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Module 4 · Lesson

From a binding line to a tradable basis

Trace how congestion changes dispatch and location prices, then define and stress an East-minus-Hub basis without confusing distance with causation.
  • 30 minutes
  • Intermediate
  • Editorial status: Domain Reviewed
  • Market-neutral + ERCOT case

Market question. Hub clears at $35/MWh while East clears at $80/MWh. What physical mechanism supports the $45/MWh spread, and what must change before it narrows?

Step 1

Treat congestion as a feasibility condition

Congestion means a modeled transmission constraint prevents the unconstrained least-cost dispatch from being feasible. It does not mean electricity stopped flowing. The operator changes injections: some generation that would have run is reduced, and generation with a more favorable effect on the constraint is increased. This is redispatch.

The prior nodal lesson priced the next MW. Here the focus is the complete causal chain:

capability or topology → feasible flow → redispatch → marginal resources → location prices
Congestion-to-price causal chain

Distance alone is not in that chain. A distant resource can be deliverable when the network has headroom; a nearby resource can be ineffective for a particular constraint. Direction, topology, shift factors, contingencies, and resource availability determine whether an injection helps.

Interactive figureThree-node price graphOpen sandbox
Prices separate. West: $35/MWh, Hub: $35/MWh, East: $80/MWh. The Hub–East interface is constrained.Prices are the modeled incremental cost of serving one more MW at each node.

Step 2

Calculate East-minus-Hub basis

Define the signed basis before interpreting it:

East-minus-Hub basis = East price − Hub price
Signed locational basis

Worked example

A positive East basis

Assume a synthetic interval with Hub at $35/MWh and East at $80/MWh. East-minus-Hub basis is:

$80/MWh − $35/MWh = +$45/MWh
East-minus-Hub basis calculation

The positive sign means East is more expensive than Hub for this interval and definition. Reversing the order would produce Hub-minus-East basis of −$45/MWh. Neither sign is intrinsically “good” or “bad”; commercial meaning depends on the exposure's source, sink, quantity, and settlement rules.

To connect price to dispatch, assume East load is 80 MW, the interface can carry 30 MW, Hub generation offers at $35/MWh, and East local generation offers at $80/MWh. Feasible dispatch imports 30 MW and runs 50 MW locally. Because the interface is full, the next East MW costs $80 while the next Hub MW costs $35.

Dispatch, flow, price, and basis in the synthetic interval
MeasureHub or import sideEast side
Offer of marginal resource$35/MWh$80/MWh
Flow or local dispatch30 MW import50 MW local
Location price$35/MWh$80/MWh
East-minus-Hub basis—+$45/MWh

Pause and predict

Which observation best supports congestion as the direct mechanism in this synthetic case?

Step 3

Stress transfer capacity without assuming the answer

Increase the interface from 30 MW to 60 MW while holding East load at 80 MW. Local East dispatch falls from 50 MW to 20 MW. Total production cost falls, but the interface is still full and the next East MW still requires the $80/MWh local resource. In this block-offer model, East price remains $80/MWh and basis remains +$45/MWh even though redispatch cost falls.

Increase capacity to exactly 80 MW. Hub supply now serves all 80 MW of East load, so local East dispatch falls to zero. But the interface is still full. Serving the next East MW would require the $80/MWh local resource, so East price remains $80/MWh and basis remains +$45/MWh.

Increase capacity again to 90 MW. The interface then has 10 MW of headroom after serving East load. If enough $35/MWh Hub capacity remains and no other constraint binds, the next East MW can come from Hub. East price converges to $35/MWh and East-minus-Hub basis becomes $0/MWh.

This discontinuity is the point: more transfer capacity can change quantities before it changes the identity of the marginal resource. Basis does not have to shrink smoothly with every added MW.

Observed basis is an outcome, not a complete diagnosis

ERCOT publishes hub and load-zone settlement point prices and separate reports for binding constraints and shadow prices. A price spread is a useful screening signal, but causal attribution requires aligned constraint, topology, dispatch, loss, adder, and correction data. The synthetic $35/$80 pair is not an observed ERCOT interval.

Apply the mechanism

Trace the synthetic case at interface limits of 30 MW, 60 MW, 80 MW, and 90 MW. For each, state import, East local dispatch, Hub price, East price, and East-minus-Hub basis. Explain why the 60 MW and 80 MW cases change dispatch but not price in the block model.

Takeaways

  • Congestion is a binding feasibility condition that changes dispatch; distance is not the causal variable.
  • East-minus-Hub basis at $80 and $35/MWh is +$45/MWh; sign convention must be explicit.
  • Increasing transfer capacity from 30 to 60 MW lowers local dispatch without changing the marginal East resource in the block model.
  • Basis collapses only when the next East MW can be served by the upstream marginal resource, holding other constraints and losses fixed.

Selected sources

Sources and model boundaries

  1. Federal Energy Regulatory Commission: Energy PrimerRetrieved 2026-08-03.

    A broad federal primer; it does not substitute for market-specific tariff and operating-rule analysis.

  2. ERCOT: Market PricesObserved: Operating day 2026-01-24; corrected RTM files approved 2026-06-01.Retrieved 2026-08-03.

    ERCOT publishes observed prices and correction archives. January 24, 2026 analysis must use corrected RTM files; prices alone do not reconstruct dispatch, offers, constraints, losses, adders, or settlements.