You already make so many decisions about your energy contract:
Do I go green? Do I go with a fixed-price or index? Will retrofitting my lights affect my contracted price? These are all valid questions that are crucial to making the best decision for your utility expenses.
Meanwhile, there’s a term that is frequently misunderstood and can add up to a big line item on your budget:
Nodal.
A nodal market or nodal congestion (also referred to as hub-to-load-zone basis) was a hot topic several years ago that’s finally taking effect in the Texas energy market. Though thrown around widely, many energy consumers don’t understand what it truly is or how it can impact their bill.
Texas has been a nodal market for eight years now, so it’s time to learn what’s going on with nodal.
What is a Zonal Energy Market?
To fully comprehend where we are, it’s helpful to look at where we’ve been. The current energy landscape is organized by either a zonal energy market or a nodal energy market. To understand the nodal energy market, you must first understand its predecessor: the zonal energy market.
Before December 2010, the Texas energy market was organized into four congestion-management zones. These zones determined the price of electricity, which would be paid to the energy generator. The MPCE – or the market-clearing price of energy – is the price that actually balances supply and demand.
Electric generation often occurs far from the point of consumption. As a result, the lines that transmit power can only carry so much at once time; this results in “congestion,” which causes unreliability within the system. To reduce this congestion, the grid operator sets a balancing price that effectively controls generation.
The zonal market was designed to improve the reliability of available energy. However, the system has some significant limitations.
When congestion occurs, the Electric Reliability Council of Texas (ERCOT) can “balance” the source of energy generation between zones in order to reduce congestion. However, ERCOT is unable to use the same tactic within zones. Furthermore, a lower cost generator may be forced to curtail its production, which ultimately increases the electricity price to the end consumer.
Not good.
What is a Nodal Energy Market?
Under a zonal energy market, the customers in a given zone are required to pay for the minority that creates significant congestion (think: the energy consumers way out on the end of the power lines). The zonal market design essentially socializes the congestion costs.
Under a nodal energy market, there are 4,000 delivery points, known as nodes, across the state. The energy travels along transmission lines from the generation source to one of those 4,000 nodes and can be measured before it reaches the end customer. With such a well-distributed network, areas of congestion are much easier to identify.
Additionally, nodal energy market pricing provides a more granular picture of generation and transmission in order to pinpoint areas of congestion. This allows the state to prioritize infrastructure improvements to those congestion areas and to understand where to place new generation units.
With the nodal market, the socialized fees are gone, market and operating efficiencies are improved, and the rate at which the market-clearing price is calculated is reduced from 15 minutes to 5 minutes.
By the way, in addition to all these changes, the MPCE is now called SPP (Settlement Point Price).
In all, a nodal market reduces costs to consumers, improves transparency, reduces congestion, and provides valuable insight that can guide improvements and resource allocation.
How Did Nodal Begin?
In December 2010, Texas initiated the move from the zonal system to the nodal system. This shift was in response to a request from the Public Utility Commission of Texas (PUCT). After struggling to find a solution to the zonal market issue throughout the 2000s, the PUCT asked ERCOT to create a nodal wholesale market that provided a market framework similar to other organized markets – such as those in New York, the Mid-Atlantic Region, New England, and the Midwest.
With a host of potential benefits, the main goal was ultimately to save money through a more precise allocation of transmission congestion costs that would enhance market transparency, efficiency and operations. A study conducted in 2008 by the PUCT calculated that electricity consumers would save $5.6 billion during the first 10 years of operations under a nodal market due to increased market efficiencies.
However, many Texas business consumers were left wondering how exactly the change would impact their utility bills.
How is Nodal Working 8 Years Later?
Since its implementation, we have seen ugly price spikes, notably those in the West Zone during the summer of 2012 and, most recently, the summer of 2018. While all the fracking is undeniably great for the US economy and natural gas prices, it is creating quite a strain on the electric grid in West Texas, specifically in the West Oncor and AEP utility territories.
In fact, some West Texas customers resort to running on diesel generators while waiting for their substation. Unfortunately, just as quickly as the poles and wires are built to serve a load, more load continues to outpace the available energy supply.
While we hope the nodal system ultimately benefits all of Texas, the area formerly known as the West Zone can continue to expect temporary spikes while the transmission improvements are underway to address the unprecedented growth in far West Texas. In other words, West Texas is experiencing growing pains!
Based on past ERCOT endorsement dates and their respective anticipated service dates, there is a two- to three-year waiting period between the time ERCOT endorses a transmission improvement project and the anticipated completion of the project.
The far West Texas region from Odessa to Riverton and Bakersfield to Solstice received its endorsement in June 2017 and is expected to have service between May 2020 and March 2022. The next portion of the far West Texas initiative from Riverton to Sand Lake to Solstice, Kyle Ranch to Riverton, and Horseshoe Sprint to Riverton received its endorsement this past June. The anticipated service dates have yet to be determined.
Understanding Your Bill Under a Nodal Market
As a business customer in Texas, the best way to continue navigating the not-so-new nodal market design is to stay informed and understand exactly what it is you are purchasing. While terminology can vary across providers, nodal charges are typically described as “basis” or “trade hub to load zone.”
These terms refer to the price difference between the energy price at the source (the generator) and the energy price at the destination (the load zone). The price at the load zone is an average of the prices at various nodes in a zone.
If you’re not sure whether your energy product is priced to the hub or the load zone, or whether it includes nodal congestion, ask your provider or a trusted energy advisor. If you are in an area of high risk, such as West or South Texas, ask for additional information on congestion price spikes, request historical price data, and consider your risk appetite before making a hedge.
Resources
- https://www.energyvortex.com/energydictionary/transmission_congestion.html
- https://trieagleenergy.com/Docs/Nodal.pdf
- https://webberenergyblog.wordpress.com/2010/03/14/what-a-nodal-market-means-for-texas-and-ercot/
- https://www.electricchoice.com/blog/texas-launches-revolutionary-nodal-power-grid-how-will-this-affect-your-bill/
