The energy industry is evolving and complicated. As traditional coal-fired generation retires and new renewable energy takes its place, market administrators of wholesale power and grid operators must rethink methodologies to ensure reliability.
The Midcontinent Independent System Operator (MISO) and PJM Interconnection (PJM), are both operators of regional transmission systems and provide access to wholesale power markets. They set reliability rules to ensure year-round, reliable power supply is provided to consumers by securing commitments from generators to meet customer demand on the power grid.
The MISO and PJM marketplaces have evolved to a point where initiatives are created to fix real-time and ancillary service pricing issues. When the costs for certain products are too high or too low, each operator initiates discussions with stakeholders for potential solutions. Once a solution is finalized it is submitted for approval to the Federal Energy Regulatory Commission (FERC). The timing of both when to initiate discussions for a solution and the potential implementation date has direct financial impacts on both consumers and suppliers. Let’s look at some upcoming issues within both markets.
Market operators limit the amount of solar and wind resources that can be credited against customer market obligations, specifically capacity. This restrictive limit is an outcome of a concept called Electric Load Carrying Capability (ELCC). ELCC is defined as the maximum quantity of solar or wind resources that can be added to the electric grid without impacting reliability. Although ELCC seems like a logical concept, as new renewable resources are added to the grid, existing resources lose the ability to deliver small amounts of capacity.
The MISO graph below (Exhibit A) illustrates the relation between the penetration of wind to the ELCC value (amount of capacity that can be provided by wind). As the penetration of wind energy resources increases, shown as a percentage on the x axis, the overall ELCC, or the amount of capacity that wind resources provide to customers on the y axis shrinks. As an example, a wind farm installed today may be able to provide up to 16.7% of its overall size as capacity, but ten years from now, if the amount of wind penetration within MISO increases to 41%, that same wind farm will be limited to providing only 12.6% capacity. This type of concept can make it difficult for developers of renewable assets and consumers to make long-term investment decisions. An alternative solution could be to reduce the amount of capacity that can be delivered from new renewable resources and maintain the values of capacity for existing resources consistent with the penetration level at the time of their interconnection.
MISO and PJM are sending a signal to future renewable developers that if they build the resource, the market operators will simply make room for the generation on the power grid, at the expense of existing resources. So far, very few companies have complained about this concept, simply because the penetration of wind and solar resources has not increased to a point where the allocation of reductions to existing resources has had sufficient financial impacts.
Carbon pricing is a concept currently being discussed in PJM. Carbon pricing essentially acts like a tax to generators that emit carbon pollutants. PJM stakeholders are deciding whether to go forward with an effort to allow states to elect whether to include a carbon dispatch price.
While the concept may seem relatively simple, it is not without complications. To describe one complication, let’s hypothetically say that the state of Ohio has elected to participate in carbon pricing. All generation resources within PJM must submit a carbon cost associated with any energy produced, regardless of whether it physically resides within a state that participates in carbon pricing. The inclusion of a carbon cost in offer prices for energy changes the order of resources PJM would utilize for meeting its energy and ancillary services requirements. The cost of carbon impacts a carbon-emitting generation resource, such as coal, by increasing its overall offer price to PJM. Resources emitting less carbon, such as natural gas generators, should have lower overall prices to PJM, resulting in these resources being selected to provide more energy to the grid. The cost of carbon and the quantity emitted by a resource directly impacts PJM’s choice of which resource to utilize.
The impact to the carbon-emitting resources will be fewer energy market revenues. This will likely result in those resources seeking out new markets or revenue streams. One such avenue to seek out higher revenues is from the capacity market. Another may be to export power to a different market, such as MISO. If a resource takes this approach and still emits the same amount of carbon, has carbon pricing been successful?
What happens if carbon-emitting generators within a non-carbon priced region such as MISO export their energy to PJM? PJM has no visibility into the type of resource producing the energy. The imported energy may have higher quantities of carbon-emissions associated with it. This imported energy will impact the dispatch of energy from both emitting and non-emitting resources within PJM. Carbon emissions across an area may not decrease if PJM’s carbon emitting resources emit less, but MISO’s carbon-emitting resources emit more. This concept is called “leakage”. Leakage is also applicable within PJM itself, and is a result of having some states participate in carbon pricing, while having others that do not. Leakage must be addressed appropriately for a carbon-pricing mechanism to be efficient and result in the actual reduction of carbon dioxide. If not, PJM generators and jobs within the PJM region will be at stake, with fewer actual environmental benefits.
A national policy on carbon pricing could help solve these types of complications, but until that occurs, PJM and other marketplaces pursuing carbon strategies will need to deploy ‘fixes.’ PJM has yet to publish analysis showing the potential cost impact of implementing carbon pricing.
Renewable resources and low natural gas prices are swiftly changing the mix of resource types within the marketplace, resulting in the retirement of generation assets that have historically provided energy-related products to the grid.
One such product that market operators require is operating reserves. This product is designed to support short-term unit dispatch decisions required as a result of outages to a generation resource, rapid changes in customer demand, transmission line outages, and load forecasting errors. Generation resources having the ability to rapidly increase and maintain energy output within a ten-minute period historically provided this type of reserve.
While natural gas resources can provide this product by reducing their output so that they are in an operational position to rapidly increase power output upon request, renewable resources such as wind and solar are not inclined to offer this type of service. Wind and solar resources are typically operated at an energy production level directly corresponding with the current wind speed or solar illuminance. While it is technically feasible to provide energy reserves from renewable assets, the loss of production tax credits associated with not maximizing energy production may not result in it being economical to do so.
Demand response is another type of asset that can provide operating reserves. Customers enrolled in demand response in PJM’s marketplace can rapidly reduce load during emergency situations, resulting in the market operator needing less energy from generators. This reduction of customer load on the grid helps market operators ensure reliability.
MISO and PJM are likely to seek changes that will increase the prices paid to resources that can provide this service. These types of changes will likely increase costs to consumers.
Each year PJM and MISO hold competitive auctions to secure future capacity requirements at the lowest reasonable price for Load Serving Entities (LSE), such as AEP Energy. PJM conducts four capacity auctions leading up to the delivery year. The first auction is called the Base Residual Auction (BRA) and is conducted three years prior to the year the energy is delivered. Annual Incremental Auctions (IA) occur each year after the BRA up to the delivery year. MISO, on the other hand, conducts only one auction that occurs in April prior to the start of each delivery year. The MISO construct is known as Resource Adequacy. Like PJM’s market, Resource Adequacy ensures enough reliable generating resources are available to fulfill customer demand.
PJM and MISO capacity market delivery years start June 1 and end the following year on May 31. Both markets allow for bilateral transactions and the self-scheduling of resources to lower the amount of capacity that must be purchased through the capacity market mechanisms.
PJM’s 2022/2023 BRA is being postponed until the FERC makes a ruling on how subsidized resources will be offered into the capacity marketplace. The issue came about when nuclear power plants began receiving state-funded operational proceeds. Allowing these resources to continue their participation under the current rules will have a price suppressive impact on the capacity market clearing prices. Nuclear resources can offer their capacity at a reduced price versus that of most other resources within PJM who do not receive out-of-market subsidies. This distortion of capacity market pricing signals may impact the decisions of developers to decide whether and where they should construct a new generation resource. Once FERC rules on this issue in the very near future, PJM must conduct a BRA which should have been held last May.
The graph below provides historical BRA capacity clearing prices back to the 2007/2008 planning year. As you will see capacity prices tend to fluctuate year-over-year. This is a reminder why managing your demand can impact your capacity costs. To find out how AEP Energy’s programs and services can help you reduce capacity costs, click here.
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