1 Economic Dispatch Sub-Committee Meeting Ross Baldick Department of Electrical and Computer Engineering The University of Texas at Austin September 24, 2004

2 Overview  “Economic dispatch” and the nexus with “nodal pricing,”  The current state of the ERCOT market and its drawbacks: –Lack of transparent prices, –Poor system-wide coordination of generator decisions, –Poor signals for generation expansion,  The advantages of economic dispatch and nodal prices for ERCOT: –Transparent prices, –Coordinated operation of generation, –Signals for market-based generation expansion.

3 Outline I  What are the benefits of economic dispatch?  What is nodal pricing?

4 Purpose and benefits of economic dispatch.  Minimize total fuel costs by maximizing use of most efficient generators to meet demand,  Integrate all operational and economic issues ERCOT-wide: –Transmission limits (“nodal prices”),  Newer, more efficient generators: –Produce less emissions, –Save natural resources.

5 What is nodal pricing?  Price energy to reflect transmission constraints,  Basic principle is to price energy at the cost of serving an additional MW of demand: –In absence of transmission constraints (and losses), price is uniform throughout system, –With transmission constraints, price varies by location, so also called “locational pricing.”  Nodal prices reflect the cost of serving demand at each location: –Align system needs with financial incentives, –Provide incentives for new generators to locate where energy is most valuable.

6 Outline II  Do we have ERCOT-wide economic dispatch today?  Why not?  Cost savings with ERCOT-wide economic dispatch.  Achieving the savings of ERCOT-wide economic dispatch.  Environmental advantages.

7 Do we have ERCOT-wide economic dispatch today?  Individual firms (“Qualifying Scheduling Entities” or QSEs) may achieve economic dispatch within their individual portfolios: –To meet their bilateral contract obligations, –Just as traditional utilities met their demand in ERCOT. G G G G G G G Firm 1 Firm 2 Firm 3

8 Do we have ERCOT-wide economic dispatch today? No.  But more savings are possible if economic dispatch is performed across all of ERCOT: –Back off (or turn off) generators that are more expensive, –Increase production (or turn on) at less expensive generators, –While satisfying transmission limits. G G G G G G G Back off more expensive Increase production at less expensive

9 Why can’t firms achieve ERCOT-wide economic dispatch today? 1.Transmission limits: Impose complicated limitations on energy delivery, 2.Portfolio-based dispatch in the balancing market: Solves zonal congestion but can create local congestion, 3.Planning for start-up of generation: Efficient generation must be committed day-ahead, 4.Limited coordination between firms: Firms cannot coordinate trades to minimize costs.  Each prevents ERCOT-wide economic dispatch: See appendix for details.

10 Cost savings with ERCOT-wide economic dispatch.  To get a full answer we need to quantify the cost of transmission and other operational limits: –PUCT sponsored cost/benefit study should address this in detail,  However, the thousands of MW of combined-cycle gas turbine (CCGT) plant recently installed in ERCOT provide an example of the possible savings: –Much of this capacity is not being fully utilized, –An example is the two-year old, American National Power plant in Hays County that has recently been shut down.

11 Cost savings with ERCOT-wide economic dispatch.  Combined-cycle uses about 30% less fuel than older gas-fired boilers: –But gas-fired boilers often generate in ERCOT while combined-cycle is not being fully utilized,  With ERCOT-wide economic dispatch, combined- cycle will be more fully utilized: –Suppose that just 250 MW of gas-fired boiler production was displaced by combined-cycle generation for 2000 hours per year, at a gas price of $5 per million Btu, –The savings would be $7.5 million per year for this small change alone! –Total savings likely to be much more!

12 Achieving the savings of ERCOT- wide economic dispatch.  ERCOT needs a day-ahead economic dispatch process with nodal pricing: –Generator owners submit to ERCOT unit-specific offers to generate at their individual plants, –ERCOT finds the best dispatch decisions to minimize total offer prices, taking into consideration all transmission and operational constraints, –Energy is sold at nodal prices, –Gets the right generation mix committed day-ahead,  ERCOT can use all the offers proactively to choose the right generation mix overall rather than reacting at the last minute to uncoordinated decisions by individual firms.

