Each year, the ERCOT market’s Independent Market Monitor, or IMM, publishes a “State of the Market Report” for the previous year. The IMM is an office intended to act as an independent “watchdog” over the wholesale electric market. This role encompasses both watching the market for malfeasance — market manipulation and market power abuse — as well as making general diagnoses of how the market is performing, and how it might be improved.
This year’s State of the Market Report, issued on July 29, contains both these elements. Overall, the IMM concludes that the market performed competitively in 2014 and was not impaired by market manipulation.
Key conclusions are:
Wholesale Energy Prices Increased
As the IMM notes, wholesale energy prices in the ERCOT region increased 21% in 2014 relative to 2013. On an ERCOT-wide, load weighted average basis, 2014 saw a pricing at $40.64 per megawatt hour, compared to $33.71 per MWh in 2013. The IMM attributes this mostly to higher natural gas prices; natural gas is a key fuel in the ERCOT generation fleet, and frequently fuels the “marginal“ power plants in the market—the plants that typically set market prices. The IMM noted that natural gas prices increased 17% in 2014 compared to 2013. All else equal, these wholesale price increases would have been reflected in retail prices in 2014.
Congestion Costs Increased
Congestion occurs when more power is demanded over a transmission line than it can safely carry. That congestion is resolved by “dispatching” a different set of power plants to operate so as to reduce the need to use the line. The total cost of that re-dispatch over the total cost of what would otherwise be the most efficient plant dispatch is the cost of congestion. In 2014, the IMM notes that congestion increased 52% over 2013 levels. That congestion was mainly centered in the Houston area and in the Rio Grande Valley. ERCOT and the relevant wires utilities are both addressing this persistent congestion with large-scale transmission projects in these regions. Indeed, in the Rio Grande Valley in 2014, congestion was often caused by transmission outages that were necessitated by construction of transmission upgrades. As a result, while increased congestion costs are not good news (in that they ultimately can increase the retail rates that customers pay), the remedy for high 2014 congestion costs is already in progress.
Market Manipulation Did Not Occur in 2014
The IMM found that on a big-picture basis, the market performed competitively in 2014, and “very little evidence of potential physical withholding was found.” The IMM reached this conclusion through an analysis which showed that, when it was profitable to do so, power plants in the ERCOT region generally ran. As a result, the IMM concluded that sellers were not attempting to increase market prices by withholding power from the wholesale market.
About Chris Brewster
Mr. Brewster, an attorney for the Lloyd Gosselink law firm in Austin, represents the interests of cities at the Electric Reliability Council of Texas.