Power Market Design

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Competitive wholesale electricity markets are at a turning point. Current market rules and practices were established to manage a system built around large central plant stations generating electricity to meet inflexible demand. Prices and market revenues are tied to generators’ production costs, which have historically been largely dependent on the prices of fuels burned in those plants.

Today’s resource mix is changing. Carbon free resources with near-zero production costs such as wind, solar, and energy storage are replacing fuel-burning power plants due to falling prices and government policy. This trend is certain to continue.

These resources differ in several important ways from the fuel-burning power plants around which wholesale electricity markets were originally designed. First, they have near-zero production costs as they don’t require any fuel. Second, these new resources are smaller, and can therefore be deployed more rapidly and in smaller increments. Third, they have very different production characteristics than thermal resources, with output tied to the availability of their energy resource, i.e. wind or sunshine. These differences have significant implications for how markets run and how prices and revenue can support a least-cost electricity mix.

The evolving mix of energy resources on the grid and decarbonization trend leads to the following question: “What wholesale market design would provide the best framework for reliably integrating the new, clean resources needed to decarbonize the power system at least cost?”


Resources

Series: Wholesale Electricity Market Design for Rapid Decarbonization—Energy Innovation (June 2019)

Competitive wholesale electricity markets are at a turning point. The fact that clean energy is increasingly the cheapest option for the electricity grid leads to the following question: “What wholesale market design would provide the best framework for reliably integrating clean resources to decarbonize the power system at least cost?” These papers outline questions emerging about wholesale market reform and introduce two pathways for markets to evolve.

Wholesale Electricity Market Design for Rapid Decarbonization This summary paper includes all three individual papers, outlines underlying questions about wholesale market reform, and introduces two pathways for markets to evolve.

Visions for the Future This paper outlines underlying questions emerging about wholesale market reform and introduces two alternative pathways for markets to evolve.

A Decentralized Markets Approach This paper proposes a continuation of today’s energy markets coupled with more robust bilateral contracting as a solution to the challenge facing competitive wholesale electricity markets. In it, the authors suggest a market structure with a central spot market and active decentralized forward procurement between wholesale buyers and sellers through bilateral contracting will generate sufficient investment to achieve resource adequacy and rapid decarbonization at the lowest reasonable cost to consumers.

Long-Term Markets, Working with Short-Term Energy Markets This paper proposes a hybrid solution to the challenge facing competitive wholesale electricity markets. In it, the authors propose adding long-term markets to today’s short-term spot markets to support investment in zero-carbon resources, along with complementary clean energy technologies to reliably decarbonize the power system at least cost to consumers.

A Roadmap for Finding Flexibility in Wholesale Markets, by Robbie Orvis and Sonia Aggarwal – Energy Innovation (October 2017)

This report looks at why flexibility is increasingly important in U.S. wholesale power markets, outlines which types of flexibility are needed, offers advice on how markets can ensure sufficient flexibility, and helps identify ways to manage the grid with a rapidly evolving mix of resources. The report offers case studies of successful market practices, rules, and products across the U.S. that can serve as templates for other markets looking for similar types of flexibility.

On Market Designs for a Future with a High Penetration of Variable Renewable Generation (working draft), by Eric Gimon – Energy Innovation (September 2017)

Restructured wholesale electricity markets serve stakeholders by providing three principal services: economically efficient real-time dispatch, incentives for resource adequacy and long-term cost recovery. Because at least two of these functions happened dynamically through market forces, future scenarios for clean, affordable and reliable power with a high fraction of variable resources challenge today’s market design. This paper presents two possible paths for future designs to continue serving these three functions and principles for policy-makers working on future market design.

Grid Flexibility: Methods for Modernizing the Power Grid, by Robbie Orvis and Sonia Aggarwal – Energy Innovation (March 2016)

This paper touches on the growing importance of grid flexibility, reviews the types of resources that can deliver it, describes case studies of how the United States has attempted to foster it, and concludes with options for how to incorporate and enhance grid flexibility.

