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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 choice, open the door to innovation, and enhance efficiency and operations. This new competitive era replaced an inflexible, vertically integrated monopoly utility model that was cost prohibitive and failed to incentivize new technology. As competitive power suppliers, EPSA members have since delivered substantial economic benefits to consumers and businesses – by quickly adapting to and investing in the lowest-cost, most efficient resources, and achieving lasting widespread, regional electric reliability.
PJM Interconnection: Competitive markets done right.
The PJM Interconnection electric grid system (PJM) is America’s largest electric grid operator and runs the nation’s biggest competitive wholesale power market—serving more than 65 million Americans in 13 states and the District of Columbia.
PJM’s Competitive Markets
PJM operates three types of markets, each working in tandem to bring least cost, reliable power to customers. PJM’s 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 – electricity 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.
Thus competition amongst the generators keeps prices low. 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 in areas (like big cities) and insufficient transmission to move all the supply to that demand (transmission congestion), much like rush-hour traffic. In real time, the market operator evaluates system conditions on a 5-minute basis and increases, or decreases, the amount of power needed based on demand.
To ensure reliability, PJM also runs a separate reliability market called the capacity market, which works a bit like an energy market but helps guarantee sufficient power in the future. In reliability markets, generators agree to produce electricity at a future date for an agreed upon price. These markets help to provide price stability by ensuring that power will be available when needed, and shielding customers from unexpected price spikes. PJM’s Ancillary Services Markets help balance supply and demand, particularly during emergency situations, with reserves that can quickly come online and regulation resources that correct short-term unforeseen fluctuations in supply.
Large regional markets such as PJM have also fostered innovation through competition, thereby shaping the future of clean energy technology and reducing greenhouse gas emissions in the process. By cultivating an environment in which all resources (renewables, natural gas, nuclear, etc.) can thrive, PJM is a bellwether for progress, encouraging the development and integration of new, lower-emission and increasingly efficient resources – and facilitating the transition away from older, less efficient generation resources.
EPSA in PJM
EPSA members operating in the PJM footprint provide more than 50,000 MW of generation capacity to the region. They include BP, Calpine Corporation, Cogentrix, Competitive Power Ventures, Eastern Generation, Energy Capital Partners, Gen-On, J-Power, LS Power, NRG Energy, Rockland Capital, Tenaska, and Vistra Corp. 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 some of the world’s largest battery storage projects.
Competitive power suppliers are industry leaders in efficient, cost-effective clean energy investment and emissions reductions while providing least- cost, reliable electricity.
EPSA Policy Recommendations for PJM Policymakers
Policymakers in PJM states should look to the grid operator’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.
Regional market competition and coordination has been a success for PJM customers, but out-ofmarket policies, subsidies and bailouts, inefficient state policies, and options like the Fixed Resource Requirement undermine future cost savings and efficient decarbonization. Nondiscriminatory, targeted approaches that harness the benefits of competition – such as carbon pricing or a well-designed Clean Energy Standard – will yield innovation and least-cost solutions to meet the future.
A Closer Look
PJM Interconnection: Where affordability and dependability meet.
Regional wholesale electricity markets like PJM Interconnection provide significant benefits for customers and reliability.
How does PJM guarantee dependable power for 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. To ensure reliable service for today and tomorrow, PJM operates a capacity market that secures electricity
commitments from power providers at a set offer price up to three years in advance. If generators fail to deliver power when it is most needed, they must pay a significant penalty. This helps ensure that electricity consumers enjoy affordable, reliable electricity service through peaks and valleys in demand.
Customers win when companies compete.
In regional wholesale markets like PJM, the government does not select winners and losers. Rather, customers win because companies are able to compete. In fact, consumers in the PJM Interconnection footprint enjoy annual savings of $3.2 – $4 billion by integrating more efficient resources, prioritizing the lowest generation costs, and reducing the need for extra reserves by drawing from a wide pool of power generators.
The chart in Figure 1 shows that wholesale power prices, adjusted for inflation, have remained essentially flat since the advent of competitive markets in 1999 – and today are at historically low levels. Wholesale power markets have allowed customers to benefit from both falling natural gas prices and competition among generators to supply electricity at the least cost.
PJM Interconnection: Where least-cost solutions provide more emissions reductions and cleaner technology.
Large regional markets and grid operators such as PJM have shaped the future of clean energy technology by spurring and encouraging innovation to reduce greenhouse gas emissions.
How does competition reduce carbon emissions?
While some claim that meeting environmental goals and addressing growing energy demand are at odds, the truth is 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 goal. Emissions reductions in competitive power markets are largely the result of 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 significant emissions reductions without relying on expensive subsidies, rate passthroughs, or mandates.
In the PJM region alone, carbon dioxide emissions have declined 34% since 2005 at zero additional cost to customers – in fact, customers saved money. These reductions are encouraged by investment in new, more efficient power generation technologies.
Some projections indicate that PJM’s diverse resource mix and geographic reach can provide even more savings for consumers and opportunities for decarbonization by adopting regional, market-based policies that maximize choice.
- A regional carbon price of $10/ton would reduce carbon emissions by 28% by 2030 at 1/8 the cost of the status quo approach, saving consumer $2.8 billion per year.
- A regional Clean Electricity Standard (CES) that provides partial credit to any low-emitting resource achieves similar results to a carbon price –leading 80 MMT at a cost of just $400 million per year with $2.8 billion in savings.
- Extending the RGGI pricing regime to the entire PJM footprint would add little cost compared to the current footprint but would reduce annual carbon emissions by nearly 100 MMT by 2030. However, we must be careful to avoid shifting emissions to non-participating states (leakage).
New, less carbon-intensive technologies improve efficiency.
Along with accelerating emissions reductions, competition has been a key driver in putting more clean energy technology on the grid. For more than a decade, PJM has been in the midst of a drastic technology shift. More than 27,000 MW of PJM’s oldest generators retired from the system and were replaced by more than 32,000 MW of new, more efficient, lower-emission generation such as natural gas, wind and solar. Such a significant technology transition during a short period of time could have led to energy shortfalls or sharp price increases, but neither occurred in PJM. Rather, by evolving the resource mix through competitive power markets and planning for reliability through capacity markets, PJM found the most cost-effective path to accelerate clean energy growth while ensuring grid reliability. By procuring resources three years in advance, PJM was able to maintain an orderly transition of resources and reliability for customers. Now, PJM’s current generation mix is the most diverse it has been in decades.
How does competition encourage innovation and consumer choice?
PJM provides reliable power with a diverse, flexible mix of resources and technologies, including on-demand resources such as natural gas and battery storage to support intermittent wind and solar power resources. The new generation in PJM’s diverse resource mix has been largely, and appropriately, paid for by private investment, rather than consumers. These investors, not ratepayers, bear the financial risk of this technology transition. 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.