Our Grid Needs to Go on a Diet to Get Leaner and Greener
Many regions of the United States have overbuilt and retained too many power plants, which can be detrimental to their owners, consumers, clean alternatives like wind and solar power, and flexible resources like energy storage and demand response (compensating customers for being flexible with their energy use). Reforming the wholesale electricity market rules and administrative requirements can help trim power plant overbuild for a greener, leaner grid. This blog highlights some of the main points discussed in this paper on wholesale electricity markets.
Trends in wholesale electricity market changes
Looking back at recent controversial wholesale electricity market proposals, a common theme has been to ensure that power plants make enough money given that market prices have been relatively low. Unfortunately for consumers footing the bill to keep power plants online, these proposals ignore the basic economic fact that low prices reflect supply outpacing demand (i.e., cheap natural gas is flooding the market while electricity demand is falling), and that ailing power plants that can’t compete with newer, more efficient resources should get the boot. But instead of retiring aging power plants, their owners have been lobbying for bailout money, in part through wholesale electricity market rule changes designed to increase market prices.
While higher prices could be justified if customers receive additional benefits, inflating prices above market value backfires. Power plants would get a temporary hit of higher prices, but these prices (or the expectation of them) lead to building more power plants, exacerbating the oversupply problem, which ironically brings prices back down.
The bump in generator revenue may be temporary, but market rule changes can have lasting detrimental effects on cleaner energy resources. Further, as explained below, an excessive generation fleet can impede investments in flexible resources like energy storage, demand response, microgrids, and other means of absorbing extra variable renewable generation at times when its sunny or windy to use when it’s a calm night.
Most regions in the United States have target reserve margins (the excess generating capacity beyond what is needed to satisfy electricity demand), and most have actual reserves exceeding that amount. For example, PJM, the electric grid operator serving 65 million electricity customers in the Midwest and Mid-Atlantic, has an excess of about 50 gigawatts of generation beyond what is needed to serve these customers this winter. (50 gigawatts roughly equals 100 extra coal plants.) According to the North American Electric Reliability Corporation, this oversupply is expected to continue for at least a decade.
Oversupply disincentivizes investment in flexible resources
Grid operators, like PJM, make sure there is plenty of electricity available for the customers they serve – which is important – but procuring too much extra must be balanced with the costs. All customers pay to keep these plants around, and like an all-you-can-eat buffet of plentiful generation, customers are less likely to conserve energy when it makes sense, store electricity for later, or separately purchase greener or more local options as compared to ordering a la carte and paying for just what is ordered.
How investment incentives change with varying levels of reserves is apparent from the cost breakdowns in the figure below in a study conducted for the Texas grid.
First, note that the total system costs are the smallest at a certain reserve level – 10.2% for the Texas grid (corresponding to a total system cost of $35.7 billion/year) – going to higher or lower reserves would result in higher total costs.
As the reserve increases to the right of that minimum, the cost of building out the generation fleet drives up total system costs (the bottom pink bars show that capital costs grow as the reserve margin increases). At the same time, the costs associated with demand response deployment or costs that would encourage investments in other flexible technologies like storage, onsite generation, or microgrids decrease (as indicated by the top set of colored bars that become vanishingly small on the right). As with the buffet of plentiful generation, customers perceive less of a need to consume less or store it for later, but everyone pays more to maintain a higher reserve level than most of them individually want, and there is no practical way to account for different customer preferences. For example, some customers like hospitals with life support systems would pay a lot to keep electricity on at all times, while more cost-conscious customers would rather save money through demand response than pay for that high level of reliability.
Indeed, with the large reserve margins common across the United States, actual demand response reductions have been anemic. For example, PJM notes that demand response dispatch has been infrequent in its energy market, a far cry from demand response’s envisioned role as being a routine means of smoothing out daily or seasonal variability with high levels of renewable generation.