Rethinking Policy to Deliver a Clean Energy Future

16 Pages·2013·0.96 MB·English

by  Sonia Aggarwal

SoniaAggarwalisDirectorofStrategyat
EnergyInnovation:PolicyandTechnologyLLC.
Sheleadstheorganization’sworktodevelopaset
ofpoliciesthatcansupportahighershareof
renewablesonthegridwhilemaintaining
reliabilityandkeepingcostslow.Beforejoining
EnergyInnovation,Ms.AggarwalwastheGlobal
ResearchManageratClimateWorksFoundation,
anetworkof13regionalfoundationsandexpert
teamswhopromotepolicestoreducethethreatof
climatechange,wheresheworkedwiththeMajor
EconomiesForum,JapaneseandChinese
governments,severalU.S.senators,theWhite Rethinking Policy to Deliver a
House,andtheAmericanEnergyInnovation
Council.Shealsoservedasanadvisortothe
InternationalEnergyAgency’s‘‘Accelerating Clean Energy Future
TechnologyTransitions’’project.Earlierinher
career,sheworkedinaccidentpreventiondesign
engineeringforanuclearpowerplantinOhioand
lateradvisedcleanenergycompanieson
America’s electricity system is in the early days of a
technologyandfinancialcommunications.Ms.
AggarwalholdsaB.S.fromHaverfordCollegein radical makeover that will drastically reduce greenhouse
AstronomyandPhysicsandanM.S.from
StanfordUniversityinEngineering,withafocus gas emissions, increase system flexibility, incorporate new
onenergy.
technologies, and shake up existing utility business
HalHarveyistheCEOofEnergyInnovation:
models. Depending on each region’s history and
PolicyandTechnologyLLC.HeisalsoaSenior
FellowforEnergyandtheEnvironmentatthe
preference, well-designed markets or performance-based
PaulsonInstitutelocatedattheUniversityof
Chicago.Previously,hewasthefounderandCEO regulation can be used to accomplish power system goals
ofClimateWorksFoundation.From2001to2008,
heservedasEnvironmentProgramDirectorat of low costs, high reliability, and environmental
theWilliamandFloraHewlettFoundation.From
1990through2001,Mr.Harveyservedas performance.
founderandPresidentoftheEnergyFoundation.
Mr.Harveyhasservedonenergypanels
appointedbyPresidentsGeorgeH.W.Bushand
Sonia Aggarwal and Hal Harvey
BillClinton.In2005,Mr.Harveyservedas
RhodesChairandLecturerinPublicPolicyat
ArizonaStateUniversity.HehasB.S.andM.S.
degreesfromStanfordUniversityinEngineering.
Theauthorsacknowledgevaluablecomments
I. Introduction building a cleaner, more
fromDanAdler,DougArent,LaurenAzar,
RichardCaperton,RalphCavanagh,Allison affordable,andmorereliablegrid,
Clements,KennethCostello,SteveFine,Peter
The electricity system in as well as an industry ready to
Fox-Penner,EricGimon,DianGrueneich,
MichaelHogan,MarijaIlic,JohnJimison,Ronald America, and in many other profit from deploying its
Lehr,MichaelLiebreich,TrieuMai,Robert
nations, is in the early days of a technologies around the globe.
Marritz,ColinMeehan,BenthamPaulos,Jigar
Shah,JosephWiedman,UdayVaradarajanand radical makeover that will Managed badly, we will spend
CarlZichella.However,theauthorsaresolely
drasticallyreducegreenhousegas too much time, money, and
responsibleforthecontentofthisarticle.This
articleispartofapackagefundedandorchestrated emissions, increase system pollution on obsolete power
byEnergyInnovation:PolicyandTechnology
flexibility, incorporate new plants, leave our country
LLC,anenergyandenvironmentalpolicyfirm,in
partnershipwiththeEnergyFoundation,a technologies, and shake up increasingly exposed to system
partnershipofphilanthropicinvestorspromoting existing utility business models. failure, and let our energy
cleanenergytechnology.
