Industry and resource provider responses in a Federal Energy Regulatory Commission proceeding this February on U.S. power system supply-demand uncertainties revealed two important things about the nation's accelerating energy transition.
First, rising penetrations of variable and distributed generation make reliability a growing concern for regional market operators governed by FERC, the FERC proceeding showed.
Second, no single solution for affordably enhancing reliability seems adequate to the diverse needs of solar-rich California, the windswept heartlands, and the Northeast's emerging offshore wind and distributed generation portfolio, representatives of clean energy developers, investor-owned utilities and market operators agreed in proceeding filings.
Current energy market rules were issued by FERC in the 1990s based on "the inflexibility of large, central generators, which made up the large majority of energy supply" then, reported the American Clean Power Association in a Feb. 4 filing on behalf of renewables and transmission developers. New market rules allowing "flexible system operation" are needed for emerging generation and load variability, the group said.
"Changes" to the energy and ancillary services markets being reevaluated in FERC's docket can allow operators to "reliably operate the system," the Edison Electric Institute agreed in a Feb. 4 filing on behalf of member IOUs. "Competitive wholesale energy markets should provide accurate price signals, in both the day-ahead and real-time markets," it added.
Despite widespread agreement that market design changes are needed to affordably protect reliability as renewables penetrations rise, proposed solutions vary significantly, stakeholders told Utility Dive. Regional power system dynamics are specific to local technologies, resources, weather and power demand. But FERC guidance can be crucial to each market operator's efforts to meet its energy transition complexities, the stakeholders added.
Energy market basics
Every day, complex regional market operations allow customers to have electricity simply and instantaneously.
Qualified generation can bid into a grid operator's integrated markets under FERC-approved protocols and tariffs, Southwest Power Pool Manager of Market Design Gary Cate told Utility Dive.
A single, computer-based market clearing engine with every "knowable characteristic" of supply and demand co-optimizes bids and prices for each operator's market, Cate said. Adequate resources are bid and committed for energy, for ancillary services, and for contingency needs at the lowest price that protects reliability for the day ahead.
The "very complex calculation" done by operators' engines are "proposed solutions" that are "reproduced and finalized every five minutes for their real-time markets," Cate said. "But there may be real-time events not in the available forecast data that will be addressed by operator procurements from outside the market."
"Out-of-market actions" are procurements of resources to meet real-time demand not secured in day-ahead market scheduling of dispatch. Because they are typically obtained from a smaller set of immediately available flexible resources, "their prices can rise very quickly," Cate said. Though renewables offer cleaner, lower-cost power, their variability is increasing the need for those costly out-of-market actions, he added.
To add flexibility and reduce out-of-market costs, SPP added a 10-minute to 15-minute up and down ramping ancillary service product and is developing an hour product for longer duration uncertainties, Cate said. Though they add cost as standard procurements in SPP's day-ahead and real-time markets, they "could save the higher costs of out-of-market actions."
Similar products may cost-effectively protect reliability and meet emissions reduction policy goals in other markets, stakeholders told a September FERC technical conference. And other ancillary services products, or reforms to existing ones, may be needed, to provide adequate compensation to providers of flexible resources, according to a Sept. 8 FERC staff report for the conference.
More controversial reforms of capacity markets or required reserves, where they are used to protect reliability, are also being studied through a separate FERC technical conference. Some market operators prefer market dynamics to administratively calculated and set capacity reserves, sometimes called resource adequacy, to protect reliability.
The consensus is that flexible ancillary services products in real-time markets are more granular and better defined than capacity, and ensure operators get what they need, when and where they need it, Grid Strategies Founder and President Rob Gramlich said. But where capacity markets and resource adequacy programs are used, they will still be important for longer duration issues, he added.
Market operators' definitions of flexibility differ, but "generally refer to a resource's availability to increase or reduce energy output" in a short timeframe, FERC staff observed. For SPP, it is "the available amount of rampable online and offline capacity that can be delivered within a certain period of time," staff said.
Despite "broad" consensus on the need for "more operational flexibility" to meet the new demands of a more variable power system resource mix, current market rules prevent emerging and less familiar flexible resources like battery storage from full market participation, which limits compensation to them for their full range of values and discourages investors, staff added.
Regional market operators' varying energy and ancillary services market needs have led to very different attitudes toward the urgency of changing those rules to address system uncertainty imposed by the rising renewables penetrations, many stakeholders said.
Participants in the FERC energy and ancillary services conferences in September and October and their follow-up docket filings reflected regional market attitudes about the need for change.
New rules can improve reliability, ACP and EEI agreed. But regional differences prevent "a one-size-fits-all approach to energy and ancillary services reforms," EEI stressed.
At less than 10% penetration of wind and solar, the New York Independent System Operator "has not seen significant cost impacts" due to variability, its Senior Vice President of Market Structures Rana Mukerji told Utility Dive. Price signals should simply "provide enough total installed resources and signal the right resources to perform in real-time to minimize customer costs."
If out-of-market actions become systematic and frequent as NYISO moves toward the New York state policy goal of 70% renewables by 2030, "that probably means a market design failure," Mukerji said.
But NYISO reliability margins could reach "concerning levels beginning in 2023" and the grid operator will need to "move carefully" to "avoid the kind of problems we've seen in other parts of the U.S.," its 2021 to 2030 reliability report found.
