Evolving power markets: The long and short of it

by Tanya Bodell, Energyzt

Twenty-five years ago, the U.K. opened its electricity industry to competition, ushering in “the great experiment” that extended to many of the British colonies as well as other countries around the world. Originally designed as energy-only markets, pricing for ancillary services to support operations of the transmission system also had to be addressed. Then, capacity markets were created to encourage new entry over the long run and prevent exit of needed generation in the short run. As power markets continue to evolve, three recent decisions concerning the Federal Energy Regulatory Commission (FERC) illustrate ongoing evolution of the competitive playing field.

The Long of It

The Electrical Reliability Council of Texas (ERCOT), California and Southwest Power Pool (SPP) continue to have energy-only markets where spot market prices for energy purport to compensate generators for variable and fixed costs of production while firm capacity may be traded bilaterally. In contrast, New England, New York, the PJM Interconnection and the Midwest Independent Transmission System Operator (MISO) have centralized capacity markets of their own design that purport to create price signals and financial support for new entry. The challenge with each of these capacity markets, however, is twofold:

  1. The term for capacity payments is much smaller than the life of a new generating asset; and
  2. The rules of the game are constantly changing.

For example, in May FERC approved, in large part, PJM’s proposed modifications to its capacity market rules. The Minimum Offer Price Rule (MOPR) set a minimum price that certain bidders could submit in capacity auctions. The floor was proposed as a way of mitigating adverse pricing impacts in PJM’s forward capacity markets caused by generators that receive contracted capacity revenue through non-regional transmission organization programs. Suffice it to say, the design of capacity markets continues to evolve.

The Short of It

Nearly four years ago, this column anticipated the need for frequency response markets to complement established markets for ancillary services. In March 2013, the North American Electric Reliability Corp. (NERC) filed with FERC a proposal that defines frequency response requirements that balancing authorities under NERC’s oversight must meet. Whereas voltage support, spinning reserves, electric supply reserve capacity and load following functions occur over minutes and hours, frequency regulation occurs in seconds.

The need for frequency response has increased with greater integration of renewable generation. New energy storage technologies might be ideally suited to respond in such short time frames, offering a more cost-effective solution compared with traditional resources if markets for frequency response are properly designed to compensate for such service. Neither NERC nor FERC, however, has defined how these standards are to be met or whether market-based approaches must be used to fulfill those obligations. A significant amount of work is required to properly implement NERC’s proposed standards for frequency regulation.

None of It

The Energy Policy Act of 2005 granted FERC significant enforcement powers to address instances of market manipulation in energy markets. This past March, however, the U.S. Court of Appeals for the District of Columbia Circuit clarified the scope of this authority with respect to commodity futures. The court ruled in Hunter vs. FERC that FERC does not have authority over energy futures contracts, nullifying FERC’s assessment of $30 million in fines against Brian Hunter for alleged manipulation of natural gas futures markets. According to the court, the U.S. Commodities Futures Trading Commission (CFTC) has exclusive oversight over such transactions under the Commodity Exchange Act. The court’s decision sets a clear boundary on regulatory oversight of futures markets and asserts that FERC is out of bounds.

All of It

FERC and independent system operators continue to have substantial oversight of and influence on development and design of competitive power markets. Such markets define megawatts in terms of use and attempt to compensate such megawatts according to the supply and demand for such uses. As the electricity industry evolves, the need for new functions is becoming apparent and economists adeptly develop separate property rights and markets for transacting those rights. Creation of such markets can unlock additional value from your existing energy assets as well as destroy value you already might have. Don’t sit on the sidelines; you might find the game has ended before you had a chance to play.

Author

Tanya Bodell is executive director of Energyzt, a collaboration of energy experts intent on understanding the impacts of energy integration. Reach her at 617-416-0651 or tanya.bodell@energyzt.com.

“History teaches everything including the future.” — Lamartine

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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