Electricity from competitive wholesale power markets keeps the lights on for two-thirds of all Americans. But pressure is mounting to reform these markets to match the changes underway in the energy system.
Wholesale power markets evolved in a world where dispatchable, central-station power plants slavishly followed demand; where the environmental costs of producing, delivering and burning fossil fuels were largely ignored; and where utilities measured their fortunes by how many kilowatt-hours of electricity they delivered to end-use customers. That world is rapidly disappearing due to emerging distributed technologies, evolving consumer preferences, and the need to reduce emissions.
Four factors will make 2016 a turning point for policymakers, clean energy providers, and wholesale market operators to work together and modernize America’s regulated wholesale power markets.
The opportunity: Markets can expose the value of co-optimizing power supply and demand
Grid flexibility is more important than ever, and resources capable of providing flexibility services at the right times will grow in value over the next decade.
Data from the Energy Information Administration shows that nine states received more than 10 percent of their electricity from variable renewables (wind and solar) in 2014. This renewables trend is on an upward trajectory, boosted by the recent extension of federal tax credits and several new state-level targets.
Luckily, as the generation mix becomes more variable, dispatching demand is also becoming possible, opening up new opportunities to optimize the system -- and to save money. For example, PJM Interconnection saw an 85 percent capacity price drop when demand response entered the market, and this week’s U.S. Supreme Court decision on FERC vs. Electric Power Suppliers Association further solidifies demand response’s footing in wholesale energy markets. Even before the favorable decision, Navigant was projecting the market for demand response would grow 600 percent in the next ten years.
Wholesale power markets have an opportunity to establish a level playing field for all technologies to compete to provide these flexibility services, resulting in a cleaner, more cost-effective, capable grid.
The Midcontinent Independent System Operator, the Electric Reliability Council of Texas, and the California Independent System Operator are developing new flexibility products in 2016, and have been working on updated rules to expand the types of resources qualified to participate. The results of these initial measures will expose the untapped potential for low-cost flexibility and illuminate important new directions for wholesale power markets.
The threat: If markets don’t capture the opportunity now, they’ll have to cope later
Germany was ahead of the U.S. on solar deployment and may be a harbinger for what happens when markets are late to modernize. Solar pulled the rug out from under traditional generators as it flooded the market with zero-marginal-cost power during previously high-priced hours, causing severe financial pain for existing market participants, without taking steps at the same time to value flexibility.
This was unnecessary and may drive up the costs of Germany’s energy transition. Now the nation is looking for ways to go back and place higher value on flexible resources in its markets.
This is the year to lay the groundwork for a more orderly transition in the U.S., one in which all resources (both supply- and demand-side) compete on equal footing to provide needed capabilities, thus creating a cost-effective, reliable system primed to rely more and more on clean energy.
The need for collaboration: Utilities are grappling with new business models
New utility models have gotten all the buzz, and as utilities build business models focused on delivering value to customers, they are considering which new services they can offer. In regions with restructured markets, clear roles will need to be defined at the boundary between the transmission system and the distribution system -- and this will begin to happen in 2016.
The value of new services aggregated at the distribution scale should depend on the value of services at the transmission scale, and vice versa. This will make the distribution service provider’s relationship with the regional grid operator even more important, and proactive utilities will put themselves in a better position by working together with grid operators now to plan for and operate a more integrated grid.
The why now: Pilots, policies and plans in 2016 will shape the next decade or more
Conversations about wholesale power markets can be complex, but 2016 is the year for policymakers and clean energy providers to jump in with both feet. Pilot flexibility products are being tested this year and the technologies that show up early in these markets can help shape expanded markets while growing new revenue streams.
The U.S. Supreme Court will decide this year whether demand response can participate in wholesale markets, and its decision will influence how markets evolve and how demand-side or distributed energy technologies get paid. At the same time, a new Western wholesale power market may begin to emerge this year, and its design will affect the overall costs, reliability and carbon content of the Western grid.
Finally, the Clean Power Plan codifies many of the trends already moving America toward a cleaner electric system. The CPP accelerates the inevitable onrush of new technologies, new ways of operating the grid, and new utility business models.
It’s cheaper and more reliable to run a grid that takes advantage of diverse resources over broader geographic regions, and smoother coordination and trading in regions with wholesale power markets can result in better use of existing assets, keeping costs low as coal plants retire and our air gets cleaner.
This year’s pilots, policies and plans will set the pattern for market development over many years to come. Now is the time to lay the groundwork for the system we want to see.
Sonia Aggarwal directs America’s Power Plan. Thanks to Mike Hogan, Arvin Ganesan, Curtis Seymour, Eric Gimon, Robbie Orvis and Michael O’Boyle for their input on this piece. The author is responsible for its final content.