Powering Strong Communities

Rethinking the markets’ role in reliability

As our electricity generation mix continues to transform — with more wind, solar, natural gas, energy storage, and distributed energy resources, and less coal and nuclear capacity — the regional transmission operators and independent system operators are facing new challenges in ensuring that the markets support reliability.

These challenges include:

  • Uncertainty about the real-time availability of renewable resources, given the variability of weather and limited dispatchability of these resources (other than hydropower).
  • Ensuring sufficient flexible resources are in operation that can quickly ramp up and down.
  • Difficulties in meeting frequency regulation and voltage support requirements.
  • Increased risk of oversupply.
  • Limited visibility of distributed energy resources (primarily rooftop solar) and their impact on patterns of electricity demand.
  • Concerns stemming from an increased reliance on natural gas-fired generation, including pipeline constraints, merchant generators’ reluctance to sign firm contracts for natural gas delivery, and environmental limitations of natural gas generators to switch to oil when supply is constrained.  

It is becoming increasingly apparent that the long-standing measure of reliability — a sufficient supply of megawatts to meet the projected summer peak demand plus a reserve margin — may no longer be appropriate. What’s needed instead are operational capabilities and attributes such as ramping (up and down), fast start, frequency regulation and voltage support.

To address these new challenges, the RTOs/ISOs have implemented or proposed the following changes to the markets they operate, and they are evaluating other options:

  • Removing barriers to the participation of energy storage resources, in compliance with the Federal Energy Regulatory Commission’s Order 841 (All RTOs except ERCOT must comply with this order).
  • Establishing a ramping product to ensure that resources capable of ramping up and down are available when needed.
  • Determining a more accurate capacity value of renewable resources based on how much of each resource is on the grid.
  • Creating new day-ahead market products to ensure that there are sufficient resources to meet unexpected changes in generation and load between the day-ahead and real-time markets.
  • Considering multiday markets to increase the visibility of resource needs beyond the day-ahead market.
  • Revising shortage pricing rules, which allow energy prices to spike to high levels during shortfalls in reserves, to provide stronger financial incentives for the development of flexible, fast ramping resources.
  • Considering having seasonal reliability requirements rather than only meeting summer peak load.
  • Operating an energy imbalance market to allow trading of energy imbalances over a wider geographic area, which provides access to a more diverse array of resources.
  • Allowing distributed resources to participate.
  • Requiring certain wind and solar resources to be dispatchable.

RTO/ISO Market Changes

Establishing a ramping product blue dot     blue dot blue square   triangle
Recalculating the capacity value of renewable resources blue square       blue dot blue square blue square
New day-ahead market products blue square   triangle       blue square
Multiday energy and ancillary services markets     blue square       blue square
Revising shortage pricing rules   blue dot   blue square blue square blue dot  
Seasonal reliability requirements     blue square blue square      
Operating an energy imbalance market blue dot           triangle
Allowing DER participation blue dot green square     blue dot blue dot  
Requiring wind resources to be dispatchable       blue dot blue dot   blue dot
Requiring solar resources to be dispatchable       blue dot green square   blue dot
blue dot implemented or approved by FERC green square proposed to FERC orange triangle being discussed or evaluated

Customer advocates, including public power, have expressed concern that some of these market rule changes might significantly increase costs beyond what is needed to address the identified challenges.

Two such examples are:

  • Despite stakeholder opposition, FERC approved changes to PJM Interconnection’s reserve markets in May 2020 that would greatly increase energy and reserve prices. One of PJM’s justifications for these market rule changes was that they address the uncertainty created by higher levels of intermittent renewable resources. The PJM market monitor and customer representatives, including public power, disagreed and countered that PJM had failed to justify the need for such increases in prices.
  • In April 2020, ISO-New England proposed creating new option products in the day-ahead market to ensure the real-time availability of energy in the event that resources are not sufficient to meet demand, especially during extreme cold weather. The ISO explained that since its system relies on natural gas and renewable resources, it faces an increased risk of these resources not being available. Filed without stakeholder support, this proposal elicited opposition from the states, public power, and other customer representatives for imposing higher costs beyond the need to ensure reliability.

The RTO/ISO-operated markets provide opportunities to procure the operational characteristics and attributes needed to ensure reliability in a rapidly changing electricity industry. However, FERC should ensure that these rule changes focus on meeting these challenges without imposing excess costs on consumers.