This transformation is already technologybusinessessliptoback
underway: it is not speculation. of the pack.
Managedwell,thistransitionwill T he stakes are high: every
give America a great boost, single part of our economy
October 2013,Vol.26,Issue8 1040-6190/$–seefrontmatter#2013ElsevierInc.Allrightsreserved.,http://dx.doi.org/10.1016/j.tej.2013.08.009 7
requires reliable, affordable vertically integrated monopolies substations. Still, well-structured
electricity. And the world built power plants, strung wholesale electricity markets
requires a climate that does transmission and distribution and performance-based
not drown our cities, dry up lines, billed customers, and were regulation have proven effective
our farms, decimate our rewarded with a predictable at reducing costs and bringing
planet’s biological diversity, or return on investment. That important innovation to the fore.
leave us vulnerable to mega- regulatory compact was Third, national security, public
storms. upended in the last two decades health, economics, and climate
T hree factors are driving as various parts of the nation’s changepointtotheneedforclean
change in America’s power grid were opened to competitive energy.Societycannotcontinueto
sector. First, a large number of markets, many electric utilities bear the public health and
new technologies are becoming were restructured into multi- environmental costs caused by
commercially viable. Power state holding companies, and unmitigated carbon pollution—
generation technologies like solar and public opinion increasingly
(pricesdown80percentinthelast demands clean, homegrown
There is no
five years) and wind (down 30 electricityforAmerica.Asaresult
more business
percent in the same period) are (despite federal inaction), a
gaining market share.1 Last year, as usual: These majority of states have adopted
the U.S. added more wind than policies to encourage greater
trends will change
any other kind of generating investmentinrenewables,energy
the power system
capacity.2 Smart engineers are efficiency,demand–response,and
rethinkingthegrid,totransformit and utility grid modernization.
from a static delivery system for businesses What does this all mean? What
electrons into an intelligent web opportunities and threats does
at their core.
that can optimize across many this conjunction of forces
variables. New solid state portend? This article argues that
equipment can deliver more thereisnomorebusinessasusual:
functionality to grid operators regulators increasingly turned to These trends will change the
and replace huge, expensive, ‘‘performance-based power system and utility
vulnerable, and hard-to-monitor regulation,’’ wherein utilities or businessesattheircore.Profound
transformers and switching competitive service providers opportunity is embedded in that
systems. And fracking3 has earn a profit when they, for change. Several studies have
transformed the economics of example, keep costs low, deliver demonstratedthatitispossibleto
natural gas in America, making efficiency,andkeepthelightson. power America’s grid using a
natural gas-fired generation an It turns out, however, that very high share of renewables in
attractive option, though history building a competitive market is the next 40 years, at very modest
has proven the value of a diverse devilishly difficult for a cost, and without relying on any
setofpowersupplyanddemand- commodity that cannot easily be technological breakthrough.4,5
side resources to minimize price stored, flows to the nearest load That kind of transformation
volatility. regardless of contract intent, means cleaner air, better jobs, a
Second, the advent of runs along monopoly more flexible power system, and
competition has challenged the distribution wires, is a hopeforfuturegenerations.Itisa
protected and privileged status prerequisite for all economic very big deal.
of America’s utilities— activity, and requires real-time T hese changes require a
catalyzing massive change in the coordination across hundreds of breakthrough in policy
energy industry. For a century, power plants and thousands of andinbusinessmodels.Wemust
8 1040-6190/$–seefrontmatter#2013ElsevierInc.Allrightsreserved.,http://dx.doi.org/10.1016/j.tej.2013.08.009 The Electricity Journal
re-think power system incentives operationtooptimizeacrossboth II. A Clean Energy
andregulation,therelationshipof demand and supply resources to System that Works
American citizens and their keep the system in balance.