For now, existing products and services meet "reliabilities risks" and "compensation mechanisms based on market prices are appropriate," NYISO Director of Market Design Mike DeSoccio told the FERC conference in September. But with new resources and operational needs "coming fast," NYISO faces a "complex mathematical problem" of managing reliability in real-time.
And if new products and services are not soon incorporated into NYISO's market, it will not be able to "keep the lights on without taking more out-of-market actions, which is an untenable situation," he added.
The SPP, PJM Interconnection and Midcontinent Independent System Operator markets face rapidly rising wind penetrations, which increases the variability of the resource mix and imposes the need for more out-of-market actions.
Renewables are "over 30% of our total generation, and we had a peak wind penetration of over 84% in May 2021," SPP's Cate said. "Our generation queue is over 95% renewable which means the trend is only going to continue."
Deviations from load forecasts necessitating out-of-market actions create "pricing distortions," but ramping products aligned with needed response times can avoid them, Cate said. SPP's FERC-approved ramping product addresses 5-minute to 10-minute deviations by compensating resources that quickly turn supply up or down.
A proposed uncertainty product will soon compensate resources for similar services over a 1-hour to 2-hour period, he said. And SPP may need other products and services if increased renewables and retiring conventional generation create longer duration uncertainties, he added.
Increased costs of resources to meet those issues, like long-duration battery storage or pumped hydro, might increase "the tension between economics and reliability," Cate said. But at higher renewables penetrations, the increased threat to reliability will attract investment in those resources, likely leading to costs "lower than out-of-market transactions," he added.
MISO's November Reliability Imperative Report and PJM's Feb. 4 filing describe existing and proposed ancillary service market products similar to those used by SPP. Without them, PJM "will not have the services we need to manage uncertainty," its filing said.
The solar-rich system managed by the California Independent System Operator has significantly more near-term uncertainty.
With over 10 GW of behind-the-meter rooftop solar, "we're seeing imbalances of over 6 GW between the day-ahead and real-time markets in both upward and downward directions," CAISO Executive Director, Market and Infrastructure Policy, Greg Cook told the FERC conference.
Despite a flexible ramping product to address uncertainty between the 15-minute and 5-minute markets, CAISO's morning and evening ramps are forcing increased out-of-market actions, Cook said.
A 30-minute and 60-minute ramp product and a new imbalance reserve product are being considered, though new rules must provide for higher compensation to them, or out-of-market actions will be necessary, Cook said. The proposed imbalance reserve product can be a solution because it can meet energy needs in the day-ahead market and imbalance needs in the real-time market, he added.
But those solutions will be inadequate to future compounding uncertainties if, for instance, "wind and solar both fall off," objected California Public Utilities Commission Energy Division Analyst for Energy Storage Mike Castelhano during the FERC conference. Administratively set resource adequacy requirements are more reliable than "playing around with real-time market prices," he said.
Market responses to the compounding uncertainties expected in high renewables systems will be "very computationally intensive," Castelhano said. Simply requiring more resources to be procured and available might more efficiently relieve the uncertainty that drives out-of-market actions, he added.
Flexible resource providers offered different types of market reforms that would compensate their resources for their multiple unique capabilities.
Flexible resource providers
Input from suppliers of flexible resources, like battery storage, emphasized reliability solutions different than those from market operators.
Ramp products have value but appropriate compensation to new technologies like batteries requires taking advantage of their new capabilities, NextEra Energy Resources Senior Director, Regulatory Affairs, Michelle C. Gardner told the conference. Prices should be settled "every minute or faster," fully utilizing their ability to respond instantaneously.
Dispatch may never be that fast, but flexible resources can respond at that pace and should be paid for that value, she added.
More emphasis should be put on a "construct that encourages procuring and using flexible resources for many needs," added LS Power Vice President, Wholesale Market Policy, Marjorie Rosenbluth Philips. That would address the inadequate compensation for "stand-alone ancillary services," she said.
"Parsing out each ancillary service product" and allowing different resources to compete to provide them is appealing, but "it is not economically efficient for consumers," she added. Market operators "need to decide what attributes they need for reliability, not what resources, because compensating for single ancillary services will not get something like battery storage built."
The best outcome
"Market rules can make or break the economics of an individual supply or demand resource, and the reliability and affordability of electricity," a 2018 Grid Strategies paper on needed energy market design improvements reported. It recommended new price signals to open markets to flexible resources and rules to allow equal market participation for all resources that enhance reliability and customer choice.
Three years later, stakeholders at the FERC technical conferences last fall called for the same objectives. And Feb. 4 filings from groups as different as ACP and EEI agreed market operators from New York across the Midwest to California have just begun to procure flexibility in energy and ancillary services markets to protect reliability and avoid out-of-market actions.
Because of a "broad industry consensus" of the need for reform, FERC intends for the conference and proceeding to support "ongoing efforts to develop a common understanding of the challenges ahead," the staff white paper said.
The best outcome might be a FERC policy statement with "principles, goals, and criteria for market design issues," Grid Strategies' Gramlich said. "Needs differ from region to region and will change over time, but continuous improvement in each region can follow some common themes, though no region is likely to get all the way to the end of the process as the system keeps evolving."