TODAY’S STUDY: The Consumer Benefits Of Power Market Reforms
Quantifying The Consumer Benefits Of The Market Reforms In The Report, “Customer Focused And Clean”
Michael Goggin and Michael Milligan Milligan, March 2019 (Grid Strategies and Grid Solutions for Wind Solar Alliance)
This report quantifies the consumer benefits provided by the primary market reforms recommended in the November 2018 Wind Solar Alliance report Customer Focused and Clean: Power Markets for the Future. 1 That report qualitatively examined opportunities for improving the market and operating practices of the grid operators in the Midwest (the Midcontinent Independent System Operator, or MISO) and the Mid-Atlantic and Great Lakes states (PJM). Given the growth of wind and solar generation, the report focused on how wholesale electric market rules that were developed with conventional generators in mind can be improved to better accommodate the contributions and characteristics of new resources and help meet customers’ and regulators’ demand for clean, affordable electricity. As shown below, that report recommended many reforms to electricity markets for energy, capacity, and reliability services. As this report demonstrates, these reforms can also save consumers billions of dollars per year by improving efficiency and allowing renewable resources to provide reliability services to the grid.
This report quantifies the consumer benefits of the following categories of power market and grid operating reforms that were identified in the Customer Focused and Clean report:
• THE COST OF IMPOSING A MINIMUM OFFER PRICE RULE IN THE CAPACITY MARKET.
PJM has proposed a measure, called the Minimum Offer Price Rule or MOPR, that would make it difficult for renewable and nuclear resources that receive state incentives to participate in the capacity market. If implemented in a way that the contributions of those resources to meeting system capacity needs would not be counted, consumers would be forced to pay for redundant replacement capacity. This cost would only apply to PJM, as MISO only has a voluntary capacity market and has not proposed a MOPR policy to limit the participation of resources that receive incentives. This policy and the details of how it might be implemented in PJM are currently pending before the Federal Energy Regulatory Commission. For the purposes of this paper, the benefit of removing the MOPR policy is calculated based on the assumption that it would prevent incentivized nuclear resources and new renewable resources from receiving credit for their capacity value.
• THE BENEFITS OF LIMITING THE SELF-SCHEDULING OF CONVENTIONAL GENERATORS.
In PJM and MISO, a significant share of conventional generators self-schedule their generation output instead of being dispatched by the centralized market. This can result in higher costs for consumers because the power plants that are being utilized may not be the most economic, and because there is less flexibility being offered into the market.
• LOAD PARTICIPATION IN MARKETS. Currently, most electricity rate structures do not provide consumers with an incentive to adjust their demand based on real-time changes in wholesale electricity market prices. There are several policy mechanisms by which electricity demand can become more price responsive, which would significantly reduce the cost of operating the power system.
• INCENTIVIZE FLEXIBILITY THROUGH MARKET DESIGN. Many of the energy and reliability services reforms recommended in Customer Focused and Clean focused on properly incorporating the cost of inflexibility into market prices and allocating that cost to inflexible resources, while also rewarding flexible resources for the benefits they provide to the power system. This saves consumers money by making power system operations more efficient.
• ALLOW RENEWABLES, STORAGE, AND OTHER NEW RESOURCES TO FULLY PARTICIPATE IN MARKETS. Currently, PJM and MISO market rules prevent renewable and storage resources from participating in reliability services markets. Preventing these resources from providing flexibility and other valuable reliability services increases consumer costs because more expensive resources must be used to provide those services.
• STREAMLINE THE SEAMS BETWEEN ISO MARKETS. Current market practices can cause unnecessary congestion at the seams between ISOs, and between ISOs and non-ISO areas, preventing economic transactions from occurring.
The remainder of the paper is structured as follows. We first examine alternative methods that can be used to assess the value of market changes, and we provide an example that illustrates the sometimes complex interaction between different market changes. We then discuss the methods used in this paper to calculate the impacts of the selected market enhancements, followed by the results of our analysis. We conclude with a summary of our findings and suggestions for future analysis…
SUMMARY AND CONCLUSIONS
In this paper we describe our analysis of some of the key market enhancements described in the Nov 2018 Wind Solar Alliance report. We used methods that allowed us to build on the work of others, adapting those results to provide an estimate of the value of key market enhancements. As such, our results are not intended to provide precise calculations of the value of these reforms, and this initial analysis could be built upon with more detailed analysis and modeling. However, we believe that our results provide a good preliminary estimate of the value of these reforms, and our results show significant consumer benefits could be obtained by adopting these market changes. Significant consumer savings could be realized by:
• Ensuring the capacity value contributions of all resources are accounted for, preventing the retention or addition of unneeded capacity.
• Improving the operational efficiency of bulk power markets by moving more resources away from self-scheduling and into the economic optimization that is already performed by market operators.
• Incentivizing flexibility in the market design, providing useful signals for investors to develop flexibility resources needed for efficient power system operation, and incentivizing existing flexibility to be efficiently incorporated into operations.
• Removing artificial barriers preventing renewables, storage, and demand response from participating in markets.
• Improving the seams between markets, thereby lowering transaction costs of economic imports and exports between neighboring systems. -