Existing power markets were designed to accommodate traditional baseload generators, and customers who simply use energy and pay their bills. Fast-growing technologies like wind and solar power, and new opportunities behind the meter like demand response, energy efficiency, and distributed energy resources, don’t fit the traditional mold. Old market designs have become barriers to innovation and must be changed.

All market structures—competitive and vertically integrated—can be adapted to enable an affordable, reliable transition to a modern power system. Aligning market rules to the opportunities presented by the evolving energy mix can create new opportunities for innovation, improve reliability, and lower costs, bringing major benefits to consumers, the economy, and the environment. At the same time, innovative public and private financing has massive promise to unlock untapped potential for technology development and investment.

In conjunction with rate reforms, old market rules and financing models must be upgraded to unlock modern technology options and the growing need for system optimization.

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Market Reform

Power Markets: Aligning Power Markets to Deliver Value, by Mike Hogan – Regulatory Assistance Project

Power markets and power market mechanisms could use an upgrade to take advantage of new resources and fairly compensate the resources already on the system for the services they provide. Power markets should increase energy efficiency, upgrade system operations to enable short-term flexibility, and upgrade investment incentives to enable long-term flexibility. This transition requires fewer and larger balancing areas, enhanced weather forecasting, increased frequency of dispatch decisions, and support for customer-sited technologies and demand-side resources.

Grid Flexibility: Methods for Modernizing the Power Grid, by Robbie Orvis & Sonia Aggarwal – Energy Innovation (April 2016)

This paper touches on the growing importance of grid flexibility, reviews the types of resources that can deliver it, describes case studies of how the United States has attempted to foster it, and concludes with options for how to incorporate and enhance grid flexibility.

“Evolution of Wholesale Electricity Market Design with Increasing Levels of Renewable Generation,” E.Ela et al. – National Renewable Energy Laboratory (Sept. 2014)

In this paper, NREL summarizes the impacts of projected increases in variable renewable generation on energy markets, ancillary service markets, and forward capacity markets, describing some upward, downward, and countervailing price pressures in each market.   In light of these findings, the paper examines two important issues on market design: first, whether energy plus ancillary service markets provide adequate revenue to cover all system costs, and second, whether current market designs are sufficient to ensure the evolving needs of the bulk power grid are met.  The paper concludes that while recommendations should be tailored to specific electricity markets, it is possible that markets which properly reward flexibility can meet reliability and system planning and operation needs.

The Market Design Initiative: Enabling Demand-Side Markets, by Mike Hogan & Phillip Baker – Regulatory Assistance Project (March 2016)

Though this resource focuses on enabling demand response to fully participate in wholesale markets in Europe it contains many lessons for U.S. markets.   In the short term, Hogan recommends electricity prices should begin to reflect time-varying value of energy, and wholesale markets should establish a right for demand response to participate.  In the long-term, policymakers should mandate time-varying pricing for all customers; adopt codes and standards that encourage smart and electrified appliances, electric vehicles, and in-home automation; reform utility business models to encourage demand response; and improve local value signals via integrated distribution system planning.

Power Market Operations & System Reliability, by Mike Hogan & Rick Weston, Regulatory Assistance Project, prepared for Agora Energiewende (Dec. 2014)

This report examines market design issues and reforms that can help Europe support additional renewable energy development while minimizing integration costs.  The paper suggests that capacity products should be differentiated by “operational characteristics,” allowing prices to reflect the added value of flexibility that supports the integration of variable renewable energy.  The report also points out several “no regrets” policies such as expanding balancing areas and opening up markets to demand-side participation that can help increase efficiency and lower costs, echoing many of the recommendations in Aligning Power Markets to Deliver Value.  Without reforms that properly value integration services, the authors conclude that Europe and other markets may face rising costs and increasing market inefficiencies that create political opposition to decarbonizing the electricity sector.

What Lies Beyond Capacity Markets – by Mike Hogan and Meg Gottstein – Regulatory Assistance Project (Aug. 2012)

As a follow-up to “Beyond Capacity Markets” (above), the Regulatory Assistance Project produced this straw man proposal for discussion, presenting market design options for delivering least-cost reliability in the face of a rapidly evolving low-carbon power system. This paper formed the basis for many of the ideas in America’s Power Plan’s “Power Markets” paper linked above.

