Fixing flaws in retail electricity market structures can enable both wholesale and retail markets to support the massive investment needed in clean energy
WASHINGTON, DC – Electricity markets are in turmoil, with recent FERC rulings causing a half-dozen states from the Midwest through New England to consider exiting the capacity markets administered by Regional Transmission Organizations. A new paper suggests a deeper look into one of the root causes: the failure of designers of most of the 14 states with retail electricity competition to make sure retail providers behave as active buyers of power in wholesale markets. Active buyers that procure wholesale power on a long-term basis support resource adequacy and offer stably priced electricity service to consumers, providing an alternative approach to capacity markets where wholesale customers have no say in the power or prices assigned to them.
The report, produced by Grid Strategies and Electric Advisors Consulting for the Wind Solar Alliance (WSA), suggests retail electricity market reforms as key initial steps in resolving wider market problems. The authors propose two main ways that states can fix the problems: (1) ensuring retail electricity suppliers are sufficiently creditworthy to execute long-term contracts; and (2) leveling the playing field between competitive providers of electricity and default utility providers. These changes will lead to retail electricity providers with the ability and incentive to become active buyers of power to serve their customers.
“This paper is especially timely given states’ motivations to rethink participation in organized capacity markets,” which guarantee electricity supply, said Devin Hartman, director of energy and environmental policy, R Street Institute. “Recent FERC orders make it all the more important for restructured states to ensure that their retail policies are in order. Fostering competitive retail supply and proper risk management are essential to enabling a market-driven clean energy future.”
The report, Who’s the Buyer? Retail Electric Market Structure Reforms in Support of Resource Adequacy and Clean Energy Deployment, provides a detailed set of recommendations for retail market design features that can help support long-term contracting.
“In many states with retail electricity competition, competitive retail suppliers are passive participants in wholesale markets, with no ability or incentive to actively manage the portfolio of resources they use to serve their retail customers,” said Rob Gramlich, founder and president of the consulting firm Grid Strategies, which has expertise in wholesale markets. “Fixing the flaws we identify in this report would improve retail market performance and enable capacity market reforms at the wholesale level to create a more dynamic and flexible power system as a whole. We hope the report spurs discussion at both the wholesale and retail levels about creating markets that support the significant investment in clean energy resources that is needed.”
Nearly all of the costs of renewable energy projects are for up-front capital investment, and long-term contracts can provide the certainty lenders need to finance them. As the report details, a lack of credit-worthy buyers among the ranks of retail electricity providers and a playing field that’s tilted in favor of default utility suppliers have hindered long-term contracting in most of the 14 states that allow customers to choose their electricity suppliers.
“Efficient electricity market design must align incentives and accommodate voluntary contracting,” said William Hogan, the Raymond Plank research professor of global energy policy at Harvard’s John F. Kennedy School of Government. “The details matter.”
The report also details how the availability of long-term power purchase contracts is particularly important in states with renewable energy targets.
“This paper is a timely re-examination of how a competitive retail market for electricity can become an engine for clean energy, innovation, and consumer protection — if only it is allowed to work,” said Travis Kavulla, vice president of regulatory affairs at NRG Energy. “Policymakers who want to adopt meaningful reforms, and not just reshuffle the deck chairs, should read this report closely.”
In addition to talking about broader market issues, the report highlights the challenges inherent in the current market structures of three states in the especially beleaguered PJM region — Maryland, Pennsylvania, and New Jersey. The PJM regional transmission organization is among the world’s largest competitive wholesale electricity markets, serving 13 states and the District of Columbia.
“While most of the restructured states suffer from the same set of market flaws, we focused on these states because they each have a unique set of energy policy challenges that can be resolved through robust energy markets,” said Frank Lacey, president, electric advisors consulting, and a retail markets expert. “Utility commissions in these states would benefit from understanding the linkage between improved retail market structures and attainment of their energy policy objectives. Energy policy objectives can all be achieved with a more robust retail market design without burdening customers with market risks.”
Who’s the Buyer? complements a prior report Grid Strategies co-authored for WSA, which made specific recommendations about updating wholesale electric market rules to better serve customers’ and regulators’ desire for clean, affordable electricity.
Erik Heinle, an assistant people’s counsel, with the Office of the People’s Counsel for Washington, D.C., added that the report is “a very timely paper as we begin to think about what is next in the PJM capacity construct.”
The states with competitive retail markets include Illinois, Texas, Ohio, Pennsylvania, Maryland, Washington DC, Delaware, New Jersey, New York, Connecticut, Rhode Island, Massachusetts, New Hampshire, and Maine.
About Grid Strategies, LLC
Grid Strategies LLC is a power sector consulting firm helping clients understand the opportunities and barriers to integrating clean energy into the electric grid. Based in the Washington DC area, the firm is actively engaged with the Federal Energy Regulatory Commission, Department of Energy, state Public Utility Commissions, Regional Transmission Organizations, the North American Electric Reliability Corporation, Congressional committees, the administration, and various stakeholders. To learn more, visit www.gridstrategiesllc.com.
About Electric Advisors Consulting
Electric Advisors Consulting combines finance and regulatory expertise to produce business strategies that make sense within the current regulatory framework, allowing clients to extract true value from the markets. To learn more, visit https://www.electricadvisorsconsulting.com/.
About the Wind Solar Alliance
The Wind Solar Alliance (WSA) is a nonprofit organization dedicated to accelerating the transition to renewable energy. WSA uses research, communications, and advocacy to raise awareness of the benefits of renewable energy and the need for power market and infrastructure policies that recognize and reward those benefits. To learn more, visit www.windsolaralliance.org.
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