government with the power When they do this, they will America has an opportunity to
system. An America powered by unleash innovation, drive down lead the world in a vast power
80 percent low-cost, reliable prices,andincreasetheresilience system transformation. As costs
renewables is within our of the grid. of renewable energy technologies
technological reach, but we are The world of electricity decline, experience across the
notonapathtoachieveitquickly regulation is extremely world is demonstrating that it is
orefficiently.Tosucceed,weneed complicated—and it is not likely easier to integrate much higher
to face head-on the task of to get simpler, at least in the near shares of renewables, more
modernizing our institutions and term. In order to capture the rapidly,thanpreviouslythought.7
lining up the right incentives in benefits of new technology—in Still, none of this happens
the power sector. automatically. Just as today’s
P ower system planners are electric system was built on clear
An America powered by
well accustomed to figuring incentives for utilities,
80 percent low-cost,
out where, when, and how to tomorrow’s system needs
build large, centralized power reliable renewables is direction,andthatwillcomefrom
plants and their transmission the way electricity systems
within our
lines. They have mostly operate, power markets are
technological reach, but
considered electricity demand to structured, utilities are managed
be an uncontrollable variable, to we are not on a path to and regulated, and new market
be met by central power plants, achieve it quickly or entrants are supported.
whicharebuiltbasedondemand Technology, competition, and
efficiently.
projections, and dispatched to increasing awareness of the
follow load. Today, though, dangers of climate change are
demand-side resources like likely to drive change in the
energy efficiency and demand– costsavings,morereliability,and power sector regardless of efforts
response allow system operators better environmental to preserve the status quo. But
and consumers alike to reduce, performance—utility regulators withoutthepolicyandregulatory
shape, and shift demand—in will have to rethink their drive to facilitate this transition,
effect making it dispatchable. At approach, and will need there is likely to be significant
the same time, renewable energy legislative permission to do so. collateral damage and economic
introduces variability in power This article, building on seven hardship.
supply. Utility systems will have studies organized and reviewed Aclearpolicysignalisrequired
morecontrolonthedemandside by more than 200 of the top todriveefficiencyandthenswitch
and less on the supply side— experts in the country, is a to ever-greater proportions of
which is manageable if, and only guide to that rethinking. It is clean power. Most economists
if, there are physical systems in written for state public utility arguethatapriceoncarbonisthe
place to optimize the whole, and commissioners, power company most efficient way to do this, and
the regulatory structures to executives, investors, federal a few states and countries have
reward those who perform well regulators, legislators, grid and adopted that approach, though
at this optimization.6 Utilities marketoperators,andtheirstaffs, mosthave done so in conjunction
and their regulators must re- considering the demands of their withbroaderefficiencystandards
think system planning, jobs—to supply reliable, clean, and clean energy policy. Others
investment, markets, and and affordable power. have employed more targeted
October 2013, Vol.27,Issue8 1040-6190/$–seefrontmatter#2013ElsevierInc.Allrightsreserved.,http://dx.doi.org/10.1016/j.tej.2013.08.009 9
tactics: 29 states now require withthatrisk,anddrivingprivate power sector is so capital-
utilitiestoproduceashareoftheir investment. The power sector intensive, reducing risk—and
electricity from renewable demands large capital therebyreducingcapitalcosts—is
sources, under renewable investments, but they will not be key to keeping consumer costs
electricity standards.8 Many made unless the potential for low.
stateshaveincreasedtheirtargets returnexceedstherisk.Important
as renewable energy technology criteria for an investment grade
costs continue to drop.9 Other policy include: III. Maximizing
options include feed-in tariffs, (cid:2) Policy certainty that can America’s Resources: A
production incentives (e.g., support investment choices that Framework for
production tax credits), or a may have long payback periods; Regulators and Utilities
strong emissions standard for (cid:2) Long-term certainty about
power plants. Design may vary, price, or access to markets; America’s power system is
but the most critical point is to remarkably diverse. It employs a
have an adequate, clear, stable, Conversations about the system of high-voltage wires
andlong-termpolicysignalthatis more than 200,000 miles long—
best way to keep costs
economically and politically enoughtowraparoundtheEarth
low, keep the lights on,
sustainable. eight times.11 Some parts of the
E ach of these approaches and deliver a cleaner country rely almost entirely on
has advantages and power system are often coal-fired electricity, while others
limitations, but the best have already receive a quarter of their
plagued by arguments
been remarkably effective at electricity from renewables—and
over whether utilities or
increasing the share of renewable the rest of the nation lies
energy, delivering efficiency, markets are king. somewhere in between.12 Power
and driving down costs. The generation and demand must be
series of articles brought to balanced in every instant, all
you in this special issue of acrossthegrid,tokeepAmerica’s
The Electricity Journal addresses (cid:2) Contractsanctitywithcredit- businesses functioning and
thenextgenerationofpoliciesthat worthy utilities (when the utility homes bright.
