Brian George is director of policy strategy and government affairs at EPSA.
New E3 study finds that wholesale electricity markets and a stable long-term price signal for reducing carbon emissions can facilitate reliable decarbonization.
Last week, the team at Energy + Environmental Economics (E3) released a report titled Scalable Markets for the Energy Transition: A Blueprint for Wholesale Electricity Market Reform. In it, the authors outline several recommendations for wholesale electricity market reform to help reliably and affordably decarbonize the grid. They also propose a bilateral clean energy market (BCEM) designed to facilitate clean energy deployment.
See a summary of report takeaways here.
Underscoring these findings, the report notes that wholesale electricity markets have played an important role in facilitating carbon reductions by promoting scale and diversity across broad geographic footprints, allowing more efficient generation dispatch, and encouraging faster retirement of older, less efficient resources thanks to the forces of competition. As noted by nine former Federal Energy Regulatory Commission (FERC) members in a recent letter to the current Commission, competition will be key to preparing the grid for a rapid evolution to a low carbon future.
Report Aligns with FERC’s Modernizing Electricity Market Design Effort
This report is a timely addition to the dialogue. Earlier this spring the Federal Energy Regulatory Commission (FERC) kicked off a proceeding titled “Modernizing Electricity Market Design” to examine how market design in capacity, energy and ancillary services markets may need to evolve to meet challenges posed by the grids of the future. We encourage the Commission to consider this report, and its recommendations, as part of its ongoing inquiry into electricity market design for the future.
First and foremost, the report concludes that the general three market structure—energy, capacity, and ancillary services—should be preserved, as together, these markets properly identify and efficiently procure the capabilities needed to ensure efficient and reliable operation of a modern power system. Regardless of policy preference or societal goal, maintaining reliability at an affordable cost is job number one for grid operators. This is consistent with the comments offered by the CEOs of PJM Interconnection, ISO New England, and the New York ISO in early March, stating that the purpose of competitive wholesale power markets is to achieve a reliable power system at the lowest possible cost.
Part-and-parcel to this, capacity markets should continue to focus exclusively on capacity. As noted in the report, resource adequacy remains critical for a modern economy, and ensuring resource adequacy is a key function of electricity markets. However, the capacity market should also evolve, not be abandoned, to meet the increasingly complex and interactive nature the resources on the system. These recommendations strike at the heart of FERC’s inquiry: how should markets evolve to meet the challenges posed by a future grid. While EPSA and its members may not support the specifics of each recommendation, we believe they all merit consideration and discussion at FERC.
The recommendations offered in the capacity market design generally aim to better evaluate and recognize the contributions of intermittent non-firm resources (such as wind and solar generation) through, for example, the use of effective load carrying capability (ELCC) methodology. Going forward, it is critical that all resources are accurately accredited when it comes to providing capacity. The full list of recommended capacity market changes begin on page 28 of the full report.
The recommendations in the energy and ancillary services markets focus on how efficiency can be maintained and improved in light of a resource mix with differing operational characteristics. Recommendations in the energy market include evaluating operating reserve needs on a dynamic basis, unlocking the full flexibility value of wind, solar, and other inverter-based resources and fully optimizing energy storage during market operations. The full list of recommendations in the energy and ancillary services markets can be found beginning on page 26 of the full report.
In the letter referenced above, the CEOs outline five foundational market objectives to serve as guideposts to ensure a reliable, efficient and increasingly clean power system in their respective regions. The objectives offered in that letter are strikingly similar to the recommendations offered in the E3 report, including, a focus on sound pricing in the energy market, accurate assessment of resource capacity contributions to resource adequacy, and continued efficient integration of demand-side resources into competitive wholesale markets.
Given the alignment, we believe these areas are ripe for consideration as FERC continues its efforts in the Modernizing Electricity Market Design effort. Above all else, market reforms must continue to be fuel and technology-neutral, allowing all resources the opportunity to compete, consistent with the requirements of the Federal Power Act.
A Note on the BCEM
While the focus here is on the wholesale electricity market reforms proposed in the new report, the report also offers a new idea to facilitate carbon reductions in the power sector in lieu of a carbon price. What’s notable about the new proposal is that, if adopted, significant efficiencies could be gained – ultimately lowering the cost of decarbonization and providing a strong framework for the ultimate transition to an economy-wide price on carbon. The proposal also offers several suggestions that could be implemented in a Clean Energy Standard to facilitate broader resource participation and promote competition. We will provide a separate blog post on the BCEM in the next week.
EPSA provided support for E3’s work; however, E3 retained full editorial control of the document. As such, the views expressed are solely those of the authors. We would also like to thank the following reviewers for their thoughtful input: Arnie Quinn, Bryn Baker, Cheryl LaFleur, CK Woo, Devin Hartman, Matt Barmack, Michael Panfil, Paul Joskow, Rob Gramlich, and Travis Kavulla.