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Market forces for greater efficiency -- Improved Texas price structure

Texas will next year adopt a new electricity market structure that uses pricing signals to encourage efficient location of new power plant near demand and transmission lines. The state's wind power business welcomes the change away from the so-called "zonal" structure in operation in Texas today, the largest state market for new wind plant construction.

Currently, the Texas market is split into four geographic areas with separate prices for electricity at any given time. The prices should even out across the zones over time, but in practice grid congestion causes wide discrepancies. Under the new "nodal" system, prices will still vary geographically, but will be determined at a much more precise level -- nearly down to individual power plants.

Paul Sadler of the Texas-based Wind Coalition says his group of large project developers welcomes the change. "Most agree that from an efficiency standpoint, it will be a more efficient grid," he says. The system will cost millions of dollars but studies and experience suggest it will provide a six-fold return on cost to ratepayers.

Modernisation tool

Declan Flanagan, who heads German utility E.ON's US wind operations, echoes that view, calling the new structure a necessary grid modernisation tool that has worked in other wholesale markets such as New York and New England. "Nodal sends a more granular signal as to where the best place to locate generation and that's ultimately a good thing," he says. Industry watchers also say the nodal structure will provide better insight into where crucial transmission upgrades are needed.

Location is key

It will not benefit everybody, however. "For those who already own power stations or wind farms, that can be a good thing or a bad thing and rarely a neutral thing, depending on where they happen to be located," says Flanagan. "What seemed like a good place to locate in the zonal system might not be a good place to be located in the nodal system."

The shift to nodal is already influencing developer plans. "I would say we have been taking nodal into account in the siting of our projects in Texas," says Flanagan. But transmission plays a bigger role: Flanagan says grid constraints are forcing most developers to slow West Texas wind deployments in favour of south Texas, near Corpus Christi. Iberdrola and Babcock & Brown have built big wind plant there and E.ON is adding a 180 MW wind farm in the area.

"South Texas projects are a reflection of the fact that West Texas is reaching the limitations of its current transmission capacity," says Flanagan. "The fundamental limit is from west to east. We feel nodal offers an improvement on that situation. But ultimately what you need, very simply, are new wires."

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