In order for U.S. power markets to evolve, independent system operators and regional transmission organizations need to address a slew of technology innovations and policy shifts while providing greater regulatory clarity, market experts said on Oct. 24.
"We know there are significant challenges ahead with technology innovation, renewable penetration, distributed generation, energy storage, smart metered distribution networks, electric vehicles, smart thermostats… and what technologies come forward as we try to address climate change," Abram Klein, managing partner at Appian Way Energy Partners LLC, said during the S&P Global Platts Nodal Trader Conference in New York City.
On the policy side, grid operators are juggling a wide range of complex issues, including pressure to deal with climate change through mechanisms such as carbon dioxide emissions pricing, the market impact of subsidized resources, ramp products and pricing renewable energy integration. In addition, wholesale and retail power prices are often not well aligned in some markets, providing inadequate signals to consumers to change their behavior, Klein said during a conference panel entitled "What Should the ISO/RTO 2.0 Look Like?"
While the growth of renewable energy resources in the U.S. is well known, Tom Ottem, vice president of market data operations at Yes Energy, pointed out that April 2019 was the first time that renewables outpaced coal-fired generation for the entire month. And that trend is likely to continue, Ottem said.
U.S. power generation capacity additions by fuel between 2018 and 2022 are expected to consist of 1,142 MW of coal, 60,738 MW of natural gas and 40,599 MW of hydropower, wind and solar, he said.
This influx of renewable energy is impacting prices, with wind generation in the Electric Reliability Council of Texas as an example this past summer. The average power price at ERCOT North Hub on lower-wind days was about $130/MWh, while on high wind generation days the average North Hub price was about $30/MWh, Ottem said.
RTO 2.0 challenges
Another job for "RTO 2.0" will be identifying services that will increasingly be needed, such as flexibility, increased reserves and how to deal with scarcity and ramping, said Nancy Bagot, senior vice president, at merchant generator trade group Electric Power Supply Association.
Mid-Atlantic grid operator the PJM Interconnection "is currently attempting to further value specific attributes (particularly flexibility) to meet both existing and expected needs of the RTO through the administration of an Operating Reserve Demand Curve to value energy reserves," Kieran Kemmerer, power market analyst with S&P Global Platts Analytics, said in an email.
But challenges in achieving those goals are already being observed.
"While Platts Analytics anticipates this will indeed incentivize reserves, the extent at which it provides additional compensation in the energy market appears to be limited — estimates for round-the-clock energy price impacts remain below $1/MWh," Kemmerer said.
Another thing to keep in mind, according to Bagot, is that the ancillary services market currently only represents about 1% of power sellers' compensation. Valuing those additional services, therefore, may not encourage the addition of many more resources, although it must be done, she said.
Grid operators could reform their capacity markets to better incorporate state policy goals, including cutting carbon emissions. But since grid operators' stated goal is resource adequacy, changes would be needed if we are going to value carbon dioxide emissions, Bagot said. A separate carbon market could be another option, she added.
Attempts to date at accommodating changing power market dynamics have resulted in RTO-administered markets being "over-engineered," said Ron McNamara, managing director at First Principles Economics. RTO 2.0 will have to be based on the idea that there is no separation between retail and wholesale markets, meaning "it's just the market," he said.
The interrelated nature of various power markets is another challenge where energy market tweaks, for example, can bleed into the capacity market, which ensures available power for future years. Overall performance of the entire power market and not just individual components needs to be considered and changes should be evaluated in terms of the sum of their effects across the entire system, McNamara said.
Asked about the biggest power market problems that will need to be overcome for RTO 2.0 to be successful, McNamara said RTOs are currently being reactive and the U.S. Department of Energy and Federal Energy Regulatory Commission are not providing vision.
Ottem said more clarity is needed. "Be clear about what the rules are and don't change them after the fact so I can decide if I want to participate," he said.
Jared Anderson is a reporter with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.