How to Keep the Lights on in the Era of 100% Clean Energy Targets

Posted by Ryan Katofsky on Jan 30, 2020 11:44:23 AM

Resource adequacy 100%-730

If you’re looking for big trends to watch in electricity markets, there’s no shortage these days. Some are broad policy issues, like the growing number of states targeting 100% clean grids (definitions vary but they are all directionally similar). Others are being driven by technology innovation, such as the continuing price declines for renewable energy and batteries. Some have a strong consumer focus, like smart thermostats and electric vehicles. Others are downright wonky, like the ongoing challenges related to the participation of distributed energy resources (DERs) in organized wholesale markets, or how states are trying to modernize the utility business model for the 21st century. One that we’ll look at today is how state policies to achieve 100% clean grids affect resource adequacy – that is, ensuring there is sufficient generating capacity to meet demand at all times.

I start from the premise that we don’t need to choose between a 100% clean grid and a grid that maintains the high levels of reliability we expect. I also start from the premise that we’ll be successful at meeting the 100% clean grid targets, even if the exact path to 100% may not be completely clear yet. This means that if these policies come into conflict with the approaches being used to maintain resource adequacy today, it is the approaches to resource adequacy that will ultimately need to change.

Just about everything associated with the U.S. electricity grid varies by jurisdiction, and approaches to maintaining resource adequacy are no different. For example, several regional wholesale markets – PJM, ISO New England, and New York ISO – rely on centralized capacity markets to make sure sufficient generating capacity is available. In Texas, ERCOT has no capacity market; instead, scarcity pricing for energy sends the signal to provide generating capacity at peak times. In MISO and SPP, as well as outside of organized wholesale markets, vertically integrated utilities are generally responsible for maintaining sufficient capacity to meet demand within their own footprints.

To be clear, technology is not the limitation to achieving a 100% clean grid while maintaining resource adequacy. If anything, we have more options than ever, and they get better every day, both on the supply side and the demand side. In many parts of the country, wind and solar power are already the lowest cost options for new generation, and battery storage is improving rapidly in price and performance. At the same time, electricity demand, once taken as basically inelastic, is becoming increasingly flexible and price-responsive thanks to a more intelligent grid and interconnected devices for managing and aggregating loads, both large and small. 

The variability of renewables like wind and solar is also becoming less of an issue for resource adequacy. It wasn’t that long ago that grid operators thought that the most wind energy they could reliably accommodate was around 20% of load. But in recent years, wind generation has exceeded 50% of load during some hours of the year in ERCOT and SPP, and wind power met a remarkable 66% of load in SPP on April 21, 2019. Several years ago, NREL studied how to integrate high levels of renewable energy (scenarios ranged from 30% up to 90% of annual generation by 2050) and showed that it is possible to maintain sufficient resources at all times in every region of the country.

So the issue with resource adequacy isn’t whether we can meet demand sufficiently with clean energy, but what we need to do to make sure that all these elements, put together, provide sufficient resources – both supply and demand – to make a 100% clean energy grid fully reliable. 

Generally speaking, the rules and processes for resource adequacy have been built around the performance characteristics of incumbent technologies – large generators at central station plants. But given all the investment that is already going into new resources, as well as in modernizing the grid, we should be finding ways to use these resources to provide capacity and not just clean electrons (for example, there are about 100 million smart meters in use today, most of which are being underutilized). Otherwise, utility customers will be paying twice – once for meeting policy goals and a second time for additional capacity to meet resource adequacy, as defined by rules that are blind to those policy goals.

We are already seeing efforts to address the issue, both good and bad. Here are two examples, starting with the good: In New York, which has among the most aggressive clean energy policies in the country, the Public Service Commission (PSC) recently opened an investigatory proceeding into the future of resource adequacy, given these bold targets, and AEE Institute submitted initial comments setting out principles for addressing resource adequacy and outlining a range of options the PSC could consider. Even before this proceeding, New York ISO had already been considering adding a carbon price into the functioning of the competitive wholesale market. This broad investigation is the PSC getting in front of this issue as renewable energy generation ramps up dramatically in New York State in the next few years.

In fairly stark contrast to New York’s investigation, FERC recently issued a sweeping order greatly expanding the use of the Minimum Offer Price Rule (MOPR) in the PJM Interconnection, the effect of which is to knock advanced energy technologies out of the regional grid operator’s capacity market by forcing them to bid at prices higher than their actual costs, just because they benefit from state policies. This is FERC doubling down on the existing resource adequacy construct built around incumbent technologies and the grid of the past, even though it puts that market construct in direct conflict with state policies and will force customers to pay twice. Already, because of the existing capacity market design, PJM’s reserve margin in 2019 was near 30%, far above what is needed to meet resource adequacy, and if the recent MOPR decisions stands, we can expect this number to remain above what is needed, and in all likelihood, get worse. By one estimate, these rules will cost customers billions of dollars in the coming years.

This is not just of concern in organized wholesale markets. In states with vertically integrated utilities, most utilities are required to develop integrated resource plans (IRPs) to ensure they have sufficient resources to meet demand and that they do so cost-effectively. Depending on the IRP rules, utilities may be required to look at both traditional supply-side resources and demand-side resources. Ensuring that these IRP processes, as well as other related planning activities can fully leverage clean energy investment should therefore be a high priority for states. Two examples are Hawaii and Washington State, both of which recently opened proceedings to look at this issue.

The resource mix in the electric power system and consumer demands and expectations are changing, rapidly, and in fundamental ways. The approach to ensuring resource adequacy needs to change along with it. A diverse set of advanced energy technologies can contribute to resource adequacy, and grid operators need to take them all into account as they plan for meeting projected power needs. They should be working on rules to facilitate DER participation, not impede it, and looking at new market products and planning processes that can take advantage of the massive investments being made in these technologies, driven by consumer choice as well as state policies.

In addition, approaches to resource adequacy must take into account the reliability needs of a changing grid with different kinds of resources and more elastic demand. Those all create new needs for flexible and responsive resources, making the plain megawatts of capacity procured by existing resource adequacy constructs less and less valuable to reliability and consumers.

Outmoded approaches to resource adequacy built to incentivize traditional generators must give way to new ones that value all the technologies now available to keep the lights on. 

For more on FERC’s order, download AEE’s primer, “Understanding FERC’s ‘Minimum Offer Price Rule’ Order,” by clicking below.

Download 'Understanding MOPR Order'

Topics: State Policy, 21st Century Electricity System, Wholesale Markets