President Trump directed Energy Secretary Rick Perry to prepare “immediate steps” to halt the loss of “fuel-secure power facilities.” Secretary Perry sent a letter to FERC saying the “resiliency of the electric grid is threatened by the premature retirements of these fuel-secure traditional baseload resources” and provided a proposed rule to better compensate them. While FERC rejected that specific proposal, FERC has made “resilience” the agency’s top priority and recently declared the ISO-New England market rules unjust and unreasonable for failing to account for “fuel security.” The CEO of the largest Regional Transmission Organization, Andrew Ott of PJM announced a fuel security study and said recently, “my desire would be for FERC to get the message we do need their assistance…we just feel they need to move forward. It’s important for the nation.”
What’s going on here? Has the electric industry been asleep?
Rational public policy begins with defining the problem. While the resiliency question is valid and its analysis is a worthwhile pursuit, the evidence of a generation problem to date is lacking. DOE first assessed the claim that there was a “baseload” generation shortage. The DOE staff report found the term “baseload” to be just an operating mode that many large power plants used to operate in, not a reliability need per se. Next FERC opened a proceeding on “resilience.” NERC and most grid operators told FERC that resilience has not been ignored, rather it is covered by their existing reliability programs. Many parties showed that reserve margins are ample now to provide reliable generation services, and most outages result from loss of distribution systems rather than generation. So far so good, no problem yet identified related to generation or electric markets.
Concerns about Cold Snaps
Two grid operators, ISO-New England and PJM, raised the issue of energy limitations as they rely more on natural gas during prolonged winter cold weather events, when that gas is in high demand for space heating. PJM plans to release a study on fuel security soon. ISO-New England has done the most to characterize what may be a market failure. In their most recent presentation to stakeholders, ISO-NE defined the problem as “there may be insufficient energy available to the New England power system during extended cold winter weather conditions to satisfy electricity demand, given the system’s evolving resource mix and fuel delivery infrastructure.” They said it is caused by reliance on “just in time” natural gas with regional gas import constraints and limited dual fuel capability. Their analysis is ongoing. They label the issue “fuel security,” though many resources provide energy during those periods regardless of fuel supply. While ISO-NE’s Operational Fuel Security Analysis notably found that higher levels of renewables, LNG imports, and transmission can all help ensure winter reliability in the region, numerous stakeholders have raised concerns that the grid operator has nevertheless failed to fully account for these sources in their analysis and subsequent updates. With updated renewable energy, energy efficiency, transmission and LNG assumptions, the reliability criteria violations suggested by the ISO’s study evaporate. Further analysis should clarify if the issue is winter energy supply or something else.
Can the Market Fix It?
It is also not clear there is a market failure that market participants themselves cannot solve. As long as spot prices are accurate and reflect true scarcity where and when it occurs, the incentive for market participants is to do their job of procuring sufficient energy at those times and places. ISOs can certainly help by providing information and analysis to market participants but it’s not clear they need to take over procurement responsibility.
Is the Problem Caused by a Design Flaw that can be Fixed?
If existing rules have a design flaw, a much less drastic solution would be to fix the flaw rather than create new products. Capacity markets, designed for system summer peak, arenot well enough defined to procure the flexibility and other services needed by evolving power systems. As the last ESIG blog by Bethany Frew stated, “our questions should shift from “how many MWs do we need?” to “what resources do we need to provide the full set of required system services under a wide range of possible futures?” Crudely defined capacity markets could be relied upon less relative to products that are better defined to capture the flexibility that modern systems need. Or, the rules could be modified to more carefully compensate for delivered reliability services rather than raw capacity. New England’s “pay for performance” and PJM’s “capacity performance” have improved the incentives in existing capacity but are still short of efficient price signals.
How Should the Problem be Solved?
If a fuel-security or winter peak energy-related problem is confirmed by further study in New England, PJM, or elsewhere, that cannot be addressed by the market or by fixing design flaws, there should be a whole separate effort to design a market for a new service that resolves this problem. The associated product should have a technologically neutral definition. It should not be defined based on supply “attributes” which are simply aspects of some supply sources. Product definition should be based instead on what the buyer needs or wants. For example, if a product called “winter peak energy” is what studies indicate customers need, a product could potentially be defined neutrally enough that it would allow supply from all sources, such as the large amounts of wind energy that tend to be produced in cold snap events. In contrast, a product called “fuel supply inventory” or something based on supply characteristics alone would inefficiently exclude some valuable supply sources. ISO-NE recently introduced a new proposed product called “winter energy security,” defined as “assuring that the region’s resources, regardless of fuel or technology, are able to meet the demand for electricity and required operating reserves throughout the winter.” The details of this product are not yet established but it is important they be as broad and neutral as possible in definition while also ensuring that the product is both necessary and distinct from services for which consumers are already paying.
As RTOs, FERC, NERC, DOE and others consider threats to the power system and potential market design changes, it is important to carefully define any new reliability needs and design markets in a technology neutral way, to achieve the most reliability at the lowest cost for consumers. Many worthwhile resilience activities should be continued and expanded, however the solutions to severe weather, physical and cyber attack tend to be in the transmission and distribution planning realm, not with electricity market design.
Grid Strategies LLC