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 reduced costs. This new competitive era replaced an inflexible, vertically-integrated utility model that was costly and failed to advance the power sector.
As competitive power suppliers, EPSA members have since delivered substantial economic benefits to consumers and businesses – by quickly adapting and investing in cleaner, lower-cost, efficient resources needed to support a reliable grid. In addition to natural gas, geothermal, and wind and solar resources, EPSA members own and operate the state’s largest battery storage projects to support renewable growth totaling more than 12,600 MW of generation capacity.
CAISO: Competitive Power for California
The California ISO—or CAISO—is the only independent grid operator in the western United States and manages the flow of electricity for the grid that serves 80 percent of California and part of Nevada. Its competitive wholesale electric marketplace has been described as a hybrid of the New York Stock Exchange and NASA’s mission control, employing advanced technologies to monitor the grid to ensure that power reaches more than 30 million consumers when they need it.
Recent energy reliability concerns, including rolling blackouts in California, demonstrate a need for CAISO planners to ensure enough electricity is available to meet demand. As the state seeks to meet decarbonization goals, CAISO markets must continue to support power generation resources that help ensure reliable and affordable electricity during all times of day and night.
CAISO’s Wholesale Energy Market secures 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 transmission congestion – insufficient transmission of supply to meet demand, much like rush-hour traffic. In real time, market operators evaluate system conditions every 4 seconds, and increase or decrease the amount of power needed based on demand. CAISO’s real-time market is a spot market where utilities can buy power to meet the final increments of demand not covered by their day-ahead schedules. This market helps regulate transmission line stability by securing energy reserves that are available for ISO use if needed.
A unique feature of CAISO is the inclusion of an “Energy Imbalance Market,” or EIM, which allows balancing areas outside of California to sell energy in the real-time market on a voluntary basis. While sellers are not full members
of CAISO and thus don’t participate in the day-ahead market or transmission planning, the ability to sell power when it’s available is particularly helpful as the amount of renewable generation in the region has increased. Efforts are underway to change the governance structure of the CAISO Board to allow for the EIM balancing authorities to become full “participating transmission owners” or PTOs, thus creating a fully integrated regional market.
The EIM has led to $1.28 billion in benefits for participants since 2014. The benefits for customers is expected to increase significantly if a fully integrated market, including day-ahead participation can be achieved.
Toward Reliable Electric Power
To help ensure reliability, CAISO also administers an ancillary services market and has both reliability requirements and resource adequacy programs that complement the state’s requirements.
Specifically, the California Public Utilities Commission (CPUC) imposes resource adequacy requirements so that enough generation capacity is built to meet peak consumer demand. This helps ensure that power customers enjoy affordable, reliable electricity service through peaks and valleys in demand in the immediate years ahead.
Meanwhile, the CAISO ancillary services market handles the services and products needed to maintain reliable electricity transmission. This market fosters competition between energy resources every six seconds as system needs change. These additional markets help keep power prices stable by ensuring availability when needed and preventing unexpected price spikes.
Meeting Peak Demand
As more solar generation supplies energy to California consumers during the day, the CAISO faces an emerging challenge: it must meet “net” peak demand when solar generation is not available. The availability of solar generation reduces as the sun sets, following the hottest time of the day, around 5:00 p.m. As the sun lowers, “gross” peak demand may stay at a high level without being able to rely on the generation of solar. CAISO must rapidly meet this need using natural gas, energy storage or imports, which may be limited during western heat waves.
EPSA Policy Recommendations for CAISO 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 California should encourage CAISO operations and competitive markets to continue delivering least-cost, efficient, and – above all – reliable power generation solutions to support clean energy growth and greater electrification of the economy on a broad regional scale.
CAISO’s market rules incorporate the costs of greenhouse gas emissions into energy prices, a structure that complies with state climate regulations and allows all resources to compete to reduce emissions. EPSA supports carbon pricing and policies that focus on reducing emissions at the least cost to consumers and encourages California to continue to pursue competitive pathways to achieve cleaner, affordable and reliable power generation.
Recent rolling blackouts during times of peak demand demonstrate a need for enhanced resource adequacy and reliability planning in California, and CAISO and California state agencies are working with stakeholders to develop short- and long-term solutions. Battery storage projects built by EPSA member companies will help support California’s large dependence on intermittent renewable resources like wind and solar, but it is necessary to ensure that sufficient flexible, firm resources like natural gas are available to provide uninterrupted power to the state.
