Groups Launch Push To Speed Reliable, Decarbonized Power Market Designs

April 6, 2021

With experts questioning the ability of current market designs to deal with changing power system needs, the World Resource Institute (WRI) and Resources for the Future (RFF) are pursuing a multi-year project to generate insights into how a new long-term electricity market could work with current day-ahead and other short-term markets to deliver reliable, low-carbon electricity at the lowest cost.

The groups are now touting their joint project, which they kicked off with a two-day workshop on “Market Design for the Clean Energy Transition: Advancing Long-Term Approaches,” held late last year that was co-hosted by Karl Hausker, a senior fellow in WRI’s Climate Program, and RFF Senior Fellow Karen Palmer.

The workshop produced “the best diagnosis of the problem,” Hausker tells Climate Extra.

But the workshop only represents “the beginning of a multi-year process” of defining proposals, pressure-testing them, and finding at least one regional transmission organization (RTO) that would agree to pilot test a new organized long-term market design to identify investments and support the financing and development of efficient, reliable mixes of zero- and very low-carbon resources.

Project participants have “lines of communication” with the Federal Energy Regulatory Commission (FERC) and others, but it will take some time to ripen any proposal, and each RTO and independent system operators (ISO) will differ, he says.

The project comes at a critical time. With climate change creating aggressive demands to decarbonize the grid, the project leaders and a growing body of other experts agree that current wholesale energy markets cannot achieve the necessary optimal mix of reliable, low-cost, and clean energy.

Such concerns are spurring numerous calls, including by the National Academy of Sciences (NAS), to accelerate the development of new market designs better adapted to the rapidly transitioning mix of wind, solar, and other resources.

Palmer, in the same interview, adds that the need to find new market designs is driven by “the imperative of decarbonization” and a recognition that market structures built for a different type of electricity system will not work to achieve the necessary decarbonization for a variety of reasons. The workshop underscored the broad interest in the need for new market designs and a recognition that “we have a long way to go,” she adds.

WRI and RFF are explicitly building on 2019 market design work by Energy Innovation (EI), a policy and technology organization whose mission is to accelerate the transition to a clean energy system.

Eric Gimon, an EI senior fellow, in an email says his group is “open about just what kind of clean energy system arises,” as long as “we can get to something affordable, clean and reliable which can also support societal priorities around access, equity, justice and resiliency.”

Furthermore, “We don't expect a uniform evolution in the energy transition -- each region has its own idiosyncrasies, priorities and historical context which will shape the trajectory of that transition,” he adds.

EI’s focus on market design issues arises from the fact that more than 60 percent of the U.S. electricity demand is currently served by restructured power markets organized by ISOs. “These markets will play an important role in steering the clean energy transformation, potentially throttling or accelerating this process, while guiding the shape of the ultimate clean system,” thus making their design extremely important as more and more companies, states, and others ramp up their renewable energy and decarbonization demands, Gimon says.

New Technologies

According to a just-released summary of the WRI-RFF workshop, experts generally agree that the current market designs created by ISOs and RTOs “function adequately at managing daily system operations and maintaining resource adequacy in a system that is still largely fossil-based.”

However, mounting research suggests that current designs “face challenges in terms of rationalizing the mix of new technologies and supporting efficient investments within them” amid intensifying decarbonizing pressures that will affect sectors economy-wide, the summary states.

In a keynote address, Paul Joskow, a professor at the Massachusetts Institute of Technology (MIT), made the case that “some kind of rationally-derived” plan for an “effective, efficient hybrid market” designed to work well in conjunction with day-to-day short-term markets and “guide vigorous competition” in long-term clean energy development should “replace today’s somewhat ad hoc approach to the selection of clean energy resource types.”

Today’s system is characterized by widely varying state clean energy policies and long-term wind, solar, and storage contracts.

Likewise, MIT professor Richard Schmalensee argued for a hybrid market design that aims for “both short-run and long-run efficiency” with retail electricity rates that would “encourage electrification and thus decarbonization of other sectors.”

The workshop followed the 2020 launch of the Future Power Markets Forum that RTOs and ISOs, generation companies and utilities, and trade associations and think tanks are using to study possibilities for electricity markets as “variable generation” expands.