Power Markets: Aligning Power Markets to Deliver Value, by Mike Hogan – Regulatory Assistance Project (October 2013)

Power markets and power market mechanisms could use an upgrade to take advantage of new resources and fairly compensate the resources already on the system for the services they provide. Power markets should increase energy efficiency, upgrade system operations to enable short-term flexibility, and upgrade investment incentives to enable long-term flexibility. This transition requires fewer and larger balancing areas, enhanced weather forecasting,

Finance Policy: Removing Investment Barriers and Managing Risk, by Todd Foley – ACORE, Uday Varadarajan – Climate Policy Initiative, and Richard Caperton – American Progress (October 2013)

America’s power system – from transmission lines, local distribution grids, transformers and controls — is getting old, and some parts are becoming obsolete as new technologies emerge. This paper discusses investment opportunities to support upgrades to America’s aging grid system. Optimizing the grid to accommodate increasing shares of renewables as well as demand-side resources is expected to require billions of dollars of investment. Financing these upgrades to the grid system requires policy, regulation, and market structures that eliminate barriers to cost-effective financing by enabling long-term debt and equity financing. Smart finance policy will also enable investors to realize the full value of the new assets they deploy, such as reduced emissions or increased reliability.

A New Approach to Capabilities Markets: Seeding Solutions for the Future (requires purchase; contact us if you’d like a copy) – by Eric Gimon, Sonia Aggarwal, and Hal Harvey – Energy Innovation (July 2013)

Finding the best pricing mechanism to ensure that supply and demand properly match has become an increasingly important challenge as more variable energy sources are added to the grid. To tackle some of the major issues associated with load balancing, this paper discusses the potential role of a “Staircase Capabilities Market,” a market mechanism that seeks innovative solutions to future grid requirements at the lowest cost. This involves long-term planning for investment certainty, as well as flexible, small volume requests for proposals to encourage experimentation with capabilities. This paper walks through how a Staircase Capabilities Market might work in California, suggests systems that could effectively participate in the market mechanism, and discusses the conditions of transitioning toward a new energy paradigm.


Articles

U.S. Electricity Markets Aren’t Designed to Handle 100% Clean Energy. Here’s How to Fix That. Silvio Marcacci. Forbes, July 2019.

How Market Rules Are Holding Back Energy Storage. Eric Gimon. Greentech Media, January 2019.

Two Ways Energy Storage Will be a True Market Disruptor in the U.S. Power Sector. Eric Gimon. Forbes, September 2018.

ERCOT’s Summer Peak Demand Forecast: New Investment, Generator Profits, No Blackouts.Eric Gimon. Greentech Media, June 2018.

Three Ways Energy Storage Can Generate Revenue in America’s Organized Power Markets.Eric Gimon. Forbes, June 2018.

It’s Time to Refine How We Talk About Wholesale Markets. Robbie Orvis and Mike O’Boyle. Greentech Media, February 2018.

Flexibility, Not Resilience, Is the Key to Wholesale Electricity Market Reform. Eric Gimon. Greentech Media, October 2017.

Mind the Storage Gap: How Much Flexibility Do We Need for a High-Renewables Grid?Brendan Pierpont. Greentech Media, June 2017.

Secretary Perry, We Have Some Questions for You Too. Mike O’Boyle. Greentech Media, May 2017.

How a Cold Day in Texas Exposed the Value of Grid Flexibility. Eric Gimon. Greentech Media, April 2017.

A Guide to the Debate Over Closing Nuclear Plants. Eric Gimon. Greentech Media, March 2017.

Was 2016 the Year for Wholesale Power Market Reform? Sonia Aggarwal. Greentech Media, December 2016.

Texas Regulators Saved Customers Billions by Avoiding a Traditional Capacity Market. Eric Gimon. Greentech Media, June 2016.

Is the Transmission Grid Ready for Aggregated Distributed Energy Resources? Eric Gimon. Greentech Media, April 2016.

2016 Is the Year for Wholesale Power Market Reform. Sonia Aggarwal. Greentech Media, January 2016.

The Future of Demand Response Without FERC Order 745. Eric Gimon and Mike O’Boyle. Greentech Media, October 2015.

A Tale of Two Regions: Why Wind Is Booming in Texas and Stalling in the West. Eric Gimon, Mike O’Boyle, and Sonia Aggarwal. Greentech Media, September 2015.

Do Pay-for-Performance Capacity Markets Deliver the Grid Resiliency Outcomes We Need?Mike Hogan, Mike O’Boyle, and Sonia Aggarwal. Greentech Media, April 2015.

Renewables Curtailment: What We Can Learn From Grid Operations in California and the Midwest. Eric Gimon, Robbie Orvis, and Sonia Aggarwal. Greentech Media, March 2015.