Economic Dispatch Sub-Committee Meeting

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. 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 Do we have ERCOT-wide economic dispatch today? Firm 1 Firm 3 Firm 2

8. 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 Do we have ERCOT-wide economic dispatch today? No. Back off more expensive Increase production at less expensive

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

22. G G G G G G G 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. Firm 1 Firm 3 Firm 2

23. G G G G G G G 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. Firm 1 Firm 3 Firm 2

24. G G G G G G G 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. Firm 1 Firm 3 Firm 2

25. 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 Why can’t firms achieve ERCOT-wide economic dispatch today? Firm 1 Firm 3 Firm 2