The integration of renewables into the grid is becoming an increasingly acute problem, writes Fereidoon Sioshansi, editor of newsletter EEnergy Informer. According to Sioshansi, this is especially true in energy-only markets that have no capacity mechanism of any sort. But market interventions in the form of subsidies are not the answer. Joe Bowring of independent consultancy Monitoring Analytics has an alternative: offering capacity against a minimum price. Courtesy EEnergy Informer.
It is becoming increasingly clear that the market designs of 1980s is not fit for today’s electricity markets, let alone those of the next decade. Among the main reasons is the growing penetration of renewables in many markets, which operate at zero marginal cost, and which typically bid their output in wholesale markets at zero, or even negative, prices while taking the market clearing price (MCP), usually set by the most expensive thermal unit dispatched to meet demand.
This phenomenon has resulted in persistently declining wholesale energy prices in some markets – and declining profits for some thermal generators. Moreover, even highly efficient peaking plants, which are increasingly needed as backup to maintain network’s reliability, are not getting dispatched frequently enough and/or for long enough number of hours to remain profitable. These conditions discourage investment in new capacity while forcing many of the less efficient units out of the market.
Energy-only markets
In a few cases, the grid operators have had to intervene in the market to prevent such unprofitable or marginally profitable units from shutting down, because that may make the network vulnerable at times when sufficient solar or wind generation is not available to meet demand. The problem tends to be more acute in energy-only markets, where generators are only paid when they are dispatched, not to keep excess capacity around for reliability purposes, such as in the PJM market in the U.S., which covers all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.
These issues are gaining considerable attention in a number of markets where the problem can no longer be ignored, and the topic is no longer of interest just among academics and scholars.
In an increasing number of cases, the market operators, regulators or politicians have had to intervene in the market by – for example – subsidizing certain critical fossil or nuclear units to prevent them from shutting down. In some cases, certain critical thermal units are designated as reliability-must-run (RMR), as in the Californian market (CAISO).
If too many units are paid out of the market merit order, and too many renewable generators bid at zero or negative costs, life becomes difficult if not unsustainable for the remaining thermal units
California does not have a formal capacity market but maintains adequate capacity through a mandatory administrative process using bilateral contracts. Much of the state’s thermal generation has been built under bilateral cost of service contracts, which – one can argue – are essentially indistinguishable from RMRs.
Such units are typically paid out of the usual market merit order because they are deemed critical to maintaining the network’s reliability either because of their location on the transmission lines, or proximity to critical load centers, or because the network needs the spinning reserves to maintain voltage or frequency. Plants designated as RMR no longer participate in daily wholesale auctions since they get paid regardless of getting dispatched.
Clearly, if too many units are paid out of the market merit order, and too many renewable generators bid at zero or negative costs, life becomes difficult if not unsustainable for the remaining thermal units, especially those with less flexible operating characteristics.
Very real threat
In its latest annual state of the market (SOM) report, Joe Bowring of Monitoring Analytics, the independent market monitor for PJM, warned that proposals to subsidize unprofitable generating resources – including a handful of unprofitable nuclear units – present “a very real threat” to the competitiveness of wholesale electricity markets.
The subsidies in question come in the form of zero-emission credits (ZEC) for otherwise uneconomic nuclear plants, which were included as part of New York’s Clean Energy Standard and are intended to aid the state’s transition away from fossil fuels and into renewables. Bowring points out that while NY is not in the PJM market, nevertheless these nuclear subsidies will still negatively affect PJM markets. He is also concerned about similar ZEC legislation in Illinois to subsidize Quad Cities nuclear plant, preventing it from shutting down.
In his 2016 SOW report, Bowring said, “Economists everywhere agree that … the most cost-effective way to do that (i.e., preventing unprofitable nuclear units from shutting down) is to have a carbon price…..,” adding, “It’s certainly not by picking (and subsidizing) individual power plants that are low carbon.”
