Wholesale Market Design for a Low-Carbon Power System

Michael HoganSenior AdvisorThe Regulatory Assistance Project (RAP)®

Rue de la Science 23B-1040 BrusselsBelgium

[email protected]

February 26-28, 2018

Energy Innovation/Hewlett Foundation WorkshopGolden, Colorado

Wholesale Market Design for a Low-Carbon Power System

Regulatory Assistance Project (RAP)®

• Support needed, fit-for-purpose investment under radical uncertainty

• Operate the system efficiently• Deliver the desired energy mix at least cost• Meet an optimal standard of reliability & resiliency• Mobilize all economic options, including demand• Compensate consumers for the value they provide

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The market design challenge for a near-zero-carbon power system:

Presenter

Presentation Notes

“Radical uncertainty”: More so than in living memory, we don’t know what will be needed, for how long, from what kind of resource, or from whom it can best be procured. The value of innovation, flexibility and non-capital solutions will outrun a few basis points’ reduction in the cost of capital every time. Vogtle or Summer, anyone? Seabrook? Dabhol? “Operate the system efficiently”: Drive maximum practical utilization of capital assets, especially given the possible wave of electrification in transport, heat and other sectors Meeting these first two challenges is incompatible with either long-term fixed commitments or with fixed, capacity-based remuneration “Desired mix at least cost”: Fuel diversity and other energy mix issues can and should be addressed through state-based supplier obligations, not through centralized long-term procurement “markets” ”Optimal standard”: Consumers do not place infinite value on service-on-demand, and cost-effective vRES integration will require that they increasingly be empowered to make their own decisions and that capital be allocated more effectively between generation (by whatever market is in place) and networks (by regulated grid companies and system operators) ”Mobilize all options”: Centralized long-term procurement favors supply-side solutions and forecloses a wide range of more cost-effective, more flexible options, many of which we cannot identify today. [Agree that “technology agnostic” can rely on getting the rules right, which is a process] “Compensate consumers”: Flexible loads must have access to the value of their flexibility without having to navigate and compete in the organized wholesale market

Regulatory Assistance Project (RAP)®

• Current market design ≠ current market practice • SCED with LMP market designed to pay needed

investment & drive efficient dispatch…• …yes, even with low/zero production costs• Value of investment in flexibility best seen in varying

real-time supply/demand for energy & services• On eve of revolution in electrification & controllable

demand, are we really going to gut energy prices?3

Why jump from a perfectly good airplane?

market will struggle to

especially with

Presenter

Presentation Notes

“Current design ≠ current practice”: let’s stop telling ourselves it does before we throw it away. SCED market designed to pay for investment even with low production cost portfolio – of course not without intervention, at least for the time being, but intervention should improve energy market prices, not undermine them. European commentators can be excused to some extent for drawing different conclusions, because energy price formation in the European market was stood up with two fatal flaws:

Regulatory Assistance Project (RAP)® 4

System services not capacity

Presenter

Presentation Notes

“First thing we do, let’s kill all the capacity markets” Eric and Mark talked yesterday about the need for markets to continually evolve and adapt. The mix of resource capabilities that will be most valuable will evolve, and the less we lock ourselves for decades into the future the better we’ll be able to adopt to changing value.


Flexibility comes in many colors


System services = Capabilities

Presenter

Presentation Notes

Market prices need to reflect the demand for both energy and for these services – and the marginal cost is the cost of the highest action needed to satisfy both. Problem identified by Jeff: Pay providers of scarce services what the market will bear, but just as we’re concerned that energy market prices reflect the price/lost welfare of “invisible” demand-side responses, we should be concerned that energy market prices reflect the price/opportunity cost of “invisible” actions to meet the demand for ancillary services.


The evolution of price formation


Scarcity amidst plenty

Source: CAISO via Calpine


So what’s the real marginal cost?

Source: Brattle Group


The false premise…


…vs getting energy price right…


…and realizing the real promise

Where the value of most DR lives


Price duration with 70% RES

Source: Ea Analyses for Orsted


Discuss!

MichaelSenior AdvisorThe Regulatory Assistance Project (RAP)®

[email protected]

Rue de la Science 23B-1040 BrusselsBelgium

About RAPThe Regulatory Assistance Project (RAP)® is an independent, non-partisan, non-governmental organization dedicated to accelerating the transition to a clean, reliable, and efficient energy future.

Learn more about our work at raponline.org

http://www.raponline.org/

Regulatory Assistance Project (RAP)® 16Source: Brattle Group


Low wholesale market prices?


Is there a dispatch problem?

Source: (1) CPI (B. Pierpont), (2) ERCOT

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20

40

60

80

100

120

140

160

180

0 15,000 30,000 45,000 60,000 75,000 90,000Cumulative Capacity (MW)

Full

Load

Cos

ts ($

/MW

h)

Median Load34,821 MW

Max Load65,531 MW

Min Load21,385 MW

Bosque CC2

Bosque CC1

Wholesale Market Design for a Low-Carbon Power System

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