Executive Insight, Generation, Policy & Regulation

Is the Great Experiment of Wholesale Electricity Competition Ending?

“Competition has been shown to be useful up to a certain point and no further, but cooperation . . . begins where competition leaves off.”
– Franklin D. Roosevelt

In April 1998, the California Independent System Operator opened the California spot market.  Other markets followed and natural gas-fired generation thrived, increasing from 12 percent of U.S. generation in 1990 to one-third of total generation in 2015 when it matched coal as a percentage of the fuel mix. Opening the markets had served its purpose, allowing a new technology with lower costs to proliferate. 

Having toppled King Coal, natural gas is challenging the economics of the next lowest cost generation resource in the supply stack: nuclear power.  At the same time, market intervention and public policies are being implemented at both the state and federal levels to stop, or at least delay, the coup.  These challenges serve to attack the very markets that enabled the natural gas revolution in America.  Is this the beginning of the end of competitive electricity markets?

Designation

When converting from a regulated market to a competitive market, market rules are not agnostic to existing technologies.  In the power sector, design of competitive wholesale markets was built around the positively sloped supply curve of fossil fuel generation. ISOs operate the lowest cost options first, subject to transmission constraints.  This fundamental market rule creates challenges when the supply curve is flat, new technology does not have an increasing heat rate curve, when it can be used as either generation or load, when load can be dispatched, or when policy dictates that the least-cost alternatives are not the desired outcome, all of which are beginning to occur.  

Diversification

The growing dominance of natural gas has created concern at both the ISO and government levels as some regions increasingly rely on natural gas-fired generation for more than half of the system mix.  A perceived lack of diversification has prompted calls for out-of-market contracts to support anything and everything other than gas.  Nuclear plants have received state legislated support in Illinois, New York, New Jersey, and Connecticut.  The Department of Energy called for contractual support of coal plants due to their resiliency resulting from on-site fuel storage.  New England is engaged in negotiations with Mystic, an LNG-fueled facility in Boston for purposes of fuel diversity.  Massachusetts also passed legislation to contract for nearly one-third of its supply with offshore wind and Canadian hydroelectric resources.  As market intervention provides out-of-market support to selected projects, the level playing field is irreparably harmed, the role of markets declines, and unsupported generation resources cannot compete.

Integration

Although renewable resources have been supported on both state and federal levels at a level that makes them the lowest cost source of new generation in some markets, they still desire long-term contracts to be financed.  Bilateral markets have enabled corporate deals, other states have passed legislation to ensure renewables are built under contract to utilities. Increased integration of renewables into competitive markets has created hours of negative prices as subsidized renewables and inflexible generation resources battle to produce energy.  Although great for consumers that have creative retailers offering free weekends and evenings, it is not sustainable in the long run.   

Electrification

At the same time policy is challenging competitive markets, those same policies need competitive markets more than ever.  The vast majority of carbon emissions comes from transportation and end-use, not the power sector. Reducing carbon emissions requires both electrification and decarbonization of the grid.  Whereas competitive wholesale electricity markets can achieve the first, the market currently does not reward the latter.  Changes need to be made if competitive wholesale electricity markets are to survive.

Modification

The market was designed to implement the lowest-cost solution and has done so for twenty years.  However, policy initiatives now are looking to achieve other objectives including diversification, decarbonization and integration of renewables.  The onslaught is unrelenting.  If competitive electricity markets do not evolve to value these other attributes, they will be destroyed.

 

About the author: 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. She can be reached at: [email protected] or 617-416-0651.