In addition, NAS published an influential report that is guiding House climate legislation, “Accelerating Decarbonization of the U.S. Energy System” that contains a full chapter on the need for improved power market designs for clean electricity.

Among its recommendations, the report calls for FERC to work with RTOs and ISOs “to ensure that markets in all parts of the country are designed to accommodate the shift to 100 percent clean electricity on the relevant timetable.”

Today, U.S. market designs in ISOs and RTOs fall into three general approaches for securing resource adequacy, Palmer explains. In Texas’ energy-only system, there is no centralized market to ensure investment in future needs. In other regions, some have capacity markets to deal with resource adequacy -- such as PJM, New York ISO, and ISO New England -- while others like Midcontinent ISO and California ISO have an energy market plus state-level resource adequacy planning requirements for regulated utilities. Some states have been aggressive on decarbonization and others have not, creating conflicts in multi-state RTOs, as is occurring in PJM over its “minimum offer price rule” (MOPR). Recently FERC began steps to roll back the MOPR.

A new approach is needed for resource adequacy and decarbonization, which New Jersey is exploring in PJM, Palmer says. But the WRI-RFF project is exploring proposals for an even longer-term market. “A lot of states are already making centralized decisions about renewables,” through energy and capacity market procurements, so figuring out how those procurement policies will work together with markets “is really key,” she says.

‘Ugly And Expensive’

With renewables now only accounting for 10 or 11 percent of U.S. electricity, a reliability issue does not yet exist, Hausker says, noting that legacy coal- and gas-fired power plants still contribute to reliability. But down the road as renewables rise to between 50-70 percent or higher penetration, a more rational approach that organized long-term markets can provide will be necessary to find the optimal, least-cost combinations for each part of the country, he says.

Hausker adds that current market designs could achieve the adequacy and decarbonization goals, but the process would be “ugly and expensive,” and could produce serious reliability issues along the way. Markets have to “work hand in glove with carbon pricing, or cap-and-trade, or a clean energy standard” policy drivers that seek to squeeze carbon out of the electrical system, he says. But that effort must be done “in a very intelligent way” that “preserves reliability and keeps costs as low as possible” so that decarbonization does not harm consumers as electric vehicles, electrified buildings, and other electrification measures also drive up electricity demand, he adds.

Market design can enhance or obstruct the complex balance of goals that must be achieved, Hausker says. Under the hybrid long-term markets envisioned, “capacity markets would probably go away,” with current hour-by-hour markets continuing alongside a periodic procurement to “shape the generation mix” to meet the aims of reliability, low prices, and decarbonization through a transparent centralized market, Hausker says.

EI’s Gimon emphasizes that “There is no way we could turn off every polluting source of power tomorrow without a complete breakdown of our electricity grid, so clearly legacy fossil units play an important role as scaffolding for the transformation to a clean power sector.” However, the fundamental task is to “deconstruct the scaffolding as quickly as possible while building the clean system we want,” he says, a task that is not as simple as “trading dirty kilowatt hours for clean ones.” Gimon compares the U.S. grid to a “complicated machine with a large orchestra of participating resources which play a variety of vital roles,” and says “a new orchestra needs to emerge that can play similar music with either new players in the same roles, or in entirely new roles that still produce the music we want.”

Where 10 or 15 years ago planners and policy makers looked to models with 20-30 percent clean power, today credible models describe an affordable, clean and reliable system with more than 90 percent clean power, Gimon says. “Still, while there remains a lot of debate about which is the best way to get there, and possible paths to 100 percent” mostly clean or even completely clean electricity that most experts see as viable.

The aim of efforts like those that EI, WRI, RFF and others are leading is “to take a more proactive stance, to examine how markets need to evolve to support continued decarbonization and achieve a sustainable end-state clean power system,” Gimon adds. EI’s goal is “to identify tools, principles and metrics that can guide progressive policy makers while seeking allies and coalitions that can push back against incumbent interests that seek to use inertia in market design as a means to protect market positions for legacy fossil assets,” he says. -- David Clarke