Monitoring Analytics, whose job is to monitor the performance of the PJM market against a hypothetical functional market with no abuse of market power, no price manipulation, no gaming, no artificial or strategic withholding of energy or capacity, no out-of-market subsidies such as ZECs, or other types of manipulation or interference – is concerned that such interference, in the form of specific subsidies for specific market participants, will ultimately affect the market outcome.
“The market fundamentals are just fine. Market interventions, for example, in the form of subsidies, distort markets and create the need for more subsidies”
In addition to performing  its market monitoring function, Monitoring Analytics mitigates against exercise of market power while proposing market design changes to enhance competition.
In discussing the topic with EEnergy Informer, Bowring pointed out that markets such as the PJM, that include a capacity mechanism, “can accommodate increasing shares of renewables without too much difficulty,” adding, “Markets like ERCOT (the Electric Reliability Council of Texas) can also work fine if they correctly define scarcity pricing rules and recognize that the energy-only construct is riskier.”
Bowring believes that “the market fundamentals are just fine. Market interventions, for example, in the form of subsidies, however, distort markets and create the need for more subsidies.” Uneconomic units, he says, “should be allowed to retire. Fuel diversity has increased or remained flat over the last 10 years.”
Bowring points out that no market interventions have occurred in PJM, allowing substantial coal retirements and offsetting gas additions to take place entirely driven by price signals.
How would Bowring propose to address some of the issues confronting markets moving forward? He said, “Our proposal is to implement an existing unit MOPR (Minimum Offer Price Rule) which would prevent subsidized units from offering capacity in the PJM capacity market at less than a competitive level.”
The latest SOM report, which comes in 13 sections and 2 massive volumes, is available for download at Monitoring Analytics website. It has much more to offer, including a comprehensive list of recommendations.
Editor’s Note
This article was first published by EEnergy Informer and is republished here with permission.
Fereidoon Sioshansi is author and editor of many books on technological and policy developments in the utility sector. Hi’s upcoming book Innovation and Dirsuption at the Grid’s Edge, to be published in June 2017.
Michael Hogan says
Mr. Sionshansi appears to believe, along with a certain American president, that repetition alone can make something true. The connection between renewables and declining wholesale prices is not their marginal production cost – they virtually never set the clearing price – but simply in the contribution they make to over-capacity. As Joe Bowring recognizes, get the stranded assets out of the market and ensure legitimate price formation as in ERCOT and “the market design of the 1980s” can work “just fine.” This post is littered with odd and contradictory statements, such as the comment that “The problem tends to be more acute in energy-only markets…such as PJM” (PJM is perhaps the poster child for markets that are NOT “energy-only”) and yet later on he appears to recognize that PJM does indeed have a capacity market. He also appears not to realize that the reliability must-run mechanism is not used to address long-term resource adequacy issues but is very specifically designed to address short-term locational issues, pending resolution through transmission investment, demand management or other localized grid support measures. There are other oddities here but I will leave the comment at that for now.
Bob Wallace says
The problem is that some nuclear and fossil fuel plants are not able to compete in markets where less expensive wind, solar and natural gas are appearing. People who had expected many more years of cash flow from their large thermal plant investments are experiencing a business disruption and are flailing around in an attempt to avoid losses.
Some reactor owners have argued that their capacity is needed when, in fact, there is no data to support that claim. But they’ve been successful with their claim and we now find ourselves subsidizing reactors which were paid off long ago.
And while large thermal plant owners complain loudly about subsidies for wind and solar they fail to talk about the massive subsidies nuclear energy has received over the 60 years we’ve been using it. And they fail to mention that coal is our most heavily subsidized electricity source due to coal’s ability to leave taxpayers covering coal’s external costs. Coal, even in paid off plants, is our most expensive electricity source.
Fereidoon Sioshansi says
The article said that PJM does have a formal capacity market, perhaps the language was not sufficiently clear
Happy to further discuss if you provide e-mail, mine is fpsioshansi@aol.com
Michael Hogan says
I think you’ll find I acknowledged that quite explicitly. My point was that the article at one point also cites PJM as a market exhibiting a problem typical of “energy-only markets.” Perhaps an editing error, though I suspect it’s more an indication that your arguments about so-called energy-only markets are not well constructed.