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ERCOT market monitor: Wholesale price drops in 2009 helped consumers, hurt market

July 31, 2010

By Lynn Doan
SNL Financial LC

Consumers benefited in 2009 from some of the lowest wholesale electricity prices the Electric Reliability Council of Texas Inc. region has seen in recent years, but the market suffered, according to an annual report issued by ERCOT's independent market monitor.

According to the report, "2009 State of the Market Report for the ERCOT Wholesale Electricity Markets," wholesale electricity prices averaged $34.03 per MWh in 2009, or 56% lower than the $77.19 average price in 2008. Market monitor Potomac Economics noted in the report, sent to stakeholders July 30, that average annual prices fell to the lowest levels experienced in the ERCOT wholesale market since 2002.

All-in electricity prices, accounting for the costs of operating reserves, regulation and uplift, ranked lower than those in markets in California, New England, New York and the mid-Atlantic region.

While the lower prices provided short-term relief to consumers, Potomac Economics said, they did not reflect market conditions when operating reserves were scarce. When reserves fall short, prices are supposed to rise sharply to reflect that.

And according to the report, they did not rise sharply enough to support the development of new natural gas, combined-cycle and combustion turbine generation. A sharp drop in the number of shortage intervals last year further exacerbated the situation, Potomac Economics said.

"Although these shortage conditions occur in only a handful of hours each year," the report said, "efficient shortage pricing is critical to the long-term success of the ERCOT energy-only market."

Estimated revenues for nuclear and coal-fired generation in 2009 were also not enough to support new market entry, though that was primarily caused by a fall in natural gas prices and a related drop in wholesale energy prices.

Potomac Economics concluded in its report that the ERCOT wholesale market performed competitively in 2009, and performance measures showed "a trend of increasing competitiveness" over the 2005 through 2009 period, it said. But the 2009 report also echoes Potomac Economics' previous concerns that current market rules and procedures are resulting in "systemic inefficiencies" that the nodal market system, now scheduled to go live Dec. 1, will largely resolve.

Among other things, the report said, the nodal market design will improve ERCOT's ability to manage congestion, provide incentives to market participants to more efficiently commit and dispatch generation, and reliably integrate rapidly growing amounts of wind- and solar-generated power.

The report estimates that the net revenue required to pay for the annual fixed costs of a new gas turbine unit ranges from $70 to $95 per kW-year. The estimated net revenue in 2009 for a new gas turbine was about $55, $47 and $32 per kW-year in the South, Houston and North Zones, respectively.

For a new combined cycle unit, the estimated net revenue necessary is about $105 to $135 per kW-year, the report said, while the actual estimated net revenue in 2009 was about $76, $67 and $52 per kW-year in the South, Houston and North Zones, respectively.

"These values indicate that the estimated net revenue in 2009 was well below the levels required to support new entry for a new gas turbine or a combined cycle unit in the ERCOT region," Potomac Economics said in its report.

Estimated net revenue for a new coal unit similarly fell far below net revenue requirements in 2009, to $93, $84 and $70 per kW-year in the same three zones. And the estimated net revenue for a new nuclear unit was about $194, $187 and $172 per kW-year in the zones, well under the required net revenue of about $280 to $390 per kW-year.

The report also revealed that interzonal price disparities grew significantly in 2008 and 2009 compared with previous years, primarily because of additional wind generation in the West Zone and "inefficiencies that are inherent to the zonal market design," the report said. Wind generation also attributed to an increased use of coal-fired power as the marginal, or price-setting, fuel in the region.

The amount of load participating in the responsive reserve market fell in late 2008 and into 2009, the report said, compared with participation in previous years, likely due to a combination of Hurricane Ike and the economic downturn's impact on industrial operations. But in all, participation has held fairly constant at 1,150 MW since 2006, and Potomac Economics said this high level of support "sets ERCOT apart from other operating electricity markets."

According to the report, ERCOT's average balancing energy prices fell by 56% in 2009, and the average natural gas price fell by 56%.

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