Rao, the reason is because ERCOT has an energy-only resource adequacy mechanism that supports bilateral contracting in retail choice. MISO is (mostly) cost-of-service regulation for retail customers across multiple states that mutes customers responses to price signals in the wholesale (RTO) market. PJM's capacity market also mutes customer responses in a different way.
The PUC of Texas adopted the energy-only approach, in part, based on the idea that appropriate locational and scarcity pricing would not only allow market participants to adopt new power technologies in waves, as economic history teaches us happens, but in ways that reinforces grid reliability and efficient market outcomes. The rise of energy storage in ERCOT is an example of that process.
The power industry as a whole, with its history of top-down regulation, didn't really have that mindset 20 years ago when some of the key market design decisions were made. Texas also had the advantage of adaptive governance, in the form of a nimble three-tiered decision-making process where the same group of stakeholders hashed out ideas for improving the ERCOT market as a whole. The rest of the country has had a more fragmented governance (state PUCs, multi-state RTOs, and FERC) not well-suited to incorporate rapid technological changes in the power industry.
CAISO also has a lot of battery storage, much of it driven by state policy (https://www.cpuc.ca.gov/industries-and-topics/electrical-energy/energy-storage). It does operate in the sensible fashion--charging when wholesale prices are low and discharging when prices are high (as the sun goes down while demand remains high).
Might be an opportunity for a deep-dive comparative institutional analysis, surely there is a phd dissertation's worth of material to dig into.
Hi Eric - yes, the main features of wholesale electricity markets when they started has tended to dictate their development paths. Much like very slow drying concrete, they have became increasingly difficult to change over the years. The change to LMPs and FTRs in the early 2000s in the US markets was remarkable (win for the invisible hand over constraints of regulation). As was the later addition of central capacity markets (loss).
Unsurprisingly, people's view of their markets is through the lens provided by these features. Status quo bias is very strong.
If you made a list of electricity market features that demonstrated the greatest trust in markets, would it look something like this?
1. LMPs at every market node (not zonal and not just for generators)
2. Full-strength market cap and floor prices (not weaker set with central capacity market)
3. Full retail competition
4. Five-minute real-time market (not hourly or 30 minute)
5. Iterative rebidding (no DAM)
6. Reliability (generation adequacy) levels agreed by customers in their retail contracts.
A market with all of these features cedes to market participants (including customers) full reign to invest according to customer needs and trends in market prices. The other way of viewing the list is that it exposes customers to dangerous levels of market power and abuse and greater regulation is necessary to save them from high prices.
Not many designs make it beyond item 3. None make it all the way and 5 and 6 are the most controversial.
Lynne – I really liked this post. It resonated with me because I’ve been thinking a lot lately about why both MISO and PJM don’t have more battery storage.
That is, a cost recovery regulatory signal that, at the margin, will impose a cost penalty on carbon emissions of the next resource brought on line. The object is to discourage ramping up the next gas peaking plant and calling instead on the next battery bank that, but for the regulatory carbon signal, would be the higher cost marginal resource. The regulatory signal could be directly a cost recovery penalty, a direct carbon emissions restriction, or another performance signal that the market can respond to by silencing the gas-fired power plant.
. . . but we have to continually bear in mind that these market participants are all seeking profit. That may incidentally also serve a public interest function -- electricity system reliability; new, more efficient battery tech -- but only incidentally. If we want a public interest outcome to be served as well, it has to be introduced as a signal that affects profit in a public interest direction.
Markets work best at finding their own balancing point. Regulation works best when it adds an outcome/public interest/performance signal to the the many other market signals that participants incorporate into their minute-to-minute market decisions. Nothing new about this, but Lynne’s post illustrates the rule admirably.
Rao, the reason is because ERCOT has an energy-only resource adequacy mechanism that supports bilateral contracting in retail choice. MISO is (mostly) cost-of-service regulation for retail customers across multiple states that mutes customers responses to price signals in the wholesale (RTO) market. PJM's capacity market also mutes customer responses in a different way.
The PUC of Texas adopted the energy-only approach, in part, based on the idea that appropriate locational and scarcity pricing would not only allow market participants to adopt new power technologies in waves, as economic history teaches us happens, but in ways that reinforces grid reliability and efficient market outcomes. The rise of energy storage in ERCOT is an example of that process.
The power industry as a whole, with its history of top-down regulation, didn't really have that mindset 20 years ago when some of the key market design decisions were made. Texas also had the advantage of adaptive governance, in the form of a nimble three-tiered decision-making process where the same group of stakeholders hashed out ideas for improving the ERCOT market as a whole. The rest of the country has had a more fragmented governance (state PUCs, multi-state RTOs, and FERC) not well-suited to incorporate rapid technological changes in the power industry.
Well said, Eric, thanks.
CAISO also has a lot of battery storage, much of it driven by state policy (https://www.cpuc.ca.gov/industries-and-topics/electrical-energy/energy-storage). It does operate in the sensible fashion--charging when wholesale prices are low and discharging when prices are high (as the sun goes down while demand remains high).
Might be an opportunity for a deep-dive comparative institutional analysis, surely there is a phd dissertation's worth of material to dig into.
Hi Eric - yes, the main features of wholesale electricity markets when they started has tended to dictate their development paths. Much like very slow drying concrete, they have became increasingly difficult to change over the years. The change to LMPs and FTRs in the early 2000s in the US markets was remarkable (win for the invisible hand over constraints of regulation). As was the later addition of central capacity markets (loss).
Unsurprisingly, people's view of their markets is through the lens provided by these features. Status quo bias is very strong.
If you made a list of electricity market features that demonstrated the greatest trust in markets, would it look something like this?
1. LMPs at every market node (not zonal and not just for generators)
2. Full-strength market cap and floor prices (not weaker set with central capacity market)
3. Full retail competition
4. Five-minute real-time market (not hourly or 30 minute)
5. Iterative rebidding (no DAM)
6. Reliability (generation adequacy) levels agreed by customers in their retail contracts.
A market with all of these features cedes to market participants (including customers) full reign to invest according to customer needs and trends in market prices. The other way of viewing the list is that it exposes customers to dangerous levels of market power and abuse and greater regulation is necessary to save them from high prices.
Not many designs make it beyond item 3. None make it all the way and 5 and 6 are the most controversial.
Lynne – I really liked this post. It resonated with me because I’ve been thinking a lot lately about why both MISO and PJM don’t have more battery storage.
Thanks Rao, me too!
Of course this only works if you are actually allowed to connect to the grid in a timely fashion (looking at you PJM).
well written!
That is, a cost recovery regulatory signal that, at the margin, will impose a cost penalty on carbon emissions of the next resource brought on line. The object is to discourage ramping up the next gas peaking plant and calling instead on the next battery bank that, but for the regulatory carbon signal, would be the higher cost marginal resource. The regulatory signal could be directly a cost recovery penalty, a direct carbon emissions restriction, or another performance signal that the market can respond to by silencing the gas-fired power plant.
. . . but we have to continually bear in mind that these market participants are all seeking profit. That may incidentally also serve a public interest function -- electricity system reliability; new, more efficient battery tech -- but only incidentally. If we want a public interest outcome to be served as well, it has to be introduced as a signal that affects profit in a public interest direction.
Markets work best at finding their own balancing point. Regulation works best when it adds an outcome/public interest/performance signal to the the many other market signals that participants incorporate into their minute-to-minute market decisions. Nothing new about this, but Lynne’s post illustrates the rule admirably.
Thanks!