It’s become a monthly summer ritual here in Texas: that brief pause before checking the electric bill. Sometimes, there’s a feeling of hope — perhaps the new low-watt light bulbs, the energy-efficient appliances and the constant monitoring of the air conditioning thermostat had a positive impact on the bill.
But consumer usage is only part of the equation; the energy market itself plays a role in consumer electricity costs. And as with other free markets, the law of supply and demand and a host of other variables affect prices. The resulting upticks and downturns are reflected in the ups and downs of consumers’ energy bills, if they’re not protected by a fixed-rate plan.
In Texas, the Electric Reliability Council of Texas (ERCOT) manages the flow of electric power to more than 26 million Texas customers who represent about 90 percent of the state’s total electric load. As the system operator for most of Texas, ERCOT schedules power on a massive electric grid that connects more than 46,500 miles of transmission lines and more than 650 power generation units. ERCOT also administers retail markets for 8 million Texas premises in areas with retail competition.
Fiscal Notes recently interviewed Kenan Ögelman, ERCOT’s vice president of commercial operations, to discuss ERCOT’s role in managing the Texas energy grid and its power markets.
Q: How would you describe ERCOT’s mission and role in competitive energy markets?
Ögelman: The power grid for Texas is an interconnected network that moves electricity from producers such as power plants to consumers. ERCOT matches the supply of electricity with consumer demand and ensures the grid remains stable so Texans can be sure their lights and air conditioning stay on 24/7.
Q: How did ERCOT come to manage the grid and administer its wholesale and retail electric markets?
Ögelman: As a membership-based 501(c)(4) nonprofit corporation, ERCOT is governed by a board of directors and subject to complete oversight by the Public Utility Commission of Texas (PUC) and the Texas Legislature. In 1999, the Texas Legislature passed Senate Bill 7, which allows the production and sale of electricity services, with prices determined by customer choice and the normal forces of competition.
With guidance from the Texas Legislature, the PUC adopted rules promoting the efficient and reliable operation of the energy market, allowing the fullest use of competitive auctions to procure energy, minimal cost socialization [the passing on of business costs to customers] and the economic utilization of resources. At the same time, pricing safeguards were adopted to protect the public from market failures, including market power abuse.
The PUC certified ERCOT as the independent organization to ensure the reliability and adequacy of the regional electrical network and provide access to the transmission and distribution systems for all buyers and sellers of electricity on nondiscriminatory terms. The PUC has also delegated authority to ERCOT to create operating standards within the ERCOT region, and to oversee ERCOT-administered wholesale energy markets.
Q: In what way is ERCOT’s role as an independent organization unique compared to other U.S.-managed power networks managing energy needs?
Ögelman: ERCOT is located entirely within a single-state jurisdiction, Texas, with the PUC and the Texas Legislature having exclusive oversight of the market design [essentially, the “rules” of competition within a market]. Thus, unlike other energy markets, the Federal Energy Regulatory Commission (FERC) does not have jurisdiction over our market design, but it does have some jurisdiction on reliability-related issues.
Q: How is your organization regulated?
Ögelman: First of all, we operate under the close observation of PUC. Our daily dealings are guided by the ERCOT Protocols, which were originally approved by the PUC on March 14, 2001. The ERCOT Protocols contain the scheduling, operating, planning, reliability, customer registration and settlement policies, rules, guidelines, procedures, standards and criteria of ERCOT. ERCOT is subject to FERC jurisdiction on reliability rules called the North American Electric Reliability Corp. Reliability Standards.
Q: Would you talk a little bit about ERCOT’s relationship with the Independent Market Monitor (IMM) and how that relates to Texas energy market prices?
Ögelman: The IMM operates under the PUC’s supervision and oversight. It offers independent analysis to the PUC and assists it with making judgments in the public interest regarding ERCOT’s wholesale energy markets. The IMM is independent from ERCOT and is not subject to ERCOT’s supervision regarding its monitoring and investigative activities.