can build on the industry’s is the buyer); S itting on top of this
successful growth; policies (cid:2) Appropriate reduction of incredibly complex physical
with the potential to deliver othernon-pricebarriers,10suchas system is an equally complex
an efficient grid powered by a permitting; system of governance.
much higher share of renewable (cid:2) Access to the grid; and Conversationsaboutthebestway
energy. (cid:2) Reduced time between to keep costs low, keep the lights
Regardless of which of these application and approval (or on, and deliver a cleaner power
toolsaregionchoosestouseasan denial). system are often plagued by
overarching signal, supporting The authors of Removing arguments over whether utilities
policies must be ‘‘investment- Investment Barriers and Managing or markets are king, as well as
grade’’ to make the transition Risk—another article in this whether legislators or regulators
readily affordable, but this factor issue—lay out ways that policy are driving system evolution.
is often neglected. A policy is can remove financing barriers, There is no ‘‘right’’ answer to
investment-gradewhenitreduces enableinvestorstomakethemost thesequestions:America’spower
uncertainty, thereby shifting risk of new assets they deploy, and systemisheterogeneous,andwill
to partiesthatcan bestmanageit, lower the risk of renewable remainso.Changewillhappenon
offering return commensurate energy investments. Because the a regional basis, and innovative
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partnerships must be forged include treating energy efficiency these roles evolve—Policy
between previously siloed as a resource, higher efficiency Implications of Decentralization,
decision-makers. The path to a appliances or motors, or smart another article in this issue,
clean, reliable, and affordable controls that ensure electricity is explores the evolving role of
energy future must therefore be used when it is most needed. distributed energy resources in
adaptable to a whole range of Demand-side programs can be the power system, as well as the
regulatoryandmarketstructures. administered by utilities or policies that can support them.
I ndeed,nomatterwhatchoices government agencies, but are More than half of all electricity
each region makes about how usually executed by independent consumed in the United States is
to organize power system service providers. sold by vertically integrated
management, there are five basic 5. System optimization: Supply- utilities. This means that the
roles that must be filled: and demand-side resources must utility handles at least the first
1. Generation: Energy must be be evaluated on equal footing to three of these roles, and
converted into electricity and fed sometimes the role of demand-
intothepowersystem.Thiscanbe side management and system
Customer
done by utilities or independent optimization as well. These
service is about
power producers—and monopoliesareregulatedbystate
increasingly, by businesses and delivering the and federal governments to
homeowners. ensure they keep prices
best energy
2. Transmission: Electricity reasonable for their customers
services—not
must be transported from while meeting certain social
generatorstoareaswhereitcanbe the most objectives.15
used. This is done by utilities, electrons—for the ‘‘Restructured’’ electricity
federal agencies, or independent marketslayattheotherendofthe
least cost.
transmission builders and spectrum. Many flavors of
operators. restructuring exist because there
3. Distribution: Once electricity are many power system
is delivered via the transmission maximize their value, create a ‘‘products’’or‘‘services’’thatcan
system, or once it is produced portfolio of options to manage be provided through competitive
close to where it can be used, it risk, and keep the system in markets. In some regions,
must be conditioned and filtered balance—both for real-time customers are allowed to choose
into the homes and businesses systemoperationandlonger-term their power supplier, or
that need it at the end of the line. system planning. Advances in independent companies run the
This can be done by utilities or intelligent grid technology will transmission system, or
independent distribution system underpin this critical task. independent system operators
builders and operators.13 Properly designed wholesale use wholesale markets to call on
4. Demand-side management and markets, independent system independent service providers
customer service: Many smart operators, regional transmission andextractmaximumvaluefrom
options exist for reducing the operators, or utilities can fill this availableresourceswhilekeeping
amount of electricity that each role.14 the power system in balance.
