You can't always get what you want
But if you try sometimes you find
You get what you need
-The Rolling Stones
During the past year, some energy pundits have begun to raise an interesting question…
“With the domination of zero cost marginal generation proliferating rapidly throughout our country, do we really need to have organized energy markets anymore?
In a world where the status quo is being challenged every day in every facet of society, I do not believe it to be wise to dismiss any question offhand. Perhaps more than anywhere else, the energy industry is being tossed into a sea of turbulence without anybody completely knowing the outcome.
In fact, the rapid changeover of the generation fleet from one largely dependent on large central-station fossil units (principally coal) to a new, more diverse fleet consisting of a mix of renewable resources, demand response, distributed generation and efficient combined-cycle natural gas units would seem to give some credence to the question.
If the marginal cost of energy is approaching zero, why do we need organized markets to economically dispatch generation across a region? Do they still create value and serve a purpose?
In “Comes A Time”, Neil Young once wrote:
“Oh, this old world
Keeps spinning round
It's a wonder tall trees
Ain't layin' down
There comes a time”
While we are certainly seeing some “tall trees” like coal and nuclear plants fall, I do not believe its time that our RTO markets should join them.
Before I lay out four important reason why organized energy markets must and will continue to evolve and succeed, let’s establish six bedrock principles:
- Consumers benefit when the costs of electricity consumption are as low as possible over the long term, consistent with reliable service, environmental standards, and policy goals required by federal and state governments.
- FERC has a mandate for it to maintain reasonable, nondiscriminatory and just rates to the consumer.
- FERC has the authority and obligation to ensure that wholesale markets accommodate state and federal public policies.
- Regional energy challenges demand regional solutions.
- The delta between the cost of energy and the cost of power is widening and will likely continue to as we implement state and federal policies.
- Nothing in life is perfect. There are no perfect people, there are no perfect state and federal policies, and there are no perfect organized RTO/ISO markets.
Why RTO Markets Will Continue to Matter
- Consensus Building- CAISO, NYISO, ERCOT, MISO, ISO-NE, PJM & SPP all provide an extremely underappreciated forum whereby Public Power, IOUs, Rural Electric Cooperatives, Federal Power Agencies, non-utility generators, and state public policy advocates convene to discuss how to consider and implement competing policy goals.
Here is one recent example….
In March 2018, the SPP Board of Directors and Members Committee created the Holistic Integrated Tariff Team (HITT) to comprehensively review SPP’s cost allocation model, transmission planning processes, Integrated Marketplace services, and disconnects or synergies between planning and real-time reliability and economic operations.
After vigorous debate and discussion over seventeen months, the HITT agreed on 21 high-level recommendations for the board’s consideration. The recommendations were made from a broad perspective rather than a narrower view of SPP’s functions. The recommendations represent a consensus-based set of solutions to improve many of SPP’s critical functions.
The HITT team included member representatives of investor owned utilities, cooperatives, independent power producers, municipalities, state agencies and independent transmission companies.
Consensus building is an incredibly tough business. SPP ranks among the best of RTOs/ISOs in successfully doing so. Decisions may take a long time, but any adopted policy or market design update inherently owns a far greater chance of success if stakeholder voices are heard.
People will support what they help to create.
- Reliability- RTOs/ISOs are the air traffic controllers of our power grids, they monitor power flow throughout their footprint and coordinate regional responses to emergencies or power blackouts.
In a way, the reliability coordinators who manage organized markets are like offensive lineman in football. When they do their job, you really do not know who they are because we are all watching the quarterback throw a touchdown pass, or the running back breaking free on a long run, or the wide receiver making a spectacular catch.
While all the energy debates continue to ensue and policy decisions are being made to adjust to stunning changes in our industry, the RTOs/ISOs keep the lights on daily. The incredible blitz of intermittent resources like wind and solar make reliability a much more challenging proposition than ten years ago.
Unfortunately, human nature dictates that we often do not appreciate something until we do not have it anymore.
- Market Design - RTOs/ISOs, with the support of FERC, have been able to revise their markets to incent development and appropriately compensate more flexible resources such as demand response, energy storage and fast-ramping generating resources. Through the creation of price signals, these markets incent the development of flexible resources required to accommodate the growing dominance of wind and solar.
Market design is the solution to implement rapidly evolving public policy decisions which often vary greatly from one state to the other. The design must meet these policy goals while also providing a careful balance among numerous goals, including safety, reliability, resource adequacy, affordability, environmental sustainability, economic development, and financial stability.
Like almost all the functions of ISOs/RTOs, market design work is extremely technical and difficult. The people who provide this function are among the brightest. They not only require the technical ability to design a market, they also require the people skills to explain it to numerous stakeholders.
In a world where the consumer has become the prosumer, you need to have market design be nimble enough to respond to rapidly evolving customer preferences. While maybe not as fast as some would like, RTO/ISO markets generally retool quickly once state and federal policies become agreed upon.
The growing delta between the cost of energy and the cost of power to the consumer has nothing to do with RTO market design. In fact, the gap would be much wider without RTOs/ISOs.
- Value Creation – RTOs/ISOs consistently deliver the value. A regional approach to optimizing generation and transmission delivers value in every single ISO/RTO in the United States.The western energy imbalance market has yielded $736 million since it began in November 2014.
Besides the financial value created, our country burns less fossil fuel because regional entities organized. The surplus of low-cost renewable power is generally not curtailed because of these markets. While California does not need all their solar power during the day, neighboring states receive the surplus and back down more expensive generation.
The concept of economic dispatch and security constrained economic dispatch of transmission saves money, fully optimizes assets, and allows public policy to be implemented. Power flows more optimally.
RTOs/ISOs create significantly more value than they cost.
Summary
A very dear mentor once offered me some good advice, if you ever experience a challenge explaining the value of something, close your eyes and pretend it no longer existed. What would that world look like?
In the case of RTOs/ISOs, the elimination or the depravation of their vigor or force would have a significant negative impact on our safety, our economy, and our clear direction towards a more environmentally friendly energy world.
In many ways, the regional approach towards regional policy goals has been ten times more effective than relying upon Congress to do so. RTOs/ISOs listen and react to their stakeholders better than almost anybody.
If we can just convince Congress to fully staff our FERC Commissioners more quickly, much more can be accomplished. We have several challenges on our plate today that require immediate attention and guidance from FERC.
Like anything else, RTOs/ISOs are not perfect. The struggle to adequately and fairly price capacity has been difficult and controversial at times. Yet, the RTOs/ISOs continue to work with stakeholders from a wide universe to evolve and improve.
When it comes to policy debates or the business of dividing up revenues and expenses amongst a region of entities, you are guaranteed to have people upset and disappointed at times. You can’t always get what you want.
But if you continue dialogue with your neighbors, you may just find that you will get what you need.
We simply can not allow our differences or frustrations to simply cause us to take our bat and ball and go home. RTO/ISO organizations must be allowed to evolve to address critical challenges for our future.