What is ERCOT?
Founded in 1970, ERCOT is an independent, not-for-profit organization responsible for overseeing the reliable and safe transmission of electricity in Texas. ERCOT keeps the lights on for Texans and oversees the Texas wholesale and retail electric markets. For more information, go to www.ercot.com.
By statute, ERCOT is assigned the following responsibilities:
- Ensuring reliability and adequacy of regional electric network.
- Ensuring nondiscriminatory access to transmission/distribution systems for all buyers and sellers of electricity.
- Facilitating retail registration and switching.
- Ensuring accurate accounting for electricity production and delivery among the generators and wholesale buyers and sellers in the region.
ERCOT is subject to the Texas Legislature, fully regulated by the Public Utility Commission, and governed by a Board of Directors. OPUC’s Public Counsel serves on the Board as an ex-officio, voting member representing residential and small commercial consumers. For more information, go to www.ercot.com/committees/board.
The ERCOT Region is one of three North American grid interconnections located in the North American Electric Reliability Corporation (NERC) region (NERC Interconnections Map). ERCOT does not include the El Paso area, the Texas Panhandle, Northeast Texas (Longview, Marshall, and Texarkana), or Southeast Texas (Beaumont, Port Arthur, and the Woodlands) (ERCOT Region Map). The ERCOT region covers 75 percent of the land area of Texas, or approximately 200,000 square miles, and 85 percent of the state’s electricity load, or approximately 22 million Texans, or 7.5 million households.
ERCOT is the only entity of its type in the United States. No other entity performs what ERCOT does in relation to the state’s grid, wholesale, and retail market operations.
How does ERCOT impact residential and small business electricity consumers?
ERCOT keeps the lights on for Texans and oversees the Texas wholesale and retail electric markets. Most consumers do not directly interact with ERCOT; however, all consumers depend on ERCOT and market participants, including generators, transmission and distribution utilities (wires companies), and retail electricity providers, to keep the lights on through ensuring a trustworthy electric grid system.
How is ERCOT funded?
ERCOT is funded through a system administration fee that represents 98 percent of ERCOT’s total base operating revenue requirement. The fee is assessed on wholesale energy transactions and becomes part of the overall cost of electricity.
The fee does not appear on residential consumer bills; however, if it were passed directly through to the end-use customer, it would average about 42 cents per month, or $5 per year, based on 1,000 kilowatt-hour usage per month.
In total, ERCOT costs a typical residential customer $10 per year, though consumers do not see the expense as a separate item on their electric bills. ERCOT is changing the way that it manages how power is bought and sold in the wholesale electricity market to make it more efficient and transparent. These improvements, called the nodal wholesale market redesign, are also funded by an ERCOT fee and account for nearly half of the annual fee costing residential electric consumers approximately 38 cents per month, or $4.80 annually. See Nodal.
What is NERC?
Founded in 1968 by the electric utility industry to develop and promote rules and standards, or protocols, for the reliable operation of the North American transmission systems, the North American Electric Reliability Corporation (NERC) is an international, independent, self-regulatory, not-for-profit organization whose mission is to ensure the reliability of the bulk power system (BPS) in North America. The BPS includes the electric power generation facilities combined with the high-voltage transmission system, which together create and transport electricity around the continent. NERC develops and enforces reliability standards; monitors the BPS; assesses adequacy; audits owners, operators, and users for preparedness; and educates and trains industry personnel. For more information, got to www.nerc.com.
The Federal Energy Regulatory Commission (FERC) oversees NERC in the United States and regulates the interstate transmission of electricity (as well as oil and natural gas). For more information, go to www.ferc.gov.
In 2006, FERC approved NERC’s application to become the Electric Reliability Organization for the United States. In 2007, compliance with NERC Reliability Standards became the legal requirement for BPS owners, operators, and users.
How does ERCOT interact with NERC?
ERCOT is one of ten North American independent system operators/regional transmission operators (ISOs/RTOs) in the NERC region (ISO/RTO Map). ISOs are single-state or multiple state entities established by FERC Order. RTOs perform similar or expanded services across a multi-state area and have been approved by FERC. ISOs perform equivalent services but tend to be smaller in geographic size, and are not subject to FERC jurisdiction (as in Central Texas and Canada).
NERC works closely with eight regional reliability organizations whose members come from all segments of the electric industry. The Regional Entities (REs) have delegated authorities and responsibilities, as approved by FERC, to enforce NERC and regional reliability standards and perform other standards-related functions assigned by NERC. NERC oversees the regions to ensure consistency of delegated functions across North America while allowing for appropriate flexibility to accommodate regional differences. The Regional Entities also have non-statutory roles, which include working with their own members to forecast electricity demand, coordinate operations, share information, and plan for emergencies in their respective regions.
