Electricity congestion happens when there is too much demand in one part of the power grid. This can make it harder and more expensive to deliver electricity to certain areas. Congestion affects electricity prices and can create extra costs for both suppliers and customers. Understanding how congestion works helps businesses and consumers plan better, manage risks, and save money on energy.
What Is Congestion in the Power System?
The U.S. electricity grid is run by several groups called independent system operators (ISOs) or regional transmission organizations (RTOs). Each system has many zones and local points where electricity is delivered and used. Every point, or node, on the grid has its own wholesale energy price. This price depends on the supply and demand in that exact location. This difference in prices is what we call electricity congestion. Now, let’s look at some important parts of this in more detail.
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Electric Grid Congestion Example
To understand how congestion works in the power system, it helps to use examples. Think about riding in a taxi in New York City. You may notice that the same trip can cost more during busy times, like rush hour. This is similar to how congestion works on the electric grid. Now, let’s look at how New York City taxi fares are calculated today.
NYC Taxi Fare Example
- $3.00 initial charge
- Plus 70 cents for every 1/5 mile when the taxi goes faster than 12 mph, or for every 60 seconds when the taxi is slow or stopped
- Plus a 50-cent MTA State Surcharge for trips that end in New York City or nearby counties
- Plus a $1.00 Improvement Surcharge
- Plus a $1.00 overnight surcharge from 8 pm to 6 am
- Plus a $2.50 rush hour surcharge from 4 pm to 8 pm on weekdays (not on holidays)
- Plus a New York State Congestion Surcharge of $2.50 (Yellow Taxi), $2.75 (Green Taxi and FHV), or 75 cents (shared rides) for trips that start, end, or pass through Manhattan south of 96th Street
- Plus tips and any tolls
When we look at how NYC taxi fares work, we see extra charges during rush hour from 4 pm to 8 pm on weekdays. We also see that the normal 70-cent charge per 1/5 mile applies only when the taxi goes faster than 12 mph. But if the taxi is stopped or moving slower than 12 mph, the 70 cents is charged per minute instead. This means a trip from the Upper East Side to Times Square can cost more when there is heavy traffic, even though the distance is the same. This taxi example helps explain congestion on the electric grid. When many people need electricity in one area (like traffic), it costs more to send power there. This increases congestion costs.
Locational Marginal Price (LMP)
Locational Marginal Price (LMP) is the price of delivering electricity to a specific place on the power grid. It is shown in dollars per megawatt-hour ($/MWh). The price is calculated in real time. LMP is found by matching the local supply of electricity with the local demand. It also considers the limits of the transmission system.
LMP includes three main costs:
- Energy
- Transmission congestion
- Line losses
LMP is different at each location. It is calculated for every point where electricity enters or leaves the grid.
Causes, Impacts, and Solutions of Electricity Grid Congestion
Causes
- Aging infrastructure: The existing grid may not have the capacity to handle current or future demand.
- Increased renewable energy: Renewable sources are often located far from where the electricity is consumed, requiring new transmission lines to carry the power.
- Extreme weather: Severe weather events can stress the grid and cause congestion, leading to higher costs.
- Lack of coordination: Inadequate planning and coordination between states and regions can contribute to the problem.
Impacts
- Higher costs: Grid operators must take costly measures to relieve congestion, such as paying certain generators to increase or decrease their output. These costs are passed on to consumers.
- Grid instability: If left unmanaged, congestion can lead to system instability and even outages.
- Locational Marginal Pricing (LMP): Congestion causes the price of electricity to vary by location, reflecting the costs of managing the grid constraints in different areas.
Solutions
- Building more transmission lines: A long-term solution is to expand the grid’s capacity.
- Grid-enhancing technologies (GETs): These technologies help the grid operate more efficiently and include methods like dynamic line ratings (which allow lines to operate at their full capacity based on weather conditions) and topology optimization (re-routing power flows).
- Improved planning: Better coordinated regional and state-level planning can help prevent congestion from occurring.
- Policy and regulatory reforms: Updating policies to encourage the construction of new lines and the deployment of GETs can help solve the issue.
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What Happens When There’s Electricity Grid Congestion?
ISOs and RTOs must keep the power grid safe. They do this through careful planning. They use mathematical models in both the day-ahead and real-time markets. These models find areas that might have congestion or other problems. When a potential issue is found, the ISO or RTO puts a constraint on the system. A constraint marks equipment that could have too much power flowing through it, meaning it could become congested. Managing electricity flow is hard, but system operators can influence how much power generators produce.
In competitive markets, operators use pricing signals to guide generators. Higher prices encourage generators to make more electricity. Lower prices tell them to make less. This helps balance supply and demand and reduce congestion.
How Much Does Electricity Congestion Cost?
Electricity congestion costs are calculated for each LMP with this formula:
(Hub Price $/MWh) – (LMP Price $/MWh).
The hub is the main trading point in the electricity region. The LMP is the price at every single location on the grid. The difference between these two prices shows the total congestion cost. This is similar to how price differences work in the natural gas market.
Congestion costs can change a lot from one region to another. They can also change between different LMP points. The fees can rise or fall based on the time of year, the weather, how much electricity people are using, and any problems on the transmission system.
For example, if a major power line breaks and reduces supply in an area, the LMP price will go up. This higher price will stay until the line is fixed.
A report from Grid Strategies showed that U.S. congestion costs went up by almost 60% in 2022 compared to 2021. Total congestion costs were $20.8 billion in 2022, up from $13.3 billion the year before. Many experts say this increase happened because natural gas prices rose sharply in 2022. Most power plants in the U.S. use natural gas, so higher gas prices cause higher electricity costs, too.
Congestion Management
There are several ways to reduce the risk of high congestion costs. Retail energy suppliers, energy brokers, and customers all use different strategies. Let’s look at how suppliers and consumers can protect themselves.
Energy Customers
Energy customers can reduce congestion risk by choosing the right retail electricity contract. It is a good idea for buyers to get help from an energy broker. The broker can help find the best contract for their needs. Some contracts let customers lock in congestion costs as part of their total electricity price. Other contracts let customers pay an index price at the LMP. This means the customer’s price can change with congestion. This can be risky, but it may also help if the customer uses power at cheaper times. Very large energy customers may register with the grid operator as a sub-account. This allows them to buy FTRs directly and hedge congestion costs themselves.
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Retail Energy Suppliers
When suppliers offer fixed electricity rates, they must think about congestion costs at the LMP near the customer. Most electricity is hedged at the main trading hub. This means the supplier takes on the congestion risk when delivering power. One way suppliers reduce this risk is by buying financial transmission rights (FTRs). FTRs let suppliers protect themselves from congestion by owning a financial path between the hub and the LMP location.
Suppliers with many customers in one area usually buy FTRs in auctions or in the secondary market. Suppliers with only a few customers often work with larger wholesale energy companies instead. Buying an FTR for a small group may not be worth the cost. In these cases, the wholesaler hedges the congestion risk for the retailer.
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Want to Learn More About Power Congestion?
Our team has many years of experience studying wholesale electricity prices, watching LMP trends, and managing congestion risk. Contact us today to learn more about congestion in your area and how to choose the best electricity supply agreement for your needs.