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 on the grid there is only one market price for all of ERCOT. 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.

Historic Congestion Costs: West Zone

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.

Historic Congestion Costs: South 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.

Annual Usage in kWh West Zone South Zone
2,000,000 $10,352 $19,785
10,000,000 $51,762 $98,927
50,000,000 $258,809 $494,637

Positive $ are excess costs, negative $ are 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 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.

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.” 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.

Summary

In summary, congestion costs may 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 Starnes

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.