Energy Department Report on Electricity Markets and Reliability

Transcription

1 Quick Insights Energy Department Report on Electricity Markets and Reliability RESEARCH QUESTION What are the key findings and recommendations from the Staff Report to the Secretary on Electricity Markets and Reliability? KEY POINTS The U.S. Department of Energy published a report entitled Staff Report to the Secretary on Electricity Markets and Reliability on August 23, 2017 to examine grid reliability, resilience, and the evolution of wholesale electricity markets in the United States. The study concludes that low natural gas prices have been the dominant factor in many recent power plant retirements, but other technology, market, and policy forces have also played roles, though there is uncertainty about the future pace, extent, and drivers of retirements. Trade-offs between desirable grid attributes like reliability, resiliency, flexibility, and affordability are inevitable and will vary across stakeholders with differing regional and economic interests. 1 Markets should work toward recognizing, defining, and compensating for resource attributes 2 moving forward including reliability, resilience, and other dimensions of electricity provision valued by society in a technology- and fuel-neutral manner. INTRODUCTION In April 2017, Department of Energy (DOE) Secretary Rick Perry sent a memo initiating a study to examine grid reliability, resilience, and the evolution of wholesale electricity markets in the United States, the results of which were published on August 23 in the Staff Report to the Secretary on Electricity Markets and Reliability. The study specifically assesses the relative roles of changing fuel prices, regulations, and subsidies at federal and state levels; market structure; and other factors on current and future system reliability, flexibility, and affordability. It provides a wide-ranging review of historical perspectives, current needs, and future 1 Page Page 10

2 challenges of the U.S. power grid. Although it offers broad policy suggestions and areas for further research, it does not provide specific regulatory directives. SUMMARY OF REPORT FINDINGS Power Plant Retirements In summarizing the causes of recent retirements of coal and nuclear assets, the report identifies the advantaged economics of natural gas-fired generation as the dominant factor in many recent plant retirements, as sustained low wholesale market prices reduce the profitability of other generation resources. 3 While other factors, such as lower-than-expected demand growth, federal and state regulations and subsidies, market structure, and renewable deployment have also played roles, these drivers are region and asset specific. For instance, dispatchable plants in areas with high wind and solar penetration experience lower capacity factors, lower revenues for online hours, and increased demand for flexible operations that leads to higher operation and maintenance costs from cycling (EPRI, 2015a). While retirements to date reflect regional patterns of generation development, state policies, and differences in market structure across regions, 4 there is uncertainty about the future pace, extent, and drivers of retirements. Although it focuses on unpriced benefits from units in its summary of premature retirement trends, the report omits discussion of unpriced negative externalities that, if priced, could impact investments and operational decisions. Reliability and Resilience The report also reviews reliability and resiliency attributes of the power system. Operational reliability considerations mainly focus on the Essential Reliability Services (ERS) defined by the North American Electric Reliability Corporation (NERC) Essential Reliability Services Working Group, which include frequency, voltage, and ramping support, as well as how different technologies contribute to those services. The report acknowledges, as has NERC in a number of its recent state of reliability reports, that the current system and the changing resource mix have not had any significant impact on reliability. Resource adequacy appears sufficient in all regions, and operational reliability issues have not seen any increase in the past 15 years, though NERC notes that traditional resource adequacy calculation methodologies will need to change. 5 Discussion is also provided on potential operating challenges related to variable renewable energy (VRE), including the impact on net load and notable events related to grid code requirements in California, Australia, and Germany. The needs and challenges identified going forward include (1) the replacement of ERS from retiring resources, (2) flexibility to accommodate variability and uncertainty of variable energy resources, (3) fuel supply issues, (4) the need for increased build-out of new transmission with the increase in utility-scale VRE, (5) unit commitment issues when VRE forecasts are not accurate, and (6) challenges with system strength as inverter-based resources increase. 6 Resilience is defined in the report based on the National Infrastructure Advisory Council, which refers to the ability to anticipate, absorb, adapt to, and/or rapidly recover from a potentially disruptive event, with examples that are broadly categorized as proactive (hardening) and reactive (recovery) measures. While acknowledging a wide variety of resiliency threats at the outset, considerable emphasis is placed on the specific threat of severe weather and the ability of resources to continue supply during these events. The report suggests that wholesale power markets can play a major role in encouraging resilience-related objectives that would not otherwise be cost-effective. Rules in New York City for dual fuel capable resources and changes to the PJM and ISO New England forward capacity markets are given as examples for how wholesale markets are attempting to improve this aspect. The critical question of how one measures enhanced resiliency is posed throughout the report. Emphasis is placed on the need for improved valuation and cost-benefit analysis techniques to evaluate trade-offs among resiliency, reliability, affordability, flexibility, and sustainability in comparable terms. The report states each independent 3 Page 13 4 Page 17 5 Page 68 6 Page 64 2

