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Competitive Wholesale Electricity Markets
More than 20 years ago, competitive wholesale electricity markets were established in many parts of the U.S. to help reduce power generation costs, increase competition and provide choice for consumers. Since then, these markets have consistently driven innovation, enhanced efficiency and improved operations. This new competitive era replaced an inflexible, vertically integrated utility model that was costly and failed to incentivize innovation. As competitive power suppliers, EPSA members have since delivered substantial economic benefits to consumers and businesses – by quickly adapting to and investing in lower-cost, efficient resources, and achieving lasting widespread, regional electric reliability.
ISO-NE: A region-based approach to competitive markets.
Established in 1997, the Independent System Operator of New England (“ISO-NE”) manages New England’s electric grid and competitive wholesale electric marketplace. ISONE serves 14.8 million New Englanders across six states: Connecticut, Rhode Island, Massachusetts, Vermont, New Hampshire, and most of Maine. ISO-NE has invested $11 billion in grid infrastructure over the past 20 years, and continues to expand its diverse energy mix to provide New England with reliable power.
ISO-NE’s energy markets secure electricity supply to meet consumer demand in real time and in the near term (sometimes referred to as the forward or day-ahead market). Power is bought and sold in the energy market much like a stock exchange – electric generators offer into the market at the price required to cover the costs of producing power and then utilities (or load-serving entities) bid for that electricity in order to meet their customers’ energy demand. The offers are then stacked in order from lowest to greatest and the energy market “clears” where supply and demand meet. Electric generators then receive the clearing price established from the utilities.
This base energy cost can be increased due to heavy demand areas (like big cities) and insufficient transmission to get all the supply to that demand (transmission congestion), much like rush-hour traffic. In the real-time, the ISO-NE market operator evaluates system conditions every few seconds, and increases or decreases the amount of power needed based on demand. To further bolster reliability, ISO-NE’s grid is linked to 13 electricity transmission interconnections in New York and eastern Canada.
Reliable electric power
ISO-NE administers both its central energy markets and a capacity market. New England’s two energy markets – the Day-Ahead Energy Market and Real-Time Energy Market – allow generators to manage their daily production, delivery, and portfolios. Market participants secure energy prices for the next day through the Day-Ahead Energy Market in order to better stabilize fluctuating prices. Conversely, the Real-Time Energy Market allows participants to meet New England’s instantaneous energy demand. Participants can be part of one or both or opt for individual contracts instead. The system’s Forward Capacity Market (FCM) is its long-term reliability market that secures needed electricity supply capability to be available to meet projected demand three years out. After the capacity commitment period begins, the facilities are required to offer resources single day into the energy market, with only the most cost-effective then dispatched to meet demand. This ensures that electricity consumers enjoy cost-competitive, reliable electricity service through peaks and valleys in demand in the immediate years ahead.
Building a cleaner, innovative grid
Regional markets such as those operated by ISO-NE spur innovation by driving efficiency through competition among suppliers, which in turn spurs clean energy technology innovation and reduces greenhouse gas emissions. By cultivating a technology-and fuel-neutral marketplace, all resources—whether renewables, natural gas, nuclear, or others, can thrive. The New England competitive electricity market encourages the development and integration of new, lower emission and increasingly efficient resources and facilitates the transition away from older, less efficient generation resources. For example, New England power plant carbon emissions declined by 51% from 1990 to 2018.
To better realize a cleaner electricity system, however, further improvements are needed. This includes filling a gap in the market to better recognize state decarbonization policies – for example, by meaningfully establishing a carbon price. Other market-based solutions, such as a regional Clean Energy Standard, are also possibilities and should be considered.
Competitive power suppliers provide 11 GW of generation to ISO-NE Customers
EPSA members operating in New England provide 11.7 GW of generation capacity to the region. They include Calpine, Cogentrix, Competitive Power Ventures, GenOn, LS Power, NRG, Tenaska, and Vistra. Many of these companies develop, own, and invest in a variety of resources and technologies including natural gas, coal, wind, solar, hydropower, geothermal, nuclear, biomass, and storage nationwide.
At the national level, EPSA members own and operate about 150,000 MW of power generation capacity in regions with access to competitive wholesale electricity markets, including more than 6,700 MW of generation powered by renewable resources and some of the world’s largest battery storage projects. Competitive power supplier are industry leaders in efficient, cost effective clean energy investment and emissions reductions while providing least cost, reliable electricity.
EPSA Policy Recommendations for New England Policymakers:
Fair competition in the markets where electricity is bought and sold is good for consumers because it helps keep costs low and power generators efficient and innovative. Policymakers in New England should look to ISO-NE’s efficient operations and competitive markets to continue delivering least-cost, efficient, and reliable power generation solutions to support clean energy growth and greater electrification of the economy on a broad regional scale.
The New England markets can continue to evolve by better aligning with regional decarbonization policies and ensuring that the right reliability products are developed and valued with a changing generation fleet. Implementing a carbon price or a well-designed clean energy standard that allows all resources to compete to reduce emissions at the least cost—while maintaining reliability can help ensure that New Englanders continue to benefit from competition and the regional grid as it moves to a lower-carbon power generation mix. Similarly, EPSA supports ongoing efforts led by the New England states, stakeholders, and ISO-NE to study and assess any reliability gaps that may need to be addressed to meet the needs of the evolving electricity grid of the future.
