Why Wholesale Markets are Important to an Advanced Energy Future

Posted by Jeff Dennis on Sep 2, 2020 11:00:00 AM

Wholesale Market RTO-745

Friction between organized wholesale electricity markets operated by Regional Transmission Organizations and Independent System Operators (RTOs/ISOs) and the trend – driven by policy, technology, and market forces – toward cleaner energy options have generated plenty of headlines in recent years. The barriers to entry that advanced energy technologies sometimes face in wholesale markets have come into stark relief, as federal policies like the Federal Energy Regulatory Commission’s (FERC) Minimum Offer Price Rule (MOPR), legacy market rules and market designs, and efforts to use the levers of federal power to prop up aging uneconomic power plants and put new regulatory barriers in front of clean energy resources collide with rapidly increasing state and customer ambitions to switch to clean energy.    

Despite these conflicts, competitive wholesale markets have still shown themselves to be a platform to integrate new technologies, increase transparency, and harness competitive forces over broad geographic regions to scale development of low-cost advanced energy technologies, improve customer access to those technologies, and replace uneconomic existing fossil fuel plants. FERC opened these markets to full participation by energy storage resources with its Order No. 841, creating a 40 GW opportunity to scale up development of technology that will be instrumental in the 100% clean energy grid of the future. And outside of FERC, RTO/ISO stakeholder processes are moving ahead on their own to reform market rules and operating practices to integrate transformative hybrid solar/wind-plus-storage power plants and consider a role for carbon pricing in the markets, providing a forum for discussions and market design progress not available in other regions.   

While the current RTO landscape – seven organized markets in the Northeast, Mid-Atlantic, Midcontinent, and Great Plains states, plus California and Texas, serving 200 million customers and accounting for two-thirds of electricity sales – has excluded most of the West and the Southeast, there is now momentum for expansion of regional organized wholesale electricity markets for the first time there too. In the West, state laws and utility commitments to a 100% clean electricity system have renewed interest in a broader integrated regional wholesale market. State leaders in the Southeast are also exploring expansion of competitive wholesale markets in the region in response to consumer demand for clean energy and the threat of rising costs from failed utility generation investments.   

Advanced energy companies and large buyers of clean energy view competitive regional wholesale markets, with technology-neutral market rules and designs, as the best path for reaching 100% clean energy and saving customers money. Independently administered markets across broad geographic areas give both sellers and buyers more options to participate compared to individual utility-specific procurement. Independent administration of markets and access to the transmission grid also helps reduce incumbent market power, allowing a wide variety of developers and sources of capital to enter the market. They are also providing important price and operational transparency, investigating uneconomic dispatch practices and other factors that are costing consumers money and allowing uneconomic power plants to stay in the market, displacing cleaner and more cost-effective options

With advanced energy technologies like solar, wind, and energy storage becoming the lowest cost options, the focus of RTO/ISO markets on optimizing the least-cost selection and dispatch of power plants and demand-side resources to provide wholesale electricity services like energy, capacity, and ancillary services provides an important opportunity to grow the industry and replace more expensive carbon-intensive generation. The provision of ancillary services (such as frequency regulation and reserves) on a competitive basis also establishes a platform for innovation, allowing fast-responding resources like energy storage and demand response to provide high quality and flexible services to the grid. This increased flexibility, along with their broader geographic scope, also establishes a foundation for reliably integrating ever-increasing shares of low-cost variable renewable resources.    

Broad regional competitive wholesale markets also provide important opportunities for customers to increase their options and reduce costs, all while reducing carbon emissions. Large corporate customers are a key source of jobs and economic growth in their communities and a leading driver of demand for new clean energy; more than 80 percent of the contracts for renewable energy signed by corporate customers in 2019 were RTO/ISO regions. Recent research shows that creating an RTO in the Southeast region would generate $384 billion in economic savings (including a 29% decrease in retail prices), along with a 37% reduction in carbon emissions (even without any enacting explicit carbon policies).

Maximizing these benefits of competitive wholesale markets, and realizing their full potential, requires hard work and a policy focus on expanding markets and making them truly technology-neutral playing fields. Where we have broad regional competitive wholesale markets, barriers to participation by low cost advanced energy technologies persist. Federal policies like MOPR exacerbate these barriers, deeming state policies supporting them something that must be mitigated, rather than facilitated, in wholesale market design. Disconnects between retail and wholesale markets and operations also hold back the potential for quickly expanding distributed energy resources like rooftop solar and local storage to play a role in wholesale markets. 

The good news is that the existing RTO/ISO markets, and the emerging ones, can be reformed to resolve these problems and capture the benefits of clean advanced energy resources for consumers and the environment. Federal leadership from Congress and FERC demonstrating a commitment to competition and to needed market reforms, and working with states to include their policy requirements as a key input to those reforms, is crucial. But so too is vigilance and engagement on the part of advanced energy companies, state officials, and all the stakeholders who want to see the clean energy transition through to completion. Right now, that’s not easy. The seven existing RTOs each have their own stakeholder governance systems where market rule and market design reforms are debated, developed, and approved before arriving at FERC. In many cases those stakeholder processes are dominated by market participants from the era they were created. These formal stakeholder processes provide an opportunity to shape how resources are procured and dispatched in a way that isn’t available in traditional vertically integrated utility regions, but they are also time consuming and hard to track across the seven regions. 

Tracking those processes may now become easier, though, as AEE’s PowerSuite online policy platform, which already tracks legislation and regulatory dockets in all 50 states and FERC, adds a new option that allows subscribers to follow RTO committees, subcommittees, task forces and other activities, as well as access thousands of historical RTO documents, from their desktops. 

Competitive wholesale markets have played a big role in getting the advanced energy industry where it is today. For the continued growth of secure, clean, affordable energy throughout the country, these markets need to continue to evolve and expand. For all those who want to see that happen, it’s time to get to work.

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Topics: Wholesale Markets