Building a Cleaner, Innovative Grid
Regional markets such as CAISO spur innovation by driving competition among suppliers, which in turn fosters clean energy technology innovation and reduces greenhouse gas emissions. CAISO can help ensure reliable and affordable service while moving toward a lower-carbon generation mix by cultivating an environment in which all resources (renewables, natural gas, nuclear, etc.) can thrive. The competitive market encourages the development and integration of new, lower emission and increasingly efficient resources – thus, enabling the transition away from older, less-efficient generation resources.
Competitive Power Suppliers Provide Over 12,600 MW of Generation to CAISO Customers
In addition to some of the world’s largest battery storage projects, EPSA members operate more than 12,600 MW of solar, geothermal, and storage capacity in CAISO, and planned energy storage projects are projected to add another 761 MW to the grid. These investments are important to improving future grid reliability. These companies include Calpine, Diamond Generating, ECP, GenOn, J-Power, LS Power, NRG, Tenaska, and Vistra. Many of these companies develop, own, and invest in all resources and technologies including natural gas, coal, wind, solar, hydropower, geothermal, nuclear, biomass, and storage.
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 battery storage. Competitive power suppliers are industry leaders in efficient, cost-effective clean energy investment and emissions reductions while providing least-cost, reliable electricity.
A Closer Look
CAISO: Working to ensure reliability in a rapidly changing grid
Regional wholesale power markets like CAISO can provide significant benefits for customers, electric innovation and reliability – particularly when contrasted with a monopoly model. California is confronting serious challenges as the state works to integrate intermittent renewable resources while ensuring reliable power. As they consider how to address CAISO’s reliability issues, California state regulators need to recognize and preserve the benefits of the wholesale market while finding ways to improve its operation.
EPSA member companies in California are making large investments in battery storage to improve reliability in the state—including, most recently, the construction of the two largest battery projects in the U.S.
However, projects like these take years to plan, permit, and construct and cannot be completed without support from officials who recognize the importance of improving how capacity markets operate in the state. There is work to be done to bring more benefits to consumers and help ensure the reliable electricity needed for public health and safety. Careful planning and assessment that provides firm resources to meet demand as the grid transitions and electric demand grows is needed to guard against outages, blackouts and other challenges.
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 the result of competition prompting the entry of new, more efficient technologies.
Cleaner 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.
CAISO is committed to helping California and its energy customers achieve their emissions reduction goals. It is committed to generating 60% of its power from renewable sources by 2030 and currently manages almost 25,000 MW of installed renewable resources. Alongside these strong state environmental policies, CAISO is continuing to promote investment in new generation capacity. Investment in new, more efficient power generation technologies fosters competition and keeps consumer costs low.
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. CAISO has made significant investments in both alternative energy generation and the transmission infrastructure needed to bring this power to consumers. Because of its market structure, CAISO is better able to identify transmission bottlenecks and to direct investment to areas with the highest cost savings and reliability returns. Through better price transparency and a structure that encourages new companies to enter the market, CAISO is helping California meet its climate goals and improve efficiency. In 2019, 54% of the electricity generated in California came from renewable or zero emission sources, including nuclear (9%), hydropower (17%), wind (10%) and solar (12%).
California’s public policies influence the CAISO energy mix and its future plans. In its quest to achieve a zero-emissions electric sector by 2045, the state of California passed a Renewable Portfolio Standard aiming to generate 60% of its electricity from renewable sources by 2030. CAISO continues to pursue its climate goals by diversifying its energy resources with:
- Installed solar capacity of over 14,100 MW
- Installed wind capacity of nearly 7,000 MW
- Installed storage capacity of 4.2 GW, more than any other state in the U.S.
Customers win when companies compete
In regional wholesale markets like CAISO, the government does not select winners and losers. Rather, customers win because companies are able to compete.
Wholesale electricity prices are heavily influenced by the cost of the fuels used to generate electricity. As natural gas prices have fallen over the past 20 years, so have electricity prices. Today, 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.
CAISO: Where least-cost solutions provide more emissions reductions and cleaner technology
Large regional markets such as CAISO have shaped the future of clean energy technology by spurring innovation to reduce greenhouse gas emissions.
How does competition encourage innovation and consumer choice?
CAISO provides reliable power with a diverse, flexible mix of resources and technologies designed with reliability and affordability in mind. Between 2014 and 2017, CAISO added about 2,000 MW of solar capacity each year, and solar construction continues to grow today.
These installations are an important step toward realizing the state’s 50% renewable mandate. 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.
Competitive wholesale electricity markets: the key to 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.
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