The past two years presented challenges for the competitive power industry as the economy responded to a global reopening from the COVID lockdowns, and the industry worked to adapt to rising natural gas prices, compounded by Russia’s invasion of Ukraine. In an explainer released by the New York Independent System Operator (NYISO) titled, “Impact of National and Global Conditions on Electricity Prices in New York,” the Empire State’s independent system operator clarifies the ways in which competitive power markets are vital to reliability in every power grid, not just in New York.
Two major current events have led to the dramatic increase in demand for natural gas: the Russian invasion of Ukraine and economic reopening after the lockdowns associated with the COVID-19 pandemic. Starting in mid-March 2020, electricity consumption decreased drastically, creating a surplus of natural gas supply and driving prices down to record low levels. Once restrictions eased throughout the nation, many of us began returning to some form of normalcy. Correspondingly, power demand shot back up, leaving the entire electricity market out of balance and creating an “uncertain market.”
While investors pressed pause on previously planned projects during the lockdowns, those decisions further intensified the disparity between supply and demand as the former stayed relatively stagnant and the latter steadily rose. As a result, companies within the power industry lost growth opportunities, while costs for suppliers and consumers increased.
The Ukraine conflict further adds to increasing energy costs. The international embargo on Russian oil and gas trade has caused prices to rise. Furthermore, many European countries are boycotting Russian oil, and the U.S. has promised to support their efforts by supplying these countries with 50 billion cubic meters of natural gas by 2030.
So how can we minimize cost? The answer lies in competitive markets which incentivize suppliers to submit their most economic bid, as ISOs rank bids chiefly on price.
Under the clearing price (the highest price of the selected suppliers), the costs of supplying electricity are covered. NYISO’s explainer states, “While the competitive market works to minimize cost, electricity prices are significantly influenced by fuel costs and these costs are ultimately passed through to customers in the electricity supply component of consumer bills.”
EPSA supports and advocates for competitive markets as they provide the most reliable power at the least cost to consumers.
Although renewables like wind and solar are growing their share of the total power generated, natural gas is still needed to ensure overall reliability. Because it is a global commodity, gas prices are sensitive to geopolitical stresses, including, as we have seen, extreme events like war. Additionally, they affect all types of market design, vertically integrated and restructured alike, and consumers will ultimately bear those costs. However, even when faced with historical challenges, competitive power markets have shown themselves to be an effective tool to protect reliability and affordability and to generate cleaner power.