13 Environmental issues.  As well as being more efficient than gas- fired boilers, new combined-cycle plants have very low emissions,  Greater use of new combined-cycle plant will reduce emissions in Texas because: –Less fuel is burned (in example, 30% less fuel), –Less emissions per unit fuel used (50% to 90% less emissions per unit fuel),  Multiplicative effect means reduction in emissions by 65% or more!

14 Outline III  Cost savings versus price changes,  How would DFW retail rates change?

15 Cost savings versus price changes.  Economic dispatch of competing generation will yield lower overall costs to meet demand in ERCOT: –The “pie” of total resource cost to generate will become smaller under day-ahead economic dispatch, –Average prices across ERCOT will decrease,  The DFW local congestion subsidy may be removed: –DFW retail customers are currently cross-subsidized, since the cost of solving DFW local congestion is “uplifted” to all ERCOT customers.

16 How would DFW retail rates change if cross-subsidies were removed?  Claims of doubling of retail rates are gross exaggerations! –Based on unrealistic assumptions about running inefficient DFW generators, –Based on incorrect assessment of the effect of wholesale energy price changes on retail rates,  Estimates based on 2003 local congestion cost data suggest a less than 3% change in retail rates.  Nodal pricing provides incentives to lower the local congestion costs and for new investment in DFW that will reduce DFW wholesale prices.

17 Outline IV  Summary of advantages of day-ahead economic dispatch and nodal prices,  The cost of setting up the new market,  Conclusion.

18 Summary of advantages of day-ahead economic dispatch and nodal prices.  Transparent nodal prices for a much larger fraction of electric energy sold in Texas: –Better decisions about contracting, –Keener competition because everyone can see the going price for electricity,  Better coordination ERCOT-wide allows for more use of efficient combined-cycle generation: –Lower the overall cost of producing electricity in ERCOT and reduce emissions,  Provides signals for market-based generation expansion in the right locations: –Incentives to locate where energy is most needed.

19 The cost of setting up the new market.  Context: –Annual retail sales in ERCOT are $20-30 billion, –Annual capital expenditures by ERCOT around $50-60 million,  Setting up the nodal market may cost on the order of $100 million: –It is a one-time charge, –Around 40% of annual local congestion costs, –Around half a percent of annual retail sales.

20 Conclusion  Coordinated ERCOT-wide day-ahead economic dispatch and nodal pricing is the optimal solution: –Best economics, –Best environmental approach, –Best use of natural resources,  Supporting day-ahead economic dispatch and nodal pricing is good for Texas.

21 Appendix: Why can’t firms achieve ERCOT-wide economic dispatch? 1.Transmission limits: Impose complicated limitations on energy delivery, 2.Portfolio-based dispatch in the balancing market: Solves zonal congestion but can create local congestion, 3.Planning for start-up of generation: Efficient generation must be committed day-ahead, 4.Limited coordination between firms: Firms cannot coordinate trades to minimize costs.  Each prevents ERCOT-wide economic dispatch.

22 Why can’t firms achieve ERCOT-wide economic dispatch today? 1. Transmission limits impose complicated, inter- related limitations on the deliverability of energy: –The (inter)-“zonal” price signals used in ERCOT today are too coarse to represent all these limits, –Limits on deliverability within ERCOT zones are not visible to generators. G G G G G G G Firm 1 Firm 2 Firm 3

23 Why can’t firms achieve ERCOT-wide economic dispatch today? 2. ERCOT “balancing market” uses portfolio based re-dispatch to solve (inter)-zonal congestion: –Only represents 5% of market, does not yield overall economic dispatch, –The process can create local congestion, –Costs of solving local congestion are “uplifted” to all ERCOT customers. G G G G G G G Firm 1 Firm 2 Firm 3

24 Why can’t firms achieve ERCOT-wide economic dispatch today? 3. Plans to start-up efficient generation must be made day-ahead: –ERCOT “balancing market” only operates hour-ahead, –Does not guarantee the starting of the correct units, –Gas-fired boilers are started or run when other generators apparently could be run at lower cost. G G G G G G G Firm 1 Firm 2 Firm 3

25 Why can’t firms achieve ERCOT-wide economic dispatch today? 4. Hard for firms to coordinate individual trades to minimize costs overall: –Incomplete representation of transmission limits, –Coordination needed between multiple firms,  Centralized day-ahead economic dispatch by ERCOT would perform this coordination: –Not possible under the current market design. G G G G G G G Firm 1 Firm 2 Firm 3