April 10, 2019 - “Allow the market to work” has been the catchphrase rebuttal to any suggestion that the accelerating loss of baseload, fuel-secure power plants threatens grid reliability. Renewable and natural gas advocates have sung it from the rooftops like a lost verse of “Baby Shark.” What their dismissal assumes – what their unshakeable faith in the market assumes – is that markets are working, or have the tools in place, to ensure grid reliability.

But what if they don’t? What if wholesale market architecture is completely ill-equipped to ensure reliability as the grid increasingly leans upon technologies dependent on just-in-time fuel delivery? Unfortunately, That appears to be precisely the finding of a new report on energy security from ISO New England.

Digging into the Problem: 

The authors of the energy security study find that increased reliance on natural gas, wind and solar generation presents new challenges – challenges only expected to grow as additional renewable capacity is added to the grid. And the market system, in its current form, isn’t up to those challenges.

They conclude that markets, and their products, were designed for a period when capacity constraints were a concern. But insufficient capacity is no longer the driving threat to reliability. What they are driving at is a value problem – that not all capacity is equal.

They write, “In today’s environment… we do not face a capacity shortfall problem (indeed, the system is awash in capacity). We, instead, face an energy security problem due to the constraints – and uncertainties – on energy for power production.”

They explain, “Our focus is whether the ISO-administered wholesale electricity markets – which were not originally designed for the challenges just-in-time generation technologies have wrought – provide adequate financial incentives for resource owners to make additional investments in supply arrangements that would be cost-effective and benefit the power system at times of heightened risk. Our central conclusion is that, in many situations, the answer is no.” (Emphasis added).

They continue, “Even when such supplemental supply arrangements would be cost-effective from society’s standpoint as a means to reduce reliability risks, the current suite of market products do not provide sufficient financial incentives for market participants to undertake them.”

You’re reading that right. Ensuring the reliability of the system, and maintaining affordable, reliable and resilient power for consumers, isn’t financially attractive, or incentivized, for power producers. 

In fact, the authors identify a “misaligned incentives problem” in the very DNA of the market design. They write in summary, “The bottom line is that investing in more robust energy supply (e.g., fuel) arrangements may often be beneficial and cost-effective for the system, but not financially viable for individual generators in today’s energy market construct.”

Implications Outside New England:

New England, to a certain degree, has its hands tied in how it responds to this challenge. Fuel-secure, dispatchable coal generation – which continues to buttress reliability and resilience in much of the rest of the nation – is all but gone in the northeast. When energy supplies run low, when natural gas pipeline capacity can’t keep up with demand and the weather reduces renewable power, generators must turn to fuel oil, often supplied by truck, or LNG imports, regularly delivered from Russia, to keep homes warm and the lights on.

Other markets – like PJM or MISO – still have the dispatchable fuel diversity to better handle bitter cold. But that dispatchable diversity is eroding, with coal plants continuing to be pushed off the grid and into early retirement. These markets simply aren’t valuing baseload, fuel-secure generation as they should. With every month of continued foot dragging in addressing the problem, the grid grows more vulnerable.

Recall that four utility executives wrote PJM earlier this year pleading for market reform to better value baseload units and the resiliency they provide the grid. The executives from Public Service Enterprise Group, Duke Energy Corporation, Exelon Corporation and FirstEnergy Corporation specifically said that PJM’s incremental efforts to reform pricing in the energy market have fallen short of the “fundamental changes that are needed to support baseload electric generator units over the long-term.” They continued, “PJM has not taken the proactive steps needed to value resiliency attributes, such as fuel security and fuel diversity, of its generating fleet.”

If Secretary of Energy Rick Perry was once out on a limb in declaring his concern over the loss of fuel-secure, baseload power, he’s certainly no longer lonely. The crowd around him – now full of utilities and market experts – can’t be ignored. Fixing the problem requires fixing wholesale electricity markets. Just “allowing the market to work” isn’t going to cut it.