Grid reliability increasingly depends on where you live. A new study conducted by Christensen Associates Energy Consulting for the nonpartisan Electric Markets Research Foundation has found that keeping the lights on is more likely in traditionally regulated markets in the South, Southwest and Northwest than in restructured markets in California, Texas, the Midwest and on the East Coast.
In regulated markets, utilities own the power plants as well as the transmission and distribution lines. State regulators set prices. Restructured markets administered by regional transmission operators (RTOs) use competitive bidding to set prices for wholesale electricity that utilities or unregulated retailer suppliers sell to consumers.
Traditionally regulated electricity markets continue to meet resource adequacy requirements under the supervision of state regulators, the EMRF study concluded. The restructured markets, by contrast, are still trying to prove the workability of their model for assuring resource adequacy.
One major issue explored by the Foundation study is fuel diversity, a key to grid reliability. Its important because approximately 23,000 MW of coal-fired generation was mothballed between 2005 and 2013. Another 37,000 MW is expected to retire over the next decade, most during the next four years. Much of these retirements are in RTOs. Meanwhile, in nearly every RTO region, natural gas generation capacity has at least doubled over the next past decade. The utility dash to gas has occurred in both markets, but traditionally regulated regions have retained more fuel diversity.
Reserve margins are one of the best ways to measure reliability. Reserve margins have declined in almost all regions of the country over the past decade but more so in restructured markets. Regions with traditional markets have forecasted higher reserve margins than the RTO regions in all forecast years. The respective simple averages for the three years 2014, 2018, and 2023 are: traditional regions, 31.9%, 25.2%, and 17.2%; RTO regions, 23.8%, 17.4%, and 13.7%.
Last winters polar vortex exposed the vulnerabilities of the electric grid in restructured markets, with utilities in the Northeast and Midwest scrambling to avoid blackouts, and raises concerns about the future. Reliability was sustained, but at times was very close to the edge, Cheryl LaFleur, acting Chairman of the Federal Energy Regulatory Commission, said at a recent FERC hearing.
Will we be as lucky next time? The planned retirements of coal-fired plants that kept the lights on last winter will make it more difficult to cope with the next shock to the system in restructured markets. Almost 90 percent of the generation the American Electric Power Co. used to cope with power demands last winter will be retired in 2015, AEP CEO Nicholas Akins told Congress.
Consumers in some instances are facing sticker shock from the enormous spikes in the price of wholesale power last winter. PPL Corp., a central Pennsylvania utility, saw its wholesale prices soar last winter from $40 per megawatt hour on a normal day to $2,000 per megawatt hour last winter. MISO recently reported electricity prices were up 26 percent during March to May compared to the same period last year. During one of the coldest days last winter, ISO New England reported, natural gas prices in the region that typically traded at $3 to $5 per million British Thermal Units soared to $79 per million BTU.
The EMRF study found that restructured markets struggle with securing adequate resources because they seek a market solution for which there is none within the existing political and institutional frameworks. Regulatory mechanisms must be part of the overall approach to ensuring long-term resource adequacy. Long-term contracts and self-build options for load-serving entities must be encouraged to ensure an adequate resource mix critical to power system reliability.
We are paying too little attention to the issue of resource adequacy. Our nation must strive for better regulatory and market rules in restructured markets that will keep the lights on at a reasonable cost to consumers. Failure to act now could have serious impact not just for the grid but also on the nations economy.
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