3 system operator (ISO) and regional transmission organization (RTO) should define criteria for resilience on its own system; proposes simulation exercises for emergency preparedness; suggests an explicit role for NERC to focus more on resilience issues; and recommends more research is needed to define, quantify, and value resilience. Wholesale Electricity Markets Wholesale electricity markets, the report contends, are currently functioning as designed, to ensure reliability while minimizing short-term costs; however, rapidly changing technology, market, and policy forces likely challenge the validity of assumptions that shaped the creation of those markets 7 decades ago. Recognizing that resulting lower energy prices could impact the profitability of many low marginal cost generators moving forward, the report provides an overview of the ways in which the missing money issue can be resolved in organized electricity markets, namely capacity markets and shortage pricing. The report highlights how resource attributes delivered by different technology types are not always reflected or monetized in current markets. Electricity markets were not originally designed to provide for societal values such as emissions reductions, job creation, and economic development, as reliability and economic efficiency were the prime objectives. In addition, system flexibility will be increasingly valuable with higher variable renewable shares and low power prices, and many organized markets have introduced features to incentivize flexibility, including make-whole payments, Federal Energy Regulatory Commission (FERC) Order 825 (aligning settlement intervals), pay-for-performance ancillary service market designs, short-term ramping service products, and long-term flexible capacity products. The report also discusses the many reasons that negative pricing occurs in wholesale markets, which may impact generators located in certain areas where they occur more frequently. Existing and emerging technologies with low or zero operating costs lead to price suppression, which can be exacerbated by subsidies and mandates. These developments could require changes in market design 8 to ensure revenue sufficiency of needed resources. The report summarizes the challenges that organized markets have with specific technology policies in certain states, including policies to influence resources with lower emissions or job preservation, such as zero-emission-credit (ZEC) programs introduced in New York and Illinois. A number of ISOs have been looking to address these issues and harmonize the markets with these state policies. Areas of further analysis include continuing efforts on price formation (i.e., how should the price for different services be determined) and ensuring that services that lead to a reliable and resilient electricity system are compensated adequately (but not excessively) to motivate resources to provide those services. Affordability The report emphasizes that there are trade-offs between multiple desirable attributes 9 in system planning with unique regional circumstances and stakeholders with different interests. The report also notes that a more reliable and resilient system may be more costly than the least-cost system. 10 Ultimately, measuring affordability and its impacts are challenging, and consumer impacts depend on the translation between wholesale and retail electricity prices. RECOMMENDATIONS FROM THE REPORT AND NEXT STEPS The report provides guidance to Secretary Perry and DOE directly but also to utilities, nonprofits, researchers, and other industry stakeholders more broadly. Many technological and institutional changes are underway that will impact the electric sector, and the report emphasizes that new levels of coordination and collaboration among the sector s many constituencies 11 are required to address them. The final chapters offer broad policy action items and identify areas for further research but do not provide statutory or regulatory recommendations. 7 Page 10 8 Page Page Page Page 11 3

4 Suggestions from the report include: Improving wholesale markets and valuing reliability services: The report directs several recommendations toward FERC, ISOs and RTOs, and their stakeholders including review of wholesale price formation and proposals for valuing ERS with fuel-agnostic criteria for reliability and resilience. Enhancing bulk power system resilience: DOE is directed to work with utilities, system operators, and other stakeholders to enhance resilience and further define criteria for resilience. Accelerating R&D for next-generation technologies and tools: National laboratories and other researchers should be developing technologies and tools to support reliability, expand cooperation across larger geographical areas, and improve variable renewable integration. Other recommendations focus on workforce development and transition assistance, implementing Executive Order (Promoting Energy Independence and Economic Growth), infrastructure development (including licensing and permitting processes), and electric-natural gas coordination. Several topics are highlighted for in-depth analysis moving forward: Investigate electricity market reforms to more accurately value and quantify the need for services and attributes like ERS, fuel availability, high resilience, low emissions, flexibility, etc. 10 ; to align capacity market reforms, in particular, with state policies; and to understand market design evolution in a system with significant low marginal cost resources. Develop improved metrics for evaluating and quantifying power system resilience, including consideration of a range of reliability and diversity-related attributes. Understand cost trade-offs with other system-wide characteristics under different future generation mixes and quantify risk and uncertainty in planning and operations with higher levels of renewables, possible fuel price fluctuations, increasing demand-side participation, and federal and state policy drivers. The recommendations are aimed to ensure adequate generation given uncertain market forces affecting future economic viability and to adapt to future changes in an increasingly dynamic industry. RELATED EPRI RESEARCH EPRI has several research projects that have been conducted or are currently underway that complement and enhance the conclusions of the report. Past analyses have reviewed key uncertainties confronting the existing U.S. fossil-based generation fleet and investigated possible retirements and other impacts from potential environmental control regulations, cost and availability of effective control technologies, and the long-term price of natural gas (EPRI, 2012). Another study qualitatively assessed the contribution of different resources to several reliability attributes, similar to a table shown in the DOE report, finding that while conventional generation technologies particularly hydro, combustion turbines, and steam turbines demonstrate most of the reliability requirements, all resource types have certain positive attribute contributions (EPRI, 2015b). EPRI s recent research on market design initiatives is cited in the DOE report in discussion of the various compensation schemes for ERS across the North American ISOs/RTOs (EPRI, 2016a), and a recent EPRI white paper (EPRI, 2015c) details mechanisms for securing revenue across different regions around the world as they relate to organized electricity markets. Ongoing research is focused on developing analytical frameworks and decision support tools that may help prioritize resiliency investments (EPRI, 2015d) and a technical assessment of resiliency metrics and analytical frameworks (EPRI, 2016b). 10 Page 128 4

5 REFERENCES EPRI 2012, Prism 2.0: The Value of Innovation in Environmental Controls. EPRI, Palo Alto, CA: EPRI 2015a, Fossil Fleet Transition with Fuel Changes and Large Scale Variable Renewable Integration. EPRI, Palo Alto, CA: EPRI 2015b, Contributions of Supply and Demand Resources to Required Power System Reliability Services. EPRI, Palo Alto, CA: EPRI 2015c, Capacity and Energy in the Integrated Grid. EPRI, Palo Alto, CA: EPRI 2015d, Distribution Grid Resiliency: Prioritization of Options. EPRI, Palo Alto, CA: EPRI 2016a, Wholesale Electricity Market Design Initiatives in the United States: Survey and Research Needs. EPRI, Palo Alto, CA: EPRI 2016b, Supplemental Project Technical Assessment of Resiliency Metrics and Analytical Frameworks U.S. Department of Energy 2017, Staff Report to the Secretary on Electricity Markets and Reliability. Available at: and%20reliability_0.pdf. Additional Related EPRI Research Reference Guide for Obtaining Input Data for Application of EPRI s Transmission Resiliency Framework to Severe Weather: Prioritizing Resiliency Investments. EPRI, Palo Alto, CA: The Evolution of Ancillary Services to Facilitate Integration of Variable Renewable and Distributed Energy Resources: A survey of some changes to the ancillary services and ancillary service markets. EPRI, Palo Alto, CA: Resiliency White Paper: Electric Power System Resiliency: Challenges and Opportunities. EPRI, Palo Alto, CA: Measuring the Value of Electric System Resiliency: A Review of Outage Cost Surveys and Natural Disaster Impact Study Methods. EPRI, Palo Alto, CA: Systems Analysis in Electric Power System Modeling: A Review of the Recent Literature and Capabilities of Selected Capacity Planning Models. EPRI, Palo Alto, CA: Quick Insights are developed by EPRI to provide insights into strategic energy sector questions. While based on sound expert knowledge, they should be used for general information purposes only. Quick Insights do not represent a position from EPRI August 2017 Electric Power Research Institute 3420 Hillview Avenue, Palo Alto, California PO Box 10412, Palo Alto, California USA askepri@epri.com Electric Power Research Institute (EPRI), Inc. All rights reserved. Electric Power Research Institute, EPRI, and TOGETHER... SHAPING THE FUTURE OF ELECTRICITY are registered service marks of the Electric Power Research Institute, Inc.