Small Power, Big Grid: Part 4
The Emerging Relationship between Distributed Energy Resources and the Transmission System
DERs AND WHOLESALE MARKETS: Leveling the Playing Field—Or Creating a New One?
This blog is the fourth in a series on the relationship between distributed energy resources or “DERs” and the transmission system.
Achieving a truly modern grid that can reliably and affordably integrate high penetrations of renewable energy like wind and solar will require policy changes to reflect and incorporate DERs into regional load forecasting and transmission system planning. It will also require making wholesale energy market rules fair so that DERs (and other clean energy resources) to can compete with fossil fuel and nuclear power plants in the supply of energy, flexibility and other grid services.
To date, the design of wholesale energy markets—centralized energy, capacity and ancillary service markets in regions managed by Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs)—has been slow to catch up with the exploding emergence of wind and solar power and, more recently, DERs like energy efficiency, demand response (compensating customers for altering energy use at specific times), rooftop solar generation, electric vehicles and other energy storage options. Although traditionally dominated by coal, nuclear and natural gas-powered participants, wholesale markets are meant to be fuel and technology neutral and allow participation by any resources that are technically able to provide the energy, capacity or other grid services that the markets facilitate.
What are wholesale markets and how do they work?
The term “energy markets” can be used to mean a lot of different things. In the traditional monopolistic utility context, the only available market prospect was a bilateral construct –a series of opportunities for power plants to sell their output to utilities, usually via a utility competitive procurement process and a long-term power purchase agreement. Utilities also often developed their own power supply outside of the market context—and still do—in order to satisfy the electricity demands of their residential, commercial and industrial customers.
But the emergence of energy and reserves sharing across utility footprints, followed by the development of RTOs and ISOs, has changed the equation. Now, utilities in some regions have become the buyers in centralized, competitive wholesale markets (for energy, capacity and ancillary services) that offer an alternative to traditional bilateral transactions in the region.
Wholesale energy markets are centralized markets in which independent power plant owners bid to supply megawatt-hours of energy (driven by coal, natural gas single and combined cycle, wind and solar power plants, and in a few cases, DERs). Wholesale buyers like utilities submit desired purchase quantities to satisfy predicted energy demand. All of the RTO and ISO regions operate day-ahead and real-time energy markets—matching offered supply with demand both the day before the energy is need and in real-time to make up for day-ahead discrepancies. Regional system operators manage the market process and “clear” or accept the power plants’ supply bids starting from the lowest priced bids to the highest bid necessary to satisfy market demand. All of the power plants that clear the market receive the same price, known as the locational marginal price (LMP), for their energy. LMP is the marginal cost (the cost it would take to produce the next megawatt-hour of energy above the total amount cleared) at a given point on the grid at a given time.
Wholesale capacity markets were designed to ensure resource adequacy—a sufficient power supply to reliably serve demand one to three years in the future. The market intends to send forward price signals that encourage both maintenance of economically-efficient existing power plants and the construction of new ones (which may take a few years) as necessary to satisfy predicted future demand. Some DERs qualify to participate in forward capacity markets. Capacity markets operate similarly to energy markets.
Finally, wholesale ancillary service markets are markets used to more competitively supply services in addition to actual energy, necessary to keep the grid running on a day-to-day basis, as well as during an unexpected outage by a power plant or transmission line. For example, frequency regulation is a market-based service that helps to balance electricity supply and demand minute by minute. Synchronized or spinning reserves is another market-based service that is provided by power plants able to start up and provide power as quickly as five minutes after asked, and that exist to respond in the case of an unexpected supply outage.
Although there are nuances within and across regions, power suppliers and the markets’ operators typically optimize their supply bids so that if their resources can provide more than one of energy, capacity and/or ancillary services at the same time, the services they end up providing represent the most cost-effective combination.
