Energy Markets and Fossil Generation, Not Competitive or Not Fair?

June 2017

Some market participants are expressing concerns over “around-market” or “extra-market” energy policies, such as zero-emissions credits for nuclear generators and subsidies for renewable generators. These policies are found in energy markets, including independent system operators (ISOs) and regional transmission organizations (RTOs), which are accountable for administering their regions’ wholesale electricity markets and providing reliability planning for the regions’ bulk electricity system.

Specific concerns of the around-market or extra-market policies include the impact of reduced energy prices that threaten cost recovery for coal and gas plants and potentially threaten grid reliability. Others believe that markets are working as they should and that reliability concerns are being exaggerated. Both sides agree that better policies are needed as we transition to a reduced-carbon energy grid.

Key Details

  • Some market observers have voiced concern that nuclear and renewable energy subsidies have resulted in distorted price signals, which have made fixed cost recovery increasingly difficult for traditional fossil generators
  • These concerns have been amplified by the recent uptick in negative prices in markets with high penetrations of renewables such as CAISO and ERCOT
  • Consequently, some fossil generators have warned of potential grid reliability impacts resulting from the premature retirement of baseload assets
  • By contrast, others believe the bigger problem is the confluence of oversupply, tempered load growth, and low natural gas prices, noting that almost all non-renewable generators are currently struggling to recover costs due to these factors
  • In their perspective, negative prices are the result of an efficient market and too much inflexible capacity. There is no threat to reliability, and the impact of renewable generation on prices is still marginal as natural gas units continue to set the locational marginal price in almost all markets the majority of the time
  • Importantly, both sides agree that a better way for state public policies and federally regulated wholesale markets to work together is needed in order to effectively and fairly transition to a reduced-carbon energy grid. They acknowledge that the current surplus capacity will not last, and difficult questions remain unanswered as markets await quorum at FERC

Implications

  • The retirement of traditional baseload units due to the low cost of energy may or may not strain the power supply and reliability of the grid due to current oversupply
  • NERC states in the latest reliability assessment that there may be issues “at some as yet unidentified penetration level”
  • Whatever that level is, questions remain:
    • Are markets working as they “should”?
    • What attributes should our policymakers consider in addition to costs when creating new policies?
    • What attributes should our market makers consider in addition to those currently priced when creating new market mechanisms and rules?
    • What can local and state governments do to ease the transition from fossil to renewable energy sources?
    • How can markets best function in accommodation of public policy?
    • Moreover, how can public policy best be formulated to aid effective price formation and markets?
  • As the CEO of Xcel, Ben Fowke, said recently, “Inadequately planned generation works fine when you have a surplus of capacity, but it will be quite different when you don’t”

More Information

Utility Drive: Is renewable energy threatening power reliability?

American Wind Energy Association: Cost of Wind Energy in the U.S.

Utility Drive: DOE review author called renewable energy policies ‘greatest emerging threat’ to reliability

Utility Drive: Can’t be half-pregnant’: Power market upheavals prompt states, feds to take action

Utility Drive: The great capacity market debate: Which model can best handle the energy transition?

This report is part of ScottMadden’s Fossil Minute series. To view all featured Fossil Minutes, please click here.

Additional Contributing Author: David Mendez

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