home or business needs to Each region has decided to fill Ancillaryservicessuchasvoltage
function, and customer service is these roles somewhat differently. support, black-start capability,
about delivering the best energy And the increasing role of and system balancing can be
services—not the most consumers in controlling their provided by regulated entities or
electrons—for the least cost. energy supply and demand will independent parties
Demand-side management can have profound impacts on how competitively bidding for the
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work. A particular region may gaining access to power markets, stateorregiontodeterminewhere
choose to restructure the whole and suggests a strong imperative along this range it lands between
system (e.g., the Electric toreducebarriersfornewmarket vertically integrated utilities and
Reliability Council of Texas), or entrants while maintaining fully restructured markets. Most
mayjustrestructureoneortwoof servicestandards.Donewell,this regions are a hybrid, and the
the roles above, leaving the other will drive innovation and bring model is likely to fall somewhere
roles as regulated monopolies. down costs. between the three illustrated
I n markets that lie somewhere Figure 1 lists each of the five above. But regardless of the
betweenthesetwoendsofthe roles that must be filled in the choices made, regulators must
spectrum, a utility might act as a power sector, and displays the ensure that the markets and
‘‘smart integrator.’’ In this spectrum of ownership models utility oversight are properly
potential scenario, the utility described here. As the figure designed, or else costs will rise,
would take advantage of its illustrates, transmission and whilereliabilityandpublichealth
unique skills and experience as a distribution are physical suffer.
large-scale social actor, using monopolies—thereisonlyoneset
markets to select the least-cost, of wires, so even if the system
most-valuable resources, and operator runs a contest to IV. The Goals, and Ways
looking across the whole system determine who should build or to Accomplish Them
to integrate those resources operatethelines,andevenifthey
effectively. The smart integrator are jointly owned, they will Regardless of how a region’s
mightoperatethepowergridand ultimatelybeoperatedbyjustone markets are organized,
its information and control entity. The other roles in the power system planners must
systems, but would not own or system can all be handled by optimize for high reliability,
sell the power delivered by the competitive markets or by reasonable cost, and strong
grid or by long-term suppliers.16 regulated monopolies. environmental performance. The
This concept relies on new A s long as all of these roles first two of these objectives have
businesses and service providers are filled, it is up to each been explicit for as long as the
[(Figure_1)TD$FIG]
Figure 1: A Wide Spectrum of Market Structures Operate in America Today
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power grid has existed. The whatkindofenergytouse,when T here are many ways to
third—environmental to use it, and how much of it design markets or
performance—has gained to use. This means that fixed regulation badly—and the worst
considerable traction as an costs cannot be passed through ofthesecanbedisastrous.Butthe
equally important objective.17 as large fixed charges to right mix of smart regulation and
Sometimes there can be tension consumers. At the same time, well-designed markets can each
between these three objectives, maintaining reliability means be very effective. Five general
but emphasis is usually set by keeping power system principles for good power policy
policies put in place by the infrastructure up to date design can help increase
electorate and the legislature (see sidebar), and minimizing effectiveness no matter how a
with public interest in mind. thefrequency,duration,andscale region’s markets are structured:
Striking the right balance of outages. And finally, 1. Long-term signals are
between these three objectives is environmental performance can necessary to give utilities and
essential to ensure the power be measured via conventional other investors the confidence
system continues to meet pollutants, greenhouse gas they need to get the right
America’s needs. To keep costs emissions, water use, effluent resources built and online by the
low, power system planners, management, and optimal timetheyareneeded.Regulations
regulators, and market designers siting for new infrastructure. must be transparent, and must
must think about how to Figure 2 provides examples of articulate the market failure they
minimize bills (not rates) for both regulatory and market address.
customers, as well as how to solutions to each of these 2. Innovation and efficiency
minimize price volatility. They challenges—though it is should be properly incentivized.
