What is Electricity Congestion?

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 chart above 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 in 2018 are almost one cent per kWh. Assuming you could lock down a five-year contact which included congestion at the 2018 rate, you would have been rewarded with savings in 2019 and 2020 as congestion costs were rising. But in 2021 and 2022, you would have overpaid as actual congestion costs were significantly less. 2023 realized congestion costs similar to the 2018 embedded in the five-year contract rate. In this example, the customer avoided excess costs in 2019 and 2020, but they also relinquished significant potential savings in 2021 and 2022. In this example the customer probably netted out to a fairly neutral position for congestion costs over the course of the contract.

But let’s look at an example from another ERCOT zone.

In this example, South Zone congestion starts off very high and becomes significantly lower over time. As in the last example, we will assume that a customer can fix their congestion costs within their energy rate for a five-year contract (2019-2023) at the 2018 rate. In this example, the customer lost some advantage in 2019 as actual congestion costs were lower than their contracted rate. In 2020, actual costs were a bit higher and the customer enjoyed some savings (as depicted by the green area). From 2021 through 2023 however congestion costs in the South zone were significantly lower than the assumed contract rate and the customer incurred a large amount of costs they could have avoided by having a contract that passed through actual congestion costs as opposed to fixing these costs in the energy rate. In 2022 and 2023 the bars extend below the zero line on the X axis as congestion costs were actually negative and ERCOT would have paid the customer a small amount (the area below the zero point on the Y-axis). In this example, the customer incurred much higher congestion costs by fixing these costs in their rate as opposed to paying these costs on an as occurred basis (often called “floating” the costs).

The matrix below shows the excess costs over the course of a five year contact by fixing the congestion costs. While this example shows excess costs being incurred by fixing the price, the opposite position of significant savings are also a possibility.

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 cost of congestion has 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.

Determining the best approach for paying congestion costs requires some market knowledge and research to make the best decision for your organization. Other factors, such as risk tolerance and anticipated future grid dynamics also play an important role.

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.” Contracts can also use words like “Basis” or other terms to refer to what we are calling congestion in the ERCOT market.

Contracts may also contain language that creates 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.