A Closer Look
New England: Keeping electricity cost-competitive and reliable
Regional wholesale markets benefit customers by providing reliable, competitively-priced power across the ISO-NE footprint.
How do competitive electricity generators bring dependable power to consumers?
Electricity is the bedrock of modern life—from lighting our homes to powering life-saving operations, we rely on the promise of ample power generation at any given time. On top of its energy and capacity markets, ISO-NE’s ancillary services ensure short-term reliability and compensate participants through five channels.
The Regulation Market is an instrument used to compensate market participants for their hand in regulation. Participants give control of their Automatic Generation Control resources to ISO-NE, which uses automated generators and other energy sources to adjust output or consumption every four seconds. The Forward Reserve Market (FRM) gathers commitments from resources to fill reserve capacity in advance through two FRM auctions in the summer and winter. ISO-NE ’s FRM fosters investment in low-cost resources to fulfill off-line reserve requirements. The Forward Capacity Market is a critical reliability and capacity tool to help ensure sufficient resources to meet future demand.
ISO-NE holds annual Forward Capacity Auctions to secure commitments three years in advance from generators to supply capacity.
Customers win when companies compete
In regional wholesale markets like New England’s, the government does not select winners and losers. Rather, customers win because companies are able to compete. In fact, wholesale energy prices in the New England region have declined by 51% since 2014—thanks to the integration of more efficient resources, lower production costs, and reducing the need for reserves by drawing from a wide pool of power generators. Wholesale electricity prices are heavily influenced by the cost of the fuels used to generate electricity. For example, ISO-NE energy prices fell about 30% when natural gas prices decreased from 2018 to 2019. The average annual wholesale energy price in 2009 was $42.09/MWh, compared to $30.67/MWh in 2019. As the cost of renewables and other resources continue to decline, market competition will continue to select the least-cost resources needed to meet demand.
New England: Where least-cost solutions provide more emissions reductions and cleaner technology
Large regional markets such as in New England have shaped the future of clean energy technology by spurring and encouraging innovation to reduce greenhouse gas emissions. The graph below illustrates New England’s energy mix leading up to 2019.
How does competition reduce carbon emissions?
Competitive power suppliers can improve the environment, advance our economy, protect low-income customers, and ensure reliability—but we must preserve and expand competitive processes to accomplish this. Emissions reductions in wholesale markets are largely due to competition encouraging the entry of new, more efficient technologies. Clean energy has become increasingly cost competitive, with natural gas and renewable resources among the cheapest fuels on the market today. Power generators have followed market price signals to retire thousands of megawatts of coal, switching to natural gas and renewables and resulting in tremendous emissions reductions without relying on expensive subsidies, rate passthroughs, or mandates.
New, less carbon-intensive technologies improve efficiency
Along with accelerating emissions reductions, competition has been a key driver in incorporating more clean energy technology into the grid. New England has made significant strides in clean energy integration in the past two decades. From 2002 to 2017, generators in the region reduced annual emissions for sulfur dioxide (98%), nitrogen oxides (74%), and carbon dioxide (34%). The market’s energy mix relies on 48.5% natural gas generation, followed by 30.5% nuclear, 11.4% renewable resources, and 8.9% Canadian hydropower. New England‘s ability to decrease its coal and oil dependence— representing 0.5% and 0.2% of its total generation, respectively – was facilitated by the rise of lower-emitting natural gas, efficiency improvements to transmission systems, imported electricity, and the integration of renewable resources into the grid.
Public policy also plays an important role in shaping New England’s energy landscape and efforts to cut greenhouse gas emissions.
How does competition encourage innovation and consumer choice?
New England’s power generators provide reliable power with a diverse, flexible mix of resources and technologies designed with reliability and affordability in mind. A properly constructed competitive power market should allow all customers to choose the products and services they desire while investment risk remains with resource developers and operators. Energy developers compete to take advantage of state incentives, falling technology costs, and wholesale market revenues when looking to introduce new clean energy resources to the region. Around 95% of resources currently proposed for the New England region are grid-scale wind (both onshore and offshore), solar, and battery storage projects. Wind power is the frontrunner among proposals in the ISO-NE Interconnection Request Queue, but solar and battery storage are quickly advancing, having already surpassed natural gas proposals.
Competitive wholesale electricity markets: the key to resource innovation, consumer choice and a reliable, cleaner, low-cost power grid.
The Electric Power Supply Association (EPSA) is the national trade association representing America’s competitive power suppliers. EPSA members provide about 150,000 MW of reliable and competitively priced electricity from environmentally responsible facilities using a diverse mix of fuels and technologies including natural gas, wind, solar, hydropower, geothermal, storage, biomass, and coal. EPSA seeks to bring the benefits of competition to all power customers. Learn more at www.epsa.org and connect with us on LinkedIn and Twitter @EPSAnews.
More EPSA Market Spotlights
Learn more about wholesale electricity markets serving 65 million customers in 13 states and the District of Columbia.
Download EPSA’s fact sheet on the New York Independent System Operator serving 19.8 million New Yorkers.
Discover key stats on cost savings and emissions reductions in all U.S. competitive electricity markets.