Executive Insight, Generation, Policy & Regulation, T&D, Transmission

Wholesale vs. Retail Electricity Markets

by Tanya Bodell, Energyzt

“Today’s final rule is about bringing benefits to consumers.” — FERC Chairman Jon Wellinghoff on FERC Order No. 745

Where do wholesale electricity markets end and retail markets begin? A recent decision by the U.S. Court of Appeals for the District of Columbia Circuit attempts to draws the line, defining Federal Energy Regulatory Commission (FERC) jurisdiction in the process.

On May 23, the D.C. Circuit invalidated FERC Order 745, which granted demand resources access to wholesale electricity markets at locational marginal prices. The implications of this decision could be significant as retail customers already had been operating in wholesale capacity markets and technological advances promised to converge the two even further.

Will the court’s decision stand, or will retail customers be able to engage in wholesale markets?

Oh, East is East and West is West, and Never the Two Shall Meet

It used to be easy to separate electricity wholesale and retail markets. Wholesale electricity was generated by large power plants and shipped over high-voltage transmission lines to local distribution companies that sold energy to end users connected to their distribution systems. The line between wholesale and retail markets was easily drawn at the load node.

During the past decade, this line has begun to blur.

The Energy Policy Act of 2005 legislated a new emphasis on demand response and energy efficiency, including incorporation of such resources in the provision of transmission, distribution, energy and ancillary services.

In 2008, demand resources were allowed to participate in New England’s wholesale electricity capacity markets, a policy decision subsequently implemented by other capacity markets.

Distributed generation has proliferated because of renewable resource policies on state and federal levels. Smart meters allow wholesale prices to be signaled to end users, enabling price responsive demand on a real-time basis. Ancillary services can be provided via automated demand response, energy storage and network communications.

FERC Order No. 745 seemed to be a continuation of the trend — directing wholesale electricity market operators to incorporate demand response into their energy markets and setting the price at the same level received by generators.

Till Earth and Sky Stand Presently at God’s Great Judgment Seat

The Electric Power Supply Association (EPSA), representing electric power generators, along with other industry organizations, supported by 21 prominent energy economists as Amici Curiae, challenged FERC Order No. 745 with a lawsuit.

On May 23, the D.C. Circuit sided with EPSA in a 2-1 decision that overturned Order No. 745, ruling that FERC acted beyond its jurisdictional authority, and the price set by FERC was unjust and discriminatory.

But There is Neither East nor West, Border, nor Breed, nor Birth

The D.C. Court’s ruling creates a dilemma for many. FERC must decide whether: 1) it is worth fighting for jurisdiction over demand resources that can participate in wholesale electricity markets; and 2) it is worth defending a controversial pricing regime championed by a former commissioner.

Independent system operators that were ready to include demand response in energy markets need to figure out how to respond to the D.C. Court’s decision—do they move forward or halt efforts?

Energy management service providers need to re-examine their business models and decide whether they can be proactive in defending their investments.

Society needs to consider the cost and benefits of using demand response and energy-efficient resources.

When Two Strong Men Stand Face to Face, tho’ They Come From the Ends of the Earth

Regardless of the D.C. Circuit’s decision, benefits to consumers are not lost. FERC orders are not the only way to integrate corporate demand resources from retail customers into wholesale markets.

Access to an appropriate price signal via smart meters and smart rates can incentivize demand response. Automated equipment and software apps combined with services offered by cable, telecommunications, home security and Internet companies can reduce load. Competitive retailers can establish products that reward customers for reduced demand while increasing retailer profits.

States can exercise their jurisdictional authority to create markets for demand response. Public utility commissions can set retail tariffs that mimic the value that would be obtained in wholesale electricity markets if retail customers had direct access and establish programs that encourage electric utilities to achieve demand reduction and shave peak loads.

Congress can clarify FERC’s role in overseeing wholesale markets and participation of retail customers in those markets.

The D.C. Circuit decision is not a roadblock to realizing benefits from integrated retail and wholesale markets; it is simply a hurdle.

To quote Rudyard Kipling one last time, “Last night ye had struck at a Border thief—to-night ’t is a man of the Guides!”

Tanya Bodell is the executive director of Energyzt, a global collaboration of energy experts who create value for investors in energy through actionable insights. Visit www.energyzt.com.  Reach Bodell at [email protected] or 617-416-0651.