must also make sure that rates important to note that all market 3. All resources—both
are designed to send the right solutions also require regulatory generation and demand-side—
signals to customers about oversight. should be properly valued for
[(Figure_2)TD$FIG]
Figure 2: Regulation or Markets (or a Combination) Can Be Used to Optimize Cost, Reliability, and Environmental Performance
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theirusefulattributes.Supplyand A. Best practices: competitive independent system operator
demand resources should be markets (ISO) or a regional transmission
compared on an equal footing to organization (RTO)—is also
determine the right mix of Competition has moved—at needed whenever operations are
resources for the system. Two varying paces in different parts handledbymorethanoneentity.
other articles in this issue, Policy of the country—into electricity As long as all five roles in the
ImplicationsofDecentralizationand generation, transmission, and power sector are filled and the
SupportingGenerationonBothSides demand.Mostofthecountryhas barriers to entry into the market
of the Meter, give clear policy introduced competitive are minimized, competitive
recommendations for how to do generation, and independent markets have the potential to
this, including how to analyze power producers own and lower prices, drive innovation,
trade-offs between centralized and deliver the energy services
and distributed resources that customers need. But it is
(emphatically including tricky to design markets that
efficiency) as well as ‘‘integrated cover all the near- and long-term
distribution planning.’’ system needs, so regulators need
4. Newancillaryservicesmustbe to act with care and
valued(andoldonesmodified)as sophistication.
the grid modernizes. These non- A n important step in
energy grid services are essential maximizing the efficiency
tokeepingthesystembalancedin of competitive markets is
real-time aswellasover the long- consolidating balancing areas—
term.Manyexpertsarebeginning creating more system flexibility
tocallthesenewancillaryservices and options by enlarging the
‘‘capabilities,’’whichincludeboth area over which supply and
real-time and forward services. operate three-quarters of all demand have to be balanced.
5. Coordination among renewable energy generation.19 Consolidating balancing areas
agencies—and constructive Federal Energy Regulatory helps system operators take
communication with utilities—is Commission (FERC) now sets advantage of a wider range of
critical.18 rules for these wholesale resources, which reduces
T hese general principles can markets across the nation. Some aggregate variability in both
be used as preliminary areas have also introduced generation and demand,
screens to identify the most competitive transmission, decrease the need for costly
effective proposals for new wherein independent backup generation or
markets or regulatory policies. transmission companies may reserves, and decrease price
The supporting articles in this compete to build and operate volatility.20 When balancing
issueprovidemanymorespecific transmission lines, taking bids areas cannot be fully
recommendations,buteachmeets and negotiating contracts to consolidated, a second-best
these criteria. move electricity (subject to FERC approach is to open an
The following two sections lay oversight). Some parts of the organized exchange for grid
out best practices for optimizing country have adopted retail services between control
cost, reliability, and choice, where residential and areas—often called an
environmental performance small business customers can ‘‘energy imbalance market’’—
using these five principles within choose their own power coupled with authority for
both competitive markets and supplier. As a rule, a system dynamic transfers between
regulated utilities. optimizer—such as an regions.21,22
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A n article in this issue, by-year basis for access to long-term certainty for investors
PlanningforandInvestingin electricity, capacity, and—in and utilities, either through well-
Wires, provides clear policy some places—ancillary services. functioning markets or long-term
recommendationsforgettingnew Takentogether,itisahugetaskto contracts, giving them the
transmission lines built to enable have all these markets built and confidence they need to
balancing area consolidation or functioning well, but luckily undertake the multi-year process
energy imbalance markets. Siting smart information technology of gaining reliable access to
ofnewtransmissionwillremaina and communications controllable demand, building
challenge, but best practices for infrastructure can help by new supply and transmission
streamlining the process are laid automating many of the resources, or upgrading older
outinoneofthismonth’sarticles, transactions. All of these shorter- ones. Markets for delivery of
Finding a Home for Renewable term markets are shown in the productsorservicesseveralyears
Energy and Transmission. shaded ellipses in Figure 3. in the future are called ‘‘forward
Eachenergymarkethasitsown Even as these complex shorter- markets.’’