The objective of the IMM is to monitor ERCOT-administered wholesale markets to detect and prevent market manipulation strategies and market power abuses by gathering and analyzing information and data regarding ERCOT-administered markets, including the behavior of market buyers and sellers, as well as ERCOT’s compliance with its own market rules.
The IMM has the authority to investigate market participants about any activities that may violate PUC or ERCOT rules regarding market manipulation that affect energy market prices. The IMM can request data from market participants or ERCOT to fulfill its monitoring responsibilities. While the IMM lacks enforcement authority, its insights inform PUC enforcement actions for market manipulation strategies and market power abuses.
Q: Would you briefly describe how ERCOT manages the energy markets?
Ögelman: In many ways, ERCOT is like a stock exchange, making sure that energy market transactions between buyers and sellers are handled accurately and efficiently.
The PUC has delegated authority to ERCOT to administer the wholesale and retail electricity markets designed to provide consumers competitive rates for electricity. ERCOT-administered wholesale electricity markets do not include the cost to deliver electricity over power lines to the customer, which remains a service provided by local utilities and is regulated by the PUC. ERCOT centrally coordinates transactions between competitive wholesale power buyers and sellers and manages the financial side of the energy market by collecting money from companies that consume power and paying the resources that produce the power.
Buyers of energy can bilaterally contract with sellers of energy at a price negotiated between them to meet the buyer’s energy obligations. ERCOT is not involved in determining the negotiated price for energy for these trades. The energy trades are presented to ERCOT for settlement. To the extent a buyer does not procure enough energy bilaterally via energy trades to meet its energy obligation, ERCOT administers a Day-Ahead Market and a Real-Time Market for energy.
In the ERCOT-administered wholesale markets, ERCOT uses nodal energy prices for resources. Nodal energy prices are location-specific marginal prices based upon resource-specific bids to provide energy. ERCOT selects the least-cost resource that will support reliable operation of the ERCOT grid. Depending on the ERCOT grid conditions, all nodal prices for resources could be the same or nodal prices can vary between resources.
Q: How does ERCOT receive the data that help determine energy market prices?
Ögelman: ERCOT incorporates data from generation resources, transmission and distribution operators and retail electric providers (REPs) representing both the willingness to buy or sell power and the complete physical network characteristics of the electric system. These data are then incorporated into models and algorithms that produce wholesale electric prices and ensure the reliable operation of the ERCOT grid. The data cover singular prices at which producers are willing to sell in addition to ratings and operational limits of all elements of the ERCOT grid, which allows for computer simulation and analysis of the grid.
The ERCOT Protocols delineate data requirements for different participants of our market. ERCOT relies on data inputs from more than 200 market participants to help maintain the accuracy of the ERCOT systems through the submission of model, market and outage data. The data are a combination of private-sector and public data sources.
Q: Please give a short explanation of the energy futures markets in layman’s terms, and how these markets can influence Texas energy costs. How do energy companies use the market pricing by ERCOT?
Ögelman: Although only a small share of the power produced in the ERCOT region is transacted exclusively in the Real-Time Market, market expectations of real-time energy prices form the basis for prices in the Day-Ahead Market and bilateral forward markets where most transactions occur.
Bilateral forward market transactions are voluntary transactions between a buyer and seller at a negotiated price for electricity. For example, an REP may agree to purchase wholesale electricity from a resource at a fixed price for a fixed term, such as all of calendar 2021. The buyer and seller will present that energy trade to ERCOT for settlement to cover some or all of the REP’s wholesale energy obligation for that customer.
Unless there are barriers preventing arbitrage of the prices between the real-time and forward markets, prices in the forward markets should be directly related to the prices in the Real-Time Market and should converge over time. Therefore, low prices in the Real-Time Market will translate to low forward prices. Likewise, price spikes in real time will increase prices in the forward markets.
An important part of a resource owner’s decision on whether to invest in additional resources and/or continue to operate current resources is the forward energy price. REPs offer energy products to retail customers based upon their costs to serve their customers during the term of the contract. The REP’s cost is based upon its procurement strategy for energy, including day-ahead, real-time and forward market energy purchases. FN