form of congestion costs insurance.
Fixing your congestion costs by including them in your energy costs sounds attractive, but is it your best option? That depends on how much it cost to do so. Using the following chart as an example you can see how rapidly congestion costs can change from one year to the next. In this West Zone example, congestion costs are over 1 cent per kWh in 2012 but fall steadily to less than 1/10 of that amount by 2016. So, if a city were contracting in 2012 for energy purchases for 2013-2016 and wanted a fixed cost of congestion included in their rate they would probably have had well over 1 cent per kWh added to their energy price just to cover congestion costs. If they would have opted to have these costs passed through at actual cost, they would have paid approximately 75%, 50%, 18% and less than 10% of the fixed costs over that same four-year period. The potential savings over four years of opting not to fix the price of congestion in this example is shown in the following chart.
|Annual Usage in kWh||Four Year Savings|
Why is Congestion Important?
As shown above, congestion can be a considerable adder to energy costs at times. So, in determining what the most favorable approach to dealing with congestion, it is important to know what the recent costs of congestion have been as well as the longer-term historic costs of congestion for your particular load zone in ERCOT. Compare these costs to the cost adder necessary to fix congestion costs over the term of the contract. In addition, it would also be wise to learn what factors are driving congestion costs in your ERCOT load zone and whether ERCOT has projects in queue to fix these issues that will be implemented during the term of your contract.
Congestion Language in Contracts
As mentioned earlier, congestion is a word that is not strictly defined by ERCOT and, thus can mean many things to many people. Contract language can vary wildly in addressing congestion. As examples, TCAP has seen contract language in the past that stated congestion costs were included in the energy price, but the Hub to Load Zone price differential would be an adder to the energy rate. Huh? As mentioned above, the difference between Zonal Hub and Load Zone pricing is basically the addition of the “cost of congestion.” Other language in contracts may create a price re-opener or adjuster by the Seller if the costs of certain price elements, such as congestion, rise as a result of governmental or regulatory action. Since most large transmission projects and many market pricing changes are approved by the Texas Public Utility Commission, this could open the door for these price adjustments to be made increasing your “fixed price” energy cost. So a fixed price may not be so fixed after all.
As you can see, congestion costs play a significant role in determining your overall costs of electricity. It requires research and market knowledge to know how to best approach congestion cost options when contracting. It is only one of many considerations in procurement that forms the TCAP position that effective energy purchasing is much, much more than requesting REP bids and comparing the price.
Bill carefully tracks and reports market supply, pricing movements and trends to the membership and helps new members through the procurement process.
Bill, who lives in Austin, started advising us in 2001 — back when we were two separate city coalitions, the Cities Aggregation Power Project and the South Texas Aggregation Project. He has more than three decades of experience in the energy field, including high-level work in strategic and operational planning and supply management. He regularly assists TCAP with regulatory compliance matters, contract negotiations, financial analysis and more.
Bill is vice president of Austin’s ReSolved Energy Consulting, where he has served as a managing consultant since 1999. Prior to his work at ReSolved, Bill served as principal executive consultant for Navigant Consulting and in numerous positions at gas pipelines and in gas and energy marketing. Bill has degrees from both Stephen F. Austin and Texas A&M University, including a Masters of Business Administration in Public Policy Management.
If you have a technical question about the energy market, Bill’s your man. You can reach him at (512) 331-4949. His expert services are just another benefit of your TCAP membership.