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Green Buyers: Just a voice in the desert or the foretelling of something big happening in the Electricity Marketplace

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Evidence of change in the electricity supply chain can be found among the thousands of articles, reports and papers that have already been posted. From coal mine closures to the introduction of capacity exchanges e.g. Level Ten Energy and the REBA marketplace, these events seem to be clear signs that something big is happening. Soon the trees will change color in New England, as a leading indicator that Winter is coming, and New Englanders will wait to see if another Arctic Vortex, and Natural Gas shortages, will cause wholesale energy prices to skyrocket into nose-bleed territory. Fortunately for many green buyers with Power Purchase Agreements (PPA) in place, they will be isolated from these spot market uncertainties that lead to price surges.

The impact of green buyer decisions to go “out of market” to secure their electricity supplies is having a profound effect on “the established way” of doing business and their actions are the leading indicators that something big is underway. Capacity markets have failed, as evidenced by the enormous over payments for capacity by consumers for excessive capacity that may never produce a single electron. The desires of environmentally conscious consumers to eliminate toxic air emissions are being expressed through Power Purchase Agreements (PPA), State based Renewable Portfolio Standards and Regional Green House Gas Initiative are chipping away another brick in the foundation of these wholesale capacity markets. Further evidence of capacity market failure can be seen in the latest tariff changes to address fuel security concerns.

The voices in the desert are getting louder, sending a clear signal to the “established markets” that the status quo no longer works for them and they want something better. REBA, Level Ten Energy and State based energy programs are the leading indicators that big changes are coming; actually, they’re already well underway. The message from consumers is crystal clear, they prefer a market-based capacity exchange that enables them to transact in Power Purchase Agreements (PPA), to satisfy their electricity needs on terms that are agreeable to both generator owners and the consumers themselves.

So why haven’t the wholesale market operators given these consumers and their generator partners the means to transact in energy supplies by operating a capacity exchange? It seems that market operators are doing everything possible to avoid giving consumers and their generator partners the means to transact! But why?

My guess is these market operators will respond with something related to reliability of the electrical system as reason for not offering a capacity exchange capability to green buyers. However, there is ample evidence that market operators can satisfy both the system reliability needs and the desires of consumers using the same capacity exchange market mechanism, without compromising either.

As I indicated earlier, change is already well underway. I recently learned of a new book, scheduled for publication in 2020, called the “Handbook of Electricity Markets” that appears to address some of the changes that are already underway and may provide direction to ensure the coexistence of reliable electric supply and consumer desires for clean air. Some materials from the forthcoming book are accessible here: http://cadmus.eui.eu/handle/1814/63445 and here: http://cadmus.eui.eu/bitstream/handle/1814/63464/PB_2019_08_FSR_Energy.pdf?sequence=4&isAllowed=y.  I’m encouraged from my reading of these items that someone is listening and doing something to make sure the message from consumers and their generator partners is heard and preserved. Alas, I now know what to buy my friends in the capacity markets business for Christmas!

Richard Brooks's picture

Thank Richard for the Post!

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Matt Chester's picture
Matt Chester on Aug 20, 2019 2:16 pm GMT

The message from consumers is crystal clear, they prefer a market-based capacity exchange that enables them to transact in Power Purchase Agreements (PPA), to satisfy their electricity needs on terms that are agreeable to both generator owners and the consumers themselves.

What's interesting is that these market forces are still coming at a time when the externalities of dirty energy are still not priced into things. It's true that many of these buyers and long-term contracts recognize that such pricing is likely coming in some form or another so they want to lock in rates now, but it makes you wonder how quickly these purchases would ramp up if/when carbon pricing becomes common. 

Richard Brooks's picture
Richard Brooks on Aug 20, 2019 4:20 pm GMT

Matt, my intuition is that a carbon pricing scheme would directly, and significatly increase the price of energy, possibly pushing more parties to use long term contracts/PPA's to limit their risks. I make this assumption based on two key factors, the locational marginal price (LMP) of electricity and the dependence on fossil fuel generators as the marginal resource to meet demand. Adding a "carbon tax" to the marginal (fossil) generators would seem to increase the locational marginal price (this contains a uniform clearing price that every gerator receives for the value of energy at a given moment in time), which I suspect would motivate some parties to cap their energy costs using some form of long term contract, to avoid paying the higher prices induced by a carbon tax. Eventually, I suspect that the "marginal unit" would fall into one of the renewable units at some point, which are not subject to the carbon tax, resulting in a lower cost of energy. But while we're dependent on fossil generators to meet demand, we'll be looking at higher energy prices if/when a carbon tax is implemented, IMO.

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