June 20, 2014
Keeping the lights on is better assured in areas served by traditionally regulated utilities than in restructured electricity markets around the country, according to a new study conducted by Christensen Associates Energy Consulting for the Electric Markets Research Foundation.
'The U.S. electric power industry has a 100-year history of meeting the power needs of its customers under all but the most extreme conditions,' said Laurence D. Kirsch of Christensen Associates, one of the authors of the study. 'Whether the electricity sector is able to continue to develop and maintain sufficient resources to ensure adequate sources of electricity has emerged as perhaps the greatest challenge the industry faces,' Kirsch emphasized.
Approximately one-third of Americans obtain electricity through a market based on the traditional regulation of vertically-integrated utilities, which provide generation, transmission and distribution services to customers at prices approved by state regulators. The other two-thirds reside in restructured markets that use competitive bidding to establish prices for wholesale power delivered to electricity users by utilities or unregulated retail suppliers. Restructured markets are managed by regional transmission operators (RTOs).
The EMRF study analyzed and compared how each market addressed reliability issues. 'Traditionally regulated electricity markets continue to meet resource adequacy requirements under the supervision of state regulators,' the study found. 'The restructured markets, by contrast, are still trying to prove the workability of their model for assuring resource adequacy,' the study said.
'As a result, any debate on resource adequacy should begin by asking how to make the restructured market-model work,' the study stated. The fundamental problem is that RTOs seek a market solution for a problem where no market solution is possible because public policies - such as price caps and renewable energy requirements - dictate that electric generating capacity meet non-market goals, the study said.
Last winter's polar vortex exposed the future vulnerabilities of the electricity system in restructured markets as the power industry in the Northeast and Midwest scrambled to avoid blackouts while consumers paid unprecedented high prices for electricity. For example, the slated retirements of many power plants that kept the lights on last winter will make it more difficult to cope with the next polar vortex, the study noted. American Electric Power Company CEO Nicholas Akins testified before Congress that 89 percent of the generation that his company will be retiring in 2015 was needed to meet electricity demand last winter. Akins also warned that 'competitive wholesale markets are not currently providing the structure necessary to maintain that reliability and do not currently provide the proper signals to foster new power plant investment for the future.'
The President's carbon rules announced in early June will likely accelerate the trends discussed in this report, forcing additional retirements of coal-fired plants and boosting demand for natural gas in restructured markets, although their impacts will also be felt in regulated markets.
Consumers are also facing sticker shock as 'the polar vortex created significant spikes in the price of wholesale power, which has quickly morphed into a political issue,' the study said. PPL Corp., a utility in central Pennsylvania, saw wholesale prices hit $2,000 per megawatt hour compared to $40 per megawatt hour on a normal day. In Texas, where the Electric Reliability Council of Texas (ERCOT) manages the grid, prices reached the wholesale market cap of $5,000 per megawatt hour for the first time, partly due to plant outages. And in New York, after a 27 percent jump in wholesale rates in January, the public service commission authorized National Grid to recover the increased wholesale power costs over four months from consumers.
Weather is not the only reason to worry about reliability concerns in restructured markets, the study said. Additional issues affecting resource adequacy include low wholesale prices that have already induced the retirements of two nuclear plants and the effects of massive fuel switching to natural gas. Also concerning is the increased reliance on intermittent sources of power such as solar and wind, which may be unavailable when needed as well and which distort free market prices because they are subsidized, the study said.
Experts have suggested many reforms to improve reliability in restructured markets. But tweaking the system won't work, the study said. A comprehensive approach is needed. For example, the restructured markets could be designed to place greater emphasis on the procurement of capacity in ways similar to those used in regulated markets: Set capacity requirements according to engineering criteria; impose high penalties on load serving entities failing to meet their requirements; and offer a centralized market for parties who find the centralized market's terms attractive. Generation could be procured through competitive solicitation, as is done successfully in some traditionally regulated markets as well as in some restructured markets. RTOs could continue to operate energy markets as they do today, the study said.
'Our nation needs to continually strive for better regulatory and market rules that will keep the lights on in restructured markets at a reasonable cost to consumers and the economy,' said Bruce Edelston, president of the Electricity Markets Research Foundation. 'We recommend that regulators and legislators, at both the federal and state levels, closely examine the resource adequacy problem in restructured markets and develop solutions. The problem is here now. Not acting could have serious impacts on the nation's economy' Edelston concluded.
EMRF is an independent non-profit research organization formed to examine issues surrounding the operation of alternative electric industry market structures and how they are affected by public policy.
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Electric Markets Research Foundation
W. John Moore, Principal
JM Strategic Communications