In Texas, the RE is the Texas Reliability Entity (Texas RE). Technically, ERCOT does not interact with NERC; rather, NERC interacts with the Texas RE. Texas RE ensures reliability of the BPS in ERCOT through monitoring and enforcing compliance with reliability standards for the NERC, developing regional standards, and monitoring and reporting on compliance with ERCOT protocols. For more information, go to www.texasre.org.
OPUC’s Public Counsel serves as an ex-officio, non-voting member of the Texas RE Board of Directors. For more information, go to www.texasre.org/about/governance.
What is FERC?
The Federal Energy Regulatory Commission (FERC) is an independent agency that regulates the interstate transmission of electricity, natural gas, and oil. FERC also reviews proposals to build liquefied natural gas terminals and interstate natural gas pipelines, as well as licensing hydropower projects. The federal Energy Policy Act of 2005 (EPAct) gave FERC additional responsibilities, and subjected ERCOT to FERC jurisdiction on certain issues for limited purposes. For more information, go to www.ferc.gov.
How does ERCOT interact with FERC?
For most purposes, ERCOT is not subject to FERC jurisdiction like other ISOs, since ERCOT does not provide for interstate transmission of electricity. Instead, ERCOT oversees the intrastate transmission of electricity solely within Texas. For issues arising under the federal EPAct provisions, ERCOT is accountable to the Texas Reliability Entity (Texas RE) and ultimately FERC. The Texas RE was established in 2006 to serve as the regional entity for the ERCOT region, pursuant to the reliability provisions of EPAct.
Texas Retail Electric Market
What is a retail electric market?
How is ERCOT involved in the retail electric market?
In 1999, the Texas Legislature passed Senate Bill 7 (SB7) which initiated the restructuring of the Texas retail electric market. The legislation required the creation of a competitive retail electricity market to give consumers the ability to choose their retail electric providers (REPs) starting January 1, 2002.
SB7 also required all formally, fully regulated investor-owned utilities (IOUs) to “unbundle” their generation, transmission and/or distribution, and retail functions. For each IOU, this created a separate power generation company (PGC), a separate transmission and distribution company (TDSP), and a separate retail electric provider (REP). For example, in the Dallas region, the PGC is Luminant, the TDSP is Oncor, and the affiliated REP is TXU Energy.
The customers of these IOUs who did not choose a new REP by January 1, 2002 were automatically enrolled with their existing utility’s affiliated REP. TDSPs continue to be regulated by the Public Utility Commission (PUC) (ERCOT TDSP Map).
ERCOT IOU Regions
ERCOT is charged with overseeing the transactions related to the restructuring of the electric industry, including the development and effective operation of the majority of Texas’ retail market. ERCOT is the central controller of the majority of the energy market’s activities, including power scheduling, power operations, and retail market data transactions between retailers and wire companies.
For residential and small commercial consumers, ERCOT acts as a centralized registration database that facilitates the process of customers switching between REPs. The consumer does not directly contact ERCOT. Instead, the REP contacts ERCOT with a consumer switch request, and ERCOT verifies that the new REP is certified by the PUC, registered with ERCOT, and authorized to serve the customer’s area. ERCOT notifies the customer and the REP about the impending switch. As a consumer, you should receive a postcard from ERCOT about your requested switch prior to the actual switch (Sample ERCOT Notice).
ERCOT Switch Notice
The PUC, a state agency, manages the education program for consumers regarding competitive choice in the retail electric market. Their website allows consumers to compare REP offers in their area by zip code, allows consumers to learn about retail electric choice, and provides considerations for consumer switching. For more information, see www.powertochoose.org. The PUC also provides a REP complaint scorecard.
Which regions of the ERCOT market are open to retail competition?
Areas served by former monopoly investor-owned utilities (IOUs) are open to retail competition. For example, the service territories that allow for electric choice include: AEP Texas Central and AEP Texas North, CenterPoint Energy, Oncor Electric Delivery, and Texas-New Mexico Power Company (IOU Map).
Customers of municipally-owned utilities (MOUs) and electric cooperatives (coops) are given the opportunity to also participate in retail competition if their governing bodies choose to do so.
Texas Wholesale Electric Market
What is a wholesale electric market?
In many cases, electricity is generated by a power company that ultimately will not deliver it to the end-use customer. A single megawatt (MW–the most common unit of electricity used in discussions–is generally enough power to light 750 - 1,000 homes), like any other commodity, is frequently bought and resold a number of times before finally being consumed. These transactions are considered "sales for resale," and make up the wholesale electric market.
