New research shows how integrating renewables exposes design flaws in energy markets and offers avenues for improvement

This post is the third in a series focusing on the future of the electricity sector and a new scholarship supported by the Alfred P. Sloan Foundation. Each post is based on a discussion between selected researchers and experts working on relevant policy. To learn more and join one of our next conversations, visit the series website.

As the nation’s energy providers integrate an increasing volume of wind, solar and battery power into their systems, researchers and regulators are seeing compelling evidence that markets may need design adjustments to address inefficiencies.

Our recent webinar, funded by the Alfred P. Sloan Foundation, examined how market designs can lead to clean energy outcomes and potential unintended consequences like increased CO2 emissions.

Moderated by Sarah Ladinlawyer at the Institute for Policy Integrity, the panel, which you can look here-included Dr. Catherine Hausmannassociate professor of public policy at the University of Michigan and research associate at the National Bureau of Economics Research, Dr. Chiara Lo Preteassociate professor of energy economics at Pennsylvania State University and Valerie Teeter, deputy director of the Office of Energy Market Regulation at the Federal Energy Regulatory Commission (FERC).

Markets for ancillary services, renewable energies and their impact on production

While most economists tend to look at wholesale energy markets, Hausman has studied ancillary service markets, which provide services essential to maintaining a safe and stable electricity system. One of these markets is the frequency regulation market, which is crucial for ensuring reliability. This market helps maintain the proper balance between supply and demand by paying producers to make small adjustments to their production. Dr. Hausman’s research explores the potential for ancillary service markets to interact with and affect the wholesale energy market.

His research studied the PJM frequency regulation market in the northeastern United States from 2012 to 2014 to show how generators responded in the wholesale power market. His team found significant market spillovers as generators adjusted both the amount of power they generated as well as the type of fuel and technology. For example, because the frequency regulation market forces generators to fluctuate their output, some may need to significantly increase their daily output in order to have the margin to make these adjustments. These results suggest that ancillary service markets interact directly with output markets in ways that academic economists had not previously considered.

Renewables, batteries and climate change are leading to rethinking ancillary services, she argues. If system operators are not careful, using batteries to provide frequency regulation could lead to the unintended consequences of increased CO2 emissions. For example, if a battery enters the frequency regulation market, it may reduce the need for a coal-fired plant to participate in frequency regulation, which will lead to an increase in coal-fired capacity in the wholesale market and , therefore, emissions. “In a world without the ideal carbon emissions regulations that we could hope for,” Dr. Hausman said, “we need to be careful of the unintended consequences of our policies, especially when it comes to things like new technologies or changes in electricity markets”.

Manage the unpredictability of the wind

The research of Dr. Lo Prete examined why the growing penetration of wind into US energy markets poses a unique challenge. Markets operated by Independent System Operators (ISO) rely on forecasts to schedule the shipment of wind and non-wind resources a day in advance (with real-time shipment adjustments as demand and offer vary). While weather forecasts have improved considerably, forecasts for wind are not as accurate, and any inaccuracies can impact other forms of energy, which need time to adjust their output (e.g., coal-fired power plants take 10 to 20 hours to reach 70% capacity).

If the wind doesn’t blow as expected, “peaking” power plants (dirty, inefficient fossil fuel-based generators that run only a few hours a year) have to ramp up quickly to meet demand. Conversely, if the wind blows unexpectedly hard, some non-wind generation units that had ramped up the previous day in response to the forecast lose their places in real time, causing them to burn fuel at idle (units that committed to turn on cannot easily turn off and then operate at their minimum output level). “Once they’re engaged, they can’t be disengaged,” says Dr. Lo Prete.

Both of these outcomes are inefficient and may increase the need for additional payments or out-of-market payments for generation or demand response resources that ensure generators are properly compensated when ordered to produce or reduce their output. power. Ensuring that forecasts are more accurate is one way to reduce these inefficiencies.

She also found an interesting interaction between the wholesale and ancillary services markets that creates greater inefficiencies due to wind variability and inaccurate forecasts. Specifically, for baseload power plants (including coal and natural gas combined cycle) that participate in both power and reserve markets, if the wind ultimately blows less than expected, these power plants may shift their capacity towards production, thus reducing their reserves. Since these plants are cheaper to operate than peaking plants, this reduces the market equilibrium supply below the marginal costs of peaking plants, thus requiring a larger increase. Dr. Lo Prete was surprised by this finding and said she hadn’t originally planned to integrate the two markets into her research. But his findings demonstrate the need for researchers to think about the system holistically, incorporating all market participation into their modeling efforts. She encouraged the researchers present to take this approach, saying that “it will become increasingly important to look at the combination of ancillary services with energy markets, as well as with other markets (such as capacity markets)”.

FERC Explores Market Reform

Ms Teeter noted that as the resource mix evolves, FERC (the agency that regulates transmission and wholesale markets) is considering how market design in wholesale and ancillary services markets can meet the need. greater operational flexibility. Given the inability of variable energy resources to scale generation up or down on demand, the remaining generation needed to meet the total load will need to be much more flexible in real time.

It is therefore essential that market rules do not create barriers to participation for producers which can rapidly increase or decrease. The Commission is exploring whether new market products can help compensate producers able to meet this growing need, as well as how market designs can better incentivize resources to reflect their operational flexibility in their price offerings. As new types of resources such as batteries have greater operational flexibility, the Commission is also examining whether market rules create undue obstacles that prevent these resources from providing this essential service.

Need for continuous interaction between academics and policy makers

During a lively discussion among the panelists, Dr. Hausman underlined the extremely important link between researchers and regulators. Since the grid is changing so rapidly in the absence of a national climate policy on carbon emissions in electricity markets, researchers should look at the unintended consequences and present their findings to agencies like FERC. to find appropriate solutions. “The market is not just going to automatically take care of itself,” she said.

Regulators rely on this type of data to make informed decisions. Mrs Teeter describes some recent technical conferences during which speakers, experts and academics discussed key issues related to the evolving needs of the system. Conferences like these, as well as the public record, she noted, are ideal venues for scholars to share some of their latest thoughts on market issues and challenges that may exist.

“Commission staff appreciate the ability to dive into these issues and understand the technical thinking that has been done and have that thinking inform their decisions,” notes Ms. Teeter. Research like that conducted by other panelists can be useful to the commission and its staff as they consider whether energy market reforms and ancillary services are needed to meet changing system needs in the electricity sector. evolving electricity.


Abdul J. Gaspar