Bulk Power Markets in the United States: Challenges and Recommendations
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Bulk Power Markets in the United States: Challenges and Recommendations Bulk Power Markets in the United States: Challenges and Recommendations Report to the Office of Energy Policy and Systems Analysis U.S. Department of Energy Washington, DC. by The Boston University Institute for Sustainable Energy Peter Fox-Penner Courtney Guard Rachel Eckles June 10, 2016 working paper 16001 This report was prepared as an account of work sponsored by an agency of the United States Government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process disclosed, or represents that its use would not infringe privately owned rights. Reference therein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply its endorsement, recommendation, or favoring by the United States Government or any agency thereof. The views and opinions of authors expressed therein do not necessarily state or reflect those of the United States Government or any agency thereof. Bulk Power Markets in the United States: Challenges and Recommendations Report to the Office of Energy Policy and Systems Analysis U.S. Department of Energy Washington, DC. by Peter Fox-Penner Courtney Guard Rachel Eckles June 10, 2016 Acknowledgement: Thanks to Michelle Ben-Aroch and Heidi Bishop for assistance. Table of Contents I. Introduction and Summary 1 II. Brief History of the Bulk Power Marketplace 3 III. Overview of the Bulk Power Markets Today 5 IV. The Role of Bulk Power Markets and Other Elements of Agreement 8 V. Challenges Facing Today’s Bulk Power Markets 9 VI. Conclusion: Strategies and Options for the Department of Energy 17 Appendix 19 Bibliography 20 I. INTRODUCTION AND SUMMARY For almost 150 years the United States has been powered by a large-scale power network consisting of large power plants and a high-voltage transmission network. This system generates and delivers nearly all of the power consumed in the U.S. today and similar amounts in most of the world’s developed economies.1 This system, often referred to as the bulk power grid, connects to approximately 4,000 low-voltage distribution systems that deliver power over the “last mile” and also integrate a growing number of relatively small “distributed energy resources” (DERs). As explained further in Section Three, there are a wide variety of power market arrangements across our bulk power grid. In many parts of the country, power marketers and other market participants buy and sell power bilaterally and through exchanges and auctions. Long-term bilateral agreements are also made, often at market-based rates and sometimes as the result of competitive procurements. In seven regions of the country there are a staged series of short term energy markets often referred to as the “organized” or centralized power markets. These markets typically have a Day-Ahead, Same-Day, and Real-time energy market, each of which plays a specific but overlapping role optimizing the short-term use of the regional grid. Finally, in several organized markets there are also capacity and ancillary services markets created to assure resource adequacy (RA), i.e. that the total electric resources in a region will always be sufficient to meet immediate demand. These markets and the system they support are now facing unprecedented challenges. The industry is in a period of technological upheaval sparked by the need to shift away from carbon- based fuels, the growth of distributed generation, and reductions in the cost of electricity storage. In addition, the industry is facing low-to-no growth in bulk power sales,2 cybersecurity and physical protection requirements, and greater demands for resilience. As FERC Commissioner Cheryl LaFleur recently noted, “this is probably the toughest time for markets since they were created 15 to 20 years ago. We’re in a major investment cycle that is testing both the centralized capacity markets that some of the eastern regions use to allocate capital to bring in reliability for the future and also stressing the energy markets that reflect real-time energy costs.”3 This White Paper reports on the results of an inquiry into the future of the bulk power markets as part of the second installment of the Quadrennial Energy Review (QER) of the United States. The main focus of the inquiry was a workshop held to solicit the views of a wide range of key stakeholders involved in the U.S. power 1 As of 2015, the grid delivered about 99% of all U.S. electrical energy consumed. International Energy Agency, PVPS 2014 National Report. 2 The total power delivered by the bulk power system and its markets will likely be diminished steadily over the next few decades by the growth of DERs, which use the local grid but not the bulk power system, and by continued progress in energy efficiency. While the total quantity of electricity services is likely to increase for the foreseeable future, growth in power supplied by the bulk power grid is highly uncertain. 3 “LaFleur Confident Wholesale Markets Can Evolve.” Jasmin Melvin, April 15, 2016. 1 sector.4 The workshop, as well as materials collected and circulated prior to and after the workshop, provide a very thorough picture of the current challenges and opportunities faced by large-scale markets. The purpose of this report is to: Summarize the views of stakeholders on the bulk power markets; Discuss the points of consensus and disagreement on the challenges facing these markets; and Provide options and directions the Department of Energy may consider incorporating into the forthcoming QER. In summary, we conclude that the bulk power market landscape in the United States is functioning reasonably well despite its enormous complexity, diversity, and multiple challenges. Electricity continues to be quite reliable, affordable, and increasingly compliant with greenhouse gas and other environmental policies. However, in every section of the country, these markets face very large challenges that call for national policy improvements, research, and technical assistance. In particular, a considerable body of research and the Department’s stakeholders suggest that QER 1.2 consider the following recommendations: ● Increased focus on technical assistance and advocacy at FERC to promote better transmission planning, especially for interregional transmission projects that play an essential role assisting states and regions in their compliance with the Clean Power Plan, state and federal renewable policies, and other national policy goals. In this context, transmission planning includes the methods by which costs and benefits are considered in the planning process and improvements in the siting process. While not strictly a planning issue, assistance with cost allocation approaches for major transmission projects is also an area of potentially important Departmental support. ● Use of the Department’s convening and research capabilities to help stakeholders resolve the tensions that have emerged between the role of capacity markets, long term contracts, and environmental goals such as greenhouse gas targets. These three factors interact in different ways in different regions of the country, but in nearly every regions there are opportunities for important improvements. ● The Department should continue to provide R&D support for generation and transmission technologies, promote fuel diversity, and provide research and technical assistance on the application of markets and other policies to CPP compliance and other policy needs. The remainder of the paper is organized in six sections. Following a brief history of the bulk power markets we provide a very brief overview of these markets as they exist today. The third section following, which is longest and most important, summarizes the challenges and opportunities stakeholders discussed during the workshop and in related communications. The fourth section of the white paper describes the points of consensus among stakeholders concerning these challenges 4 The workshop was held March 4 2016 at the National Press Club in Washington, DC. The workshop adopted Chatham House rules, so no speaker’s views described in this white paper will be associated with any individual’s name. The materials circulated prior to or at the workshop are all referenced in the bibliography. 2 and the Department’s contribution to addressing them. The final section offers additional options and considerations for the Department as well as concluding thoughts. II. BRIEF HISTORY OF THE BULK POWER MARKETPLACE From the very inception of the bulk power grid, utilities used it to trade large amounts of power for periods as short as an hour or as long as several decades. However, these trades were made exclusively at cost-based rates. Because they were trades between utilities, who would then resell the power to ultimate retail customers, these trades were considered wholesale sales, or sales for resale, and therefore subject only to regulation by the Federal Energy Regulatory Commission (FERC) rather than state utility regulators. The two most common products traded were bulk electrical energy, often loosely referred to as power, and electricity capacity, which is a guaranteed ability to provide energy on demand. During the 1990s, the U.S. began to shift away from comprehensive cost-based pricing of wholesale trades towards a framework that allowed for markets and “market-based pricing” of bulk power. To do this, the FERC began requiring utilities to offer open-access transmission service and provide “ancillary services” that help grid operators facilitate trading while maintaining high levels of reliability. The FERC then allowed bulk sellers to sell at market-determined prices at locations on the grid where competition among generators was strong enough to make prices competitive. Open access was facilitated by regulated independent transmission system operators (ISOs or RTOs), who later also became regional market operators.