The role of the wholesale electric market is to allow trading between generators, retailers and other financial intermediaries for short-term and future electricity delivery. Generators offer their electricity output to retailers who then re-price the electricity and take it to market.
How is ERCOT involved in the wholesale electric market?
In 1995, the Texas Legislature amended the Public Utility Regulatory Act (PURA or Texas Utilities Code) to deregulate the wholesale generation market. ERCOT restructured its organization and initiated operations as a not-for-profit Independent System Operator (ISO) on September 11, 1996. The wholesale market is open to anyone who, after securing the necessary approvals, can generate power, connect to the electric grid and find a counterparty willing to buy their electricity output. The market participants include competitive electricity suppliers and marketers that are affiliated with utilities, independent power producers not affiliated with a utility, as well as some excess generation sold by traditional, vertically integrated utilities. Individual traders, or power marketers, may also participate in buying and selling electricity at wholesale. All of these market participants compete with each other to sell power.
The ERCOT wholesale market is designed around bilateral transactions across its high-voltage transmission grid with the management of power flow based on a “nodal market.” The old, Zonal Market, including the transmission grid and associated interconnected load and generation points, was divided into four congestion zones, North, South, West, and Houston (ERCOT Congestion Zones).
ERCOT Congestion Zones
Though electricity is mostly purchased under long-term contracts, demand fluctuates daily, and to manage that fluctuation, ERCOT puts buyers and sellers of electricity together in the wholesale market. ERCOT acts similar to an air traffic controller through directing electricity “traffic” around the state from generators to customers. In deciding how to direct traffic, ERCOT uses the market price for electricity, typically choosing the cheapest bid from a generator when possible.
The zonal model was based primarily on the electricity transfer capability of the 345 kilovolt transmission system. Transmission flow studies were performed with the outcome used to group load and generation transmission points into groups of similar impact on flow across major transmission paths that reach limits during established system contingencies (load, generation dispatch outages). These major transmission paths established commercially significant constraints that became the basis to the zone formation.
Nodal Wholesale Market Design
In 2003, the Public Utility Commission (PUC) initiated a wholesale market redesign to better manage transmission congestion and provide “day-ahead” market services. Nodal is the new electric market design currently used by ERCOT.
Before Nodal was fully launched in December 1, 2010, the State of Texas was divided into four zones, or a Zonal Market Design. In the Zonal Market, congestion costs were directly assigned to zones and shared by participants in those zones; however, not all congestion was zonal. Some congestion was local. Congestion is caused when requests for power transfers across a transmission facility element, when netted, exceed the transfer capability of such elements.
Local congestion would occur within a zone, and ERCOT would utilize specific generating unit deployment for resolving local congestion. Costs of resolving local congestion were shared by those consuming the electricity. Zonal congestion would occur between congestion zones, and ERCOT utilized the balancing energy market for resolving zonal congestion. Costs of resolving zonal congestion were assigned directly to qualified scheduling entities, ERCOT market participants.
Thus, energy pricing was determined for zones, and prices only reflected zonal congestion.
In the new, Nodal Market Design, the market is be divided into 4,000 pricing “nodes,” or points of electricity entry/exit, locations where electricity is uploaded by generators or downloaded by retailers or electricity (ERCOT Nodal Map). Congestion costs are directly assigned to the identified cost causers and resolved more economically and efficiently. Energy pricing indicates the value of energy at all nodes and indicates where congestion occurs. Nodal is expected to increase pricing transparency, improve electricity dispatch efficiencies, and level the playing field between small and large generators. The design is also aimed at saving consumers money and easing traffic congestion on the transmission lines.
ERCOT Nodal Market Design
It has been estimated that the nodal system will save consumers approximately $5.6 billion over the first ten years of operation (CRA International, Update on the ERCOT Nodal Market Cost Benefit Analysis, Dec. 18, 2008, PUC Project No. 31600). It is believed that more transparent electricity pricing will result in new generation and transmission investment throughout the state in desirable locations.
For additional information on nodal, go to www.ercot.com.
The nodal market is a market change that primarily affects generators, and generators fund the market change in ERCOT at the direction of the Public Utility Commission (PUC).
ERCOT is presently collecting a nodal surcharge through a special fee from generators designed to provide recovery of costs to implement the nodal market, as mandated by the PUC. The fee is assessed to generation resources at a rate of $0.375 per megawatt-hour (effective January 2010).
The cost to residential electric consumers is approximately 38 cents per month, for an average household using 1,000 kilowatt hours per month, or $4.80 annually.
The total cost of the nodal market redesign is estimated between $530 million and $660 million.