Private Use Networks & Self-Generation: What You Need To Know

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ERCOT has experienced more attention to and development of Private Use Networks (“PUN”) in the last months and years. This post summarizes what these “islands in the grid” are, their positive attributes, and how to create one.

What’s a PUN?

Private Use Network is defined by ERCOT as “[a]n electric network connected to the ERCOT Transmission Grid that contains Load that is not directly metered by ERCOT (i.e., Load that is typically netted with internal generation).”  While a PUN is interconnected to the ERCOT system, it functions largely as an island within the ERCOT system that has both generation and load (separate from station load).  A PUN can contain many different categories of resources and loads, all of which are behind an ERCOT-polled settlement (“EPS”) meter. ERCOT models a PUN in its system models (used for transmission planning and for interconnection studies) if it contains at least 10MW generation, has more than one connection to the ERCOT grid, or provides ancillary services. For settlement purposes, ERCOT will settle the net of generation and load during any interval so that if the PUN is “net load” in an interval, it will be settled as load, and as generation if energy delivered to the system during interval exceeds energy consumed.

Legal requirements

A PUN’s value arises from the load’s ability to use generation within the PUN to serve its energy needs. This requires that the legal relationships between the generator and the customer load entity comply with Texas law governing retail electric service.[1] In an area open to customer choice, the generation owning entity may not directly sell electricity to the load absent the existence of some exception to the requirement that only a retail electric provider (“REP”) may provide retail electric service. These exceptions include that the generator is simply serving itself, its employees, or a tenant as an incident of tenancy. Additionally, exceptions also permit qualifying facilities (“QF”) to provide electricity to their thermal hosts, and distributed renewable generation owners under 2MW to make such direct sales. For all other arrangements, a REP must be in the chain of title.

For “non opt-in” areas, one of these exceptions must apply or else the generator cannot serve the load and QFs may only serve their sole thermal host.

In both cases, the generator may not own the transmission or distribution lines within the PUN, as that would violate the rule that neither a power generation company nor exempt wholesale generator may own transmission or distribution facilities (other than essential interconnection facilities), absent the existence of one of the above exceptions. A QF may own such lines, however, to the extent they are part of the cogeneration or small power production facility.

How to create a PUN

No explicit approvals from the PUCT are required to form a PUN; however, ERCOT requires quite a few technical steps to coordinate the reconfigured settlement and system impacts. The entities involved must also submit a declaration to ERCOT to report its net generation capacity available to the system.

Why are PUNs desirable?

The generation netting feature allows loads to reduce their exposure to TDSP non-bypassable charges, including their allocated transmission cost of service. Specifically, it allows large loads the opportunity to reduce exposure to transmission costs, which are allocated based on the customer’s demand at times of peak ERCOT system demand, by becoming “net generation,” or reducing their “net load” position, during such peak demand events. It also affords the load a reliable and secure generation source not dependent on the ERCOT system or vulnerable to broader potential outages.  Furthermore, it affords generators a built in offtaker, with a potential for financial partnership.

Who can participate?

A PUN can contain the following types of ERCOT market participants: Generation Resource, Load Resource, Non-Modeled Generator, Emergency Response Services (“ERS”) Resource, and Wholesale Storage Load, as well as customers, all of which are behind an ERCOT EPS meter.

Prospects and expected developments

With the ERCOT Protocol change, many market participants have expressed renewed interest in establishing PUNs, which we believe stems from several factors making them more attractive in today’s economy. From the customer perspective, customers have an interest in avoiding or mitigating against rising transmission costs, installing a firm generation source not dependent on the ERCOT system or as vulnerable to cyber threats, directly associating with a renewable resource from a corporate responsibility policy standpoint, or realizing a financial and revenue objective through partnering with a generation owner. Generators share some of these interests. PUNs enable them to lock in a firm customer for their capacity while leveraging a financial partnership into participating in the ancillary services or real time energy markets (if designed to do so). PUNs also provide a hedge against congestion or curtailment risk if located near a constrained transmission element by affording them a firm offtaker.  Using a PUN in this manner can benefit a Generator and make a project appear more cost effective to investors by adding a revenue stream.

Conclusion

We expect the development and reliance on PUNs to continue, based on the current state of the law. We have helped several clients analyze this option as part of their business models, and assist generators and customers alike to review these potential options. 

[1] ERCOT recently eliminated a separate Protocols requirement that the load within a PUN be “associated with” the generation.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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