As we know, the electric power grid is undergoing a shift from a traditional, centralized electricity system powered by conventional resources to a distributed, diverse system. The advanced energy technologies driving this shift give consumers more choices, improve reliability, and drive down costs for everyone. As this transition occurs, the rules governing electricity markets need to keep up. To fully realize the benefits advanced energy has to offer, we need electricity markets that treat all resources equally, and properly assign value to each of services they provide. Ensuring that markets are fair, transparent, and technology-neutral begins with the governance structures of the seven major grid operators in the United States.
A new paper, Regional Energy Markets: Do Inconsistent Governance Structures Impede U.S. Market Success?, commissioned by AEE member E4TheFuture, outlines how each Regional Transmission Organization (RTO) and Independent System Operator (ISO) operates and how advanced energy companies are able – or not able – to participate in this governance. The focus of the report is the variability between these state and regional entities, which E4TheFuture concludes “make[s] achieving a truly consistent and well-functioning energy market on a national level almost impossible.” But it also shows that the way these grid managers are governed stands in the way of some advanced energy technologies being able to compete on a level playing field with traditional generation and transmission technologies.
While most Americans know little about RTOs and ISOs, these entities set the rules of the road for organized electricity markets—the competitive markets that manage about two-thirds of the electricity bought and sold in the United States. RTOs/ISOs were created about 20 years ago, when the advanced energy sector was relatively nascent. As a result, the rules they have developed do not always take into account the unique characteristics of advanced energy technologies. For example, markets are generally designed with an eye toward the traditional, centralized electricity system. Distributed resources like energy storage, which has unique characteristics to contribute to frequency regulation, cannot sell these services into certain markets because they don’t meet criteria designed for centralized power plants.
It’s easy to see how this happens. RTO/ISO market rules are developed through stakeholder processes that vary from region to region. In most RTOs/ISOs, stakeholder groups must approve any proposed changes to how a market operates. While the processes differ depending on the RTO/ISO, each is characterized by a legislative committee-like development of rules, where different market participant groups with similar interests have weighted votes.
Market incumbents, including transmission and power plant owners, tend to control the outcome because of their established position, and weighted vote, in the stakeholder process. New market entrants, including companies offering many advanced energy technologies, wield less influence in the stakeholder process, because they have less market share. For instance, only one grid operator, ISO New England, has a specific stakeholder group for advanced energy, which it calls the Alternative Resource Sector. As the report states, “when alternative market players are excluded from RTO/ISO markets and governance systems, their ability to participate effectively in ISO/RTO planning processes … is severely compromised.”
In addition, stakeholder processes have high thresholds – generally super-majorities – for recommendations to their RTOs/ISOs, and from them to FERC, for making changes in market rules. “Because of the multiple industry sectors, proposals require coalitions and compromises to achieve even a simple majority vote in support,” the report explains. “This makes it easier to prevent change than achieve change.” The report calls this an “intentional feature” for an industry expected to move “slowly and cautiously” – but we see it as giving an advantage to incumbents over innovators as well.
We have written before on the issue of advanced energy being able to compete in wholesale markets. Advanced energy technologies and innovative operational techniques have the potential to increase reliability while lowering costs and increasing customer participation. However, current practices do not necessarily allow these solutions to compete head-to-head with incumbent technologies on the basis of what they can do. In a recent filing with FERC, AEE identified certain market rules, tariffs, and product definitions that act as barriers to participation of advanced energy technologies in one RTO, PJM Interconnection.
A well-functioning electricity market incentivizes investment where it’s needed and encourages businesses to innovate in order to provide services. Fortunately, FERC has come to understand that there are market barriers to innovative technologies, opening a docket on this issue related to energy storage. This new paper from E4TheFuture shows, however, that governance of regional markets also plays an important role in the development of market rules for advanced energy.
AEE, working with a wide range of partners including E4TheFuture, is elevating this issue with FERC, which is the ultimate arbiter of the governance rules at the RTOs/ISOs. This issue is fundamental to a well-functioning, competitive market and AEE will continue to advocate for more equitable and representative governance of markets across the country.
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