The Federal Energy Regulatory Commission should lead a reconsideration of “single-clearing price” mechanisms that help set power prices in regional transmission organization capacity and energy markets, according to FERC Commissioner Mark Christie.
The review should also dig into whether capacity markets and utility deregulation should be replaced with alternatives that would provide a more reliable power system at lower costs, Christie said in an Energy Law Journal article published last week.
With a single-clearing price, such as a locational marginal price, or LMP, in capacity markets, all sellers receive the clearing price it takes to meet demand, even if they offer less. A wind generator, which had no fuel costs and may receive tax credits, could offer $0/MWh, but could receive a vastly higher clearing price.
The pricing mechanisms are a legacy of deregulation that generally replaced utility power plant ownership under state oversight with competitive power suppliers operating in certain RTO markets, according to Christie. “A thorough reconsideration should logically examine whether the assumptions that underpinned deregulation are still valid, if they ever were,” he said.
Christie’s article was published about a month before FERC is set to hold a forum to assess the PJM Interconnection’s capacity market and whether it should be changed. The agency has scheduled a similar forum in June to consider ISO New England’s efforts to make sure it has enough wintertime power supplies.
“Most state [integrated resource planning] processes may be far better suited to plan comprehensively, to manage the risks associated with different types of generation, to incorporate demand-side resources, and to balance state policies promoting renewables with the core goals of delivering reliability and controlling consumer costs than RTO capacity markets are,” Christie said.
RTO markets may threaten reliability, according to Christie. “Investment in dispatchable generation that can no longer compete against heavily-subsidized, no-marginal-cost competitors will dry up, because what investor wants to risk capital on a generation resource that will face a market pricing mechanism stacked against it?” he said.
Christie offered alternatives to real-time and day-ahead energy markets, such as bilateral trading, average pricing and splitting markets into low-marginal cost resources, such as wind and solar, and another for gas.
Options for capacity markets include adopting a “pay as offered” mechanism, developing easier ways for load-serving utilities to supply their own capacity, replacing forward capacity markets with near-term auctions and phasing out capacity markets, according to Christie.
Generators defend markets
Any power market shortcomings are driven by federal and state energy policies, not the markets themselves, according to Todd Snitchler, president and CEO of the Electric Power Supply Association, a trade group for independent power producers.
“The issues raised in the piece suggest that the Arsonist’s Dilemma is at work here with markets being undermined by policymakers and regulators who then seek to solve the problem they helped to create,” he said in an email.
Regions that rely on IRPs such as the Midcontinent Independent System Operator and California Independent System Operator are often less reliable and more expensive than restructured markets, according to Snitchler.
During Winter Storm Elliott in December, for example, PJM had enough generation to meet demand while other non-restructured regions suffered shortfalls and power outages, he said.
Also, power markets have delivered savings to consumers, with wholesale power prices at or near record low prices while transmission and distribution costs — regulated by FERC and state public service commissions — are where costs have increased substantially, Snitchler said.
A ‘refreshing openness,’ with caveats
Others supported some of Christie’s observations, but with caveats.
Christie brings a “refreshing openness” to new ways of thinking about electricity markets, according to Abraham Silverman, director of the Non-Technical Barriers to the Clean Energy Transition program at Columbia University’s Center on Global Energy Policy.
“I think many of us recognize that the clean energy transition requires that we take a fresh look at our preconceived notions,” Silverman, former general counsel at the New Jersey Board of Public Utilities, said in an email.
However, Silverman said he was “surprised” at Christie's assertion that RTO markets "are far more vulnerable to rent-seeking" than other market structures.
“Monopoly utilities were, after all, the original rent seekers,” Silverman said. “It was the challenges of disciplining spending by those utilities that led many state legislators and regulators to embrace competition in the first place.”
Also, the benefits of LMP markets are one of the few places that state regulators of all political stripes tend to agree, according to Silverman. “There's a lot of interest from state regulators in enabling demand-side participation in wholesale markets, which depends on access to transparent pricing that varies with system conditions,” he said.
Reliability struggles signal need for change
Struggles and failures to keep the lights on during extreme weather events such as winter storms Uri and Elliott and CAISO’s efforts during a heat wave last summer suggest markets need reforming, according to Shelley Welton, a professor of law and energy policy at the University of Pennsylvania’s Kleinman Center for Energy Policy and Carey Law School.
Capacity markets were originally designed to meet peak power demand, but with more intermittent wind and solar coming online, resources that offer grid flexibility need to be acquired, she said.
Also, the recent extreme weather struggles revealed that gas-fired power plants are less reliable than many people believe, according to Welton.
“It is time to step back and ask ‘what is it that we're trying to buy and are we actually getting the products that consumers are paying plenty for?’” she said.
That doesn’t mean bifurcating markets between renewables and natural gas, Welton said. “I think it means asking what kinds of various resources, maybe it's natural gas, maybe it's geothermal, maybe it's storage, can deliver the flexibility that we need to meet our system-wide goals, and then paying for that,” she said.
Christie’s idea of having utilities supply their own capacity more and only relying on capacity markets to make up for any residual capacity needs may make sense, according to Casey Roberts, a senior attorney at the Sierra Club.
But independent market monitors guard consumers against the exercise of market power in the centralized markets, a protection that could be lost with increased bilateral trading, Roberts said.
Looking ahead, Christie’s article may indicate what he wants to discuss at the upcoming PJM capacity market forum, according to Roberts.
“It really pulls in the opposite direction from a lot of the other work that FERC has been doing, which has been trying to improve these centralized auctions,” she said. “It shows that the range of questions that we're going to be grappling with at that capacity market forum is just huge.”