A New Approach to Capabilities Markets: Seeding Solutions for the Future (requires purchase; contact us if you’d like a copy) – by Eric Gimon, Sonia Aggarwal, and Hal Harvey – Energy Innovation (July 2013)

Finding the best pricing mechanism to ensure that supply and demand properly match has become an increasingly important challenge as more variable energy sources are added to the grid. To tackle some of the major issues associated with load balancing, this paper discusses the potential role of a “Staircase Capabilities Market”, a market mechanism that seeks innovative solutions to future grid requirements at the lowest cost. This involves long-term planning for investment certainty, as well as flexible, small volume requests for proposals to encourage experimentation with capabilities. This paper walks through how a Staircase Capabilities Market might work in California, suggests systems that could effectively participate in the market mechanism, and discusses the conditions of transitioning toward a new energy paradigm.

Future Ancillary Service in ERCOT, Future Ancillary Services Team, Electric Reliability Council of Texas (Sept. 2013)

This concept paper reviews Texas’ ancillary service needs based on likely changes in the supply mix expected to occur, and proposes a framework for a new set of services to address these changes. The paper also provides guidance for the transition from Texas’ existing ancillary service market framework.

Effective Ancillary Services Market Designs on High Wind Power Penetration Systems, by Erik Ela et al. – National Renewable Energy Laboratory (Dec. 2011).

This paper discusses some of the potential changes that wind power growth will have on markets for ancillary services. The paper emphasizes that ancillary service market rules should strive to include all technologies that can provide needed flexibility, including variable renewable resources themselves. The paper also considers whether new ancillary services markets are needed to provide needed flexibility at lowest cost.

Market Organization and Efficiency in Electricity Markets, by Erin Mansur & Matthew White (Jan. 2012)

Using detailed data on prices and quantities, the authors examine how market outcomes changed when a large region in the Eastern U.S. rapidly switched from a bilateral system of trade to an auction market design in 2004. Although economic theory yields ambiguous predictions, the empirical evidence indicates that employing an organized market design substantially improved overall market efficiency, and that these efficiency gains far outweighed implementation costs. Our analysis suggests economic gains arise from superior information aggregation about congestion externalities, enabling the organized market to support greater trade.

Examination of Potential Benefits of an Energy Imbalance Market in the Western Interconnection, by M. Milligan et al. – NREL (March 2013)

An energy imbalance market (EIM) takes advantage of the flexibility that is achieved by balancing the grid over a wider balancing area with more diverse resources. This study examined the potential benefits of creating an EIM for the Western Interconnection. NREL quantified the benefits that the EIM could provide under several scenarios: shortening balancing intervals from one-hour intervals ($1.3 billion), partial geographic participation in the EIM ($95-275 million), full geographic participation in the EIM ($146-294 million), and full geographic participation in the EIM at lower gas prices ($281 million). The study provides a solid modeling framework for assessing the benefits of an EIM across wide geographical regions. In the same month this study was released, Energy & Environmental Economics released a study of the benefits of an EIM between CAISO and PacifiCorp, finding benefits of $21-129 million in 2017, with costs in the range of $2-5 million.

Finance and Policy

Finance Policy: Removing Investment Barriers and Managing Risk, by Todd Foley – ACORE, Uday Varadarajan – Climate Policy Initiative, & Richard Caperton – American Progress

America’s power system – from transmission lines, local distribution grids, transformers and controls — is getting old, and some parts are becoming obsolete as new technologies emerge. This paper discusses investment opportunities to support upgrades to America’s aging grid system. Optimizing the grid to accommodate increasing shares of renewables as well as demand-side resources is expected to require billions of dollars of investment. Financing these upgrades to the grid system requires policy, regulation, and market structures that eliminate barriers to cost-effective financing by enabling long-term debt and equity financing. Smart finance policy will also enable investors to realize the full value of the new assets they deploy, such as reduced emissions or increased reliability.

Practicing Risk-Aware Electricity Regulation: What Every State Regulator Needs to Know, by Ron Binz – Ceres (April 2012)

This report seeks to provide regulators with a thorough discussion of risk, and to suggest an approach whereby regulators can explicitly seek to identify, understand, and minimize the risks associated with electric utility resource investment. Risks discussed in this paper include: construction cost risk, fuel and operating cost risk, new regulation risk, carbon price risk, water constraint risk, capital shock risk, and planning risk. The authors lay out seven recommendations for regulators to consider in order to drive toward efficient deployment of capital, continued financial health of utilities, and confidence and satisfaction of customers.

Renewable Energy Finance, Market & Policy Overview, in White Papers, US Partnership for Renewable Energy Finance (April 2014)

This detailed market overview aggregates the numerous policy mechanisms affecting renewable energy projects in the