If we are going to fulfill the growing commitments from states, cities, and corporations for clean energy, we are going to need explicit action in the right direction. The electricity industry mixes private and public interests, so a combination of public policies and markets has been the norm in utility regulation for the past 100 years. Now, this is an important place for the fight to reduce fossil fuel use and increase renewable energy.
Transition to renewable energy takes place in a governing framework. Recent debates over “fuel security,” “resilience,” and “the changing energy mix” reveal how electricity service is laden with the public interest. Our utility regulatory framework already deals with the costs of a monopoly and the costs to avoid possible power outages. Regulators watch for prudent costs and non-priced “externalities” that affect society such as safety, health and reliability. Public policies set by public governing bodies balance these issues.
Without regulatory oversight of expenses, a utility can collect money to build and operate for ever more reliability. To keep this from getting too complicated, policymakers often seek focused and measurable requirements or standards. Present practices at PJM, the grid market operator in 13 states from Illinois to New Jersey and North Carolina, are costing $200 million to $2 billion per year, before the next “fuel security” gets layered on top.
Standards for reliability exist
Electric system reliability is closely watched. The largest electric utility investments are in power plants used collectively by all the consumers in an area. The adequacy of the supply from power plants is the most common measure of reliability, and every utility compares supply to demand for electricity. For at least 50 years, utilities and regulators have used a standard of “one day of shortage in ten years” for judging adequacy of electricity supply. This probability estimates risks in the forecast and provides a reserve, or margin for unexpected incidents that would affect both supply and demand. Without such a standard, the utility industry has incentives to keep building and operating power plants without any means to judge if the added expense is needed.
Addressing externalities with policies
Most of the environmental harm and impacts on communities from building new power
plants and continued operation of old, polluting power plants are externalities, outside the price paid for electricity. Utilities are governed by public entities to deal with these external costs. Cost reviews and environmental standards help define how the utility can raise consumer rates for the costs to meet standards.
As fuel types change and debates shift, there are still private interests and public policymakers. PJM, along with another grid operator in New England, has been having trouble with public policies for clean energy, in addition to also having trouble with market prices favoring natural gas as fuel for electric power plants over coal and nuclear. The market operators PJM and ISO-New England are disqualifying renewable energy from being counted in the capacity market as a supply. That means that as states meet renewable energy laws and corporate buyers add wind and solar, PJM and ISO-NE have policies that continue to pay redundant fossil generation to meet demand and hide the amount of renewables on the grid. This adds costs and delays the retirement of fossil-fired plants and their carbon emissions.
PJM and ISO-NE argue that there are other values and attributes to other energy resources that deserve higher payments. PJM has changed the definition of a qualified supply to be year-round, discarding the summer peak as the driver of peak demand. PJM and ISO-NE now want to reward plants that have “secure fuel.” Already, PJM and ISO-NE provide a variety of payments to power plants to provide energy, or be ready to provide energy, or to change their energy production on short notice. The definition of these “products and services” other than energy have been debated and changed pretty much continuously since the markets were launched 20 years ago. (One stakeholder counted 40 requests made by PJM to FERC to change the capacity market rules.)
The trend from PJM in the last few years has been hostile to clean energy. The newest of PJM’s policy shifts favoring “fuel security” is aimed at reducing the dominance of natural gas. But as happens often in PJM, this also disadvantages wind, solar, demand response and the latest in new technology, energy storage. PJM’s premise is that a whole series of improbable events might happen to stress the supply and the gas generators.
But PJM finds the power grid would still be reliable. The PJM analysis says the power system would be fine if a combination of particularly bad things happen all at once: the weather was colder than 1 in 20 years, the market does not replace closing power plants with new plant investment of any kind, and during the cold snap the gas pipelines are overloaded and start to explode (PJM uses the term “high-impact disruption”). PJM’s view of supplies for theoretical cold snaps misses lessons from wind contributions in 2011 in Texas and 2014 in PJM.
Wait, the analysis says reliability is OK?
The PJM reporting on this says upfront: “The PJM system is reliable today and will remain reliable into the future. While there is no imminent threat, fuel security is an important component of reliability and resilience—especially if multiple risks come to fruition. The findings underscore the importance of PJM exploring proactive measures to value fuel security attributes, and PJM believes this is best done through competitive wholesale markets.”
And yet we need to fix this?
PJM is taking the stakeholders through a process to make new changes to its market. PJM hasn’t offered any probabilities to the events it calls improbable, other than the extreme cold. But this isn’t the first time PJM focused on the gas supply delivered by pipelines. In 2015 PJM found “Gas sector infrastructure improvements have resulted in much greater operational flexibility across the pipelines and storage infrastructure that heighten the resiliency of the network to compensate for highly disruptive gas-side contingencies.”
Now PJM notes: “there is no common planning standard similar to what is required for the planning of the bulk electric system.”
Overbuilding every day, making policy as it goes
The PJM power supply has a persistent fat reserve margin, plus numerous clean energy sources it doesn’t count that boost its safety margins even further. PJM meets the one-day-in-ten-years standard with its “Reliability Pricing Model” (RPM, aka capacity market). PJM makes calculations and estimates of peak demand plus a reserve margin to determine how much capacity it needs. In doing so, the regulated private utility starts acting like a policymaker.
PJM manages the eligibility, bid prices, and clearing mechanics of its RPM auction. An intertwined set of PJM practices interfere with prices in the energy market and elevate the capacity market. PJM has made changes (40 by some count) to manage the capacity market. The trend of these changes is to spend more on fossil generators, obtain more generator-based supplies, and ensure asset owners have steady revenues.
The cumulative results of these changes is overbuilding, and greater expenditures for reliability. Instead of a reserve margin that provides one day in ten years probability, PJM’s practices are providing an estimated probability of one day in 100 years, with annual costs of $200 million to $2 billion more per year than the standard requires. The results from recent capacity market procurements show PJM is spending to exceed the 16% needed reserve margins to reach reserve margins of 20% (2015), 21% (2018), 22% (2016) and 23% (2017).
The policy-setting done by public, transparent organizations regarding the reliability of the electric grid, and the shift to include more renewable energy, is being trampled by PJM. The costs fall on consumers. Other regions have adopted some or none of these practices. The states and locally-controlled utilities that have voluntarily joined PJM should be asking who is in charge, how are they following their mandates, and whether or not will this lead where we want to go.