products and services. Within a term markets operate, system Somegridregions,suchasPJM
balancing area, well-designed optimizers and grid planners (the largest wholesale electricity
competitive markets clear on must think about the future. market in the world, located in
manydifferenttimescalesforeach Maintainingtherightresourcesto the eastern part of the country),
of these different products and keep the grid in balance requires have established forward
services. To make the most of
renewable and demand-side
[(Figure_3)TD$FIG]
energy resources, markets for
energy and short-term ancillary
services should clear as often as
every5min(orless),soastotake
advantage of short term
fluctuations in demand and
variable supply. Examples of
these ancillary services include
power quality, voltage
management and frequency
regulation. At the same time,
hour-ahead markets usually
ensure that electricity supply and
demand are on track to be
balanced, and that ample
ancillary services (like load
following and ramping
capabilities) will be available to
keepthegridreliable.Marketsfor
access to adequate power
generation capacity and ancillary
services may also clear a day
aheadofwhentheyareneeded.In
parallel to day-by-day markets,
markets mayalso clear on a year- Figure 3: Electric Power Markets Clear on Many Different Timescales36
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markets for capacity alongside A nother article in this issue, Table 1 shows the market
their energy markets. This Aligning Power Markets to solutions to meet each of the five
introduces an explicit value for Deliver Value, suggests that principles for good power policy
the ability to call on resources forward—i.e., future—markets design outlined above. Even if a
whenever they are needed, and should also be opened for a region relies heavily on
ensures a revenue stream for handful of existing ancillary competitive markets, there is still
capacitythatmayrarelyrun,butis services, such as the capability to a substantial role for regulators
critical to system reliability. ramp energy production up or setting policy direction and
Demand response is delivering down quickly. The article also providing market oversight to
more and more capacity in PJM’s suggests that new kinds of minimize gaming.
forwardmarket—almost15GWof ancillary services should be
newdemand–responseclearedthe added, such as a service that B. Best practices:
market in 2012 for delivery in hedges the price differences performance-based regulation
2015/2016,23 which suggests that between one scheduling
demand-side resources could interval and another. As To usher in a modern system,
havegreatpotentialtodeliverlow- generation becomes more regulators must reconsider the
cost solutions to capacity variable and demand more verypremiseupon whichutilities
requirements in other parts of the controllable, the flexibility have traditionally received
country. Any new market should characteristics of power compensation.A focus onrate-of-
take care to ensure that demand- generation resources will become return regulation may no longer
side resources—at least including more valuable.25 Market make sense for America’s power
efficiency,demand–response,and designers must develop tools to system—partly because of the
distributed generation—can better forecast net demand, and spread of competitive markets,
participate and bid on equal shed light on the future value of partly because it is unlikely to
footing with supply-side grid flexibility. Valuing the new adequately compensate utilities if
resources.Demand-sideresources capabilities that we anticipate they are building less new
will be an important part of the needing can make sure the right infrastructure (as growth in
flexible grid of the future—giving resources are online when grid electricity demand slows), and
system operators the freedom to operators need them to fill partly because policymakers are
call on whichever resource can resource adequacy requirements increasingly focused on
deliverclean,reliablepoweratthe ortominimizecostsandkeepthe performance, rather than capital
lowest cost.24 grid reliable. investment.26 The power sector
Table 1: Markets Can Address All of the Principles for Good Power Policy Design.
Principle Market Solution
Long-term signals Work to make short-term markets for energy and services healthy enough to provide long-term
signals37; open forward markets for energy and services.
Value supply- and demand-side Ensure new markets encourage bids from all resources.
resources
New ancillary services Open markets for new ancillary services and capabilities, carefully defined to assure an even
playing field for new services, and to reward innovation and performance.
Innovation and efficiency Minimize barrier to entry for new resources and service providers.
Coordination among agencies Consolidate balancing areas, organize frequent meetings, between PUCs/ISOs/RTOs, and utilities.
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