The current U.S. retail power system is not adequately incentivized to deploy large amounts of clean energy technologies, according to a Monday report prepared for the Wind Solar Alliance by Grid Strategies and Electric Advisors Consulting.
Fourteen states across the U.S. allow retail electric competition, but only Texas' market — the Electric Reliability Council of Texas (ERCOT) — has effective retail buyers under its model. Retail power providers across the other 13 states, which fall under ISO New England, New York ISO and PJM Interconnection, are missing the incentive and the ability to procure that energy.
- Those restructured states defer to capacity markets for procurement, which has become a problem as policymakers becomes increasingly frustrated by a lack of resource choice flexibility. But before states begin to move toward a less regulated system, the retail model needs to find a way to get active retail buyers into those regions, according to the report.
Under the current retail structure, grid operators in many of the northeast regions have taken on the resource adequacy role by mandating capacity markets for procurement. But tensions between state clean energy policies and recent market rule changes across PJM, NYISO and ISO-NE, has led at least five states to begin proceedings to back out of those markets.
Before a state will maximize on the potential of retail competition, however, the retail model itself needs to change in order to better incentivize a more rapid deployment of renewables, storage and other clean energy technologies, according to the report. With one-third of the country depending on power from hybrid retail-competitive markets as the pressure to decarbonize the power sector rises, reform is crucial, the report authors told Utility Dive.
"Retail competition has a lot of benefits and may be very well suited for the resource transition, partly because it tends to find more and more innovative ways to engage demand side participants in markets," said Rob Gramlich, founder and president of Grid Strategies. "So we really need to make sure that the system is set up to finance new generation and the way to do that is to make sure there are active buyers in the market."
In Texas, retail buyers are incentivized to go out and procure large amounts of power, then sell it back to the ERCOT market, but those same incentives don't exist in retail markets northeast of Texas, limiting the ability of states and others to have much real choice in the kinds of resources they're able to procure.
"We're looking at some of the root causes of this arrangement and finding the retail structures aren't set up to give the retailers both the incentive and the ability to be active buyers," said Gramlich.
Two key flaws the report finds in retail market structures are rules that hinder the incentive for retail providers to sign long-term contracts, and insufficient creditworthiness of retail power suppliers.
"Almost anybody" can become a competitive retailer under the current system, even without sufficient financial backing, said Gramlich. A lack of creditworthiness makes it difficult for those retailers to then procure long-term power contracts, which necessitate a lot of capital from the outset.
"If you have very little skin in the game, you have little incentive to manage effectively, you have a much lower amount of capital at risk and money at stake," said co-author of the report and President of Electric Advisors Consulting Frank Lacey. "So, your incentive to even manage prudently … is minimized."
But for retail suppliers that are well positioned financially to enter long-term power contracts, there is often little incentive to do so because market structures tend to favor the incumbent utility. For example, through default service options, customers can opt out of the market and leave retail providers stuck with a power asset they can't sell.
To combat these barriers, the report recommends states leveling the playing field between default or incumbent service and retail competitive services, as well as ensuring retail suppliers have sufficient credit available to enter into long-term contracts.
"If we get the markets right we have less need to rely on the regulatory solution," said Lacey. "These … reforms that we've outlined will help us stay down the path that we started a long time ago."
This post has been updated to clarify ERCOT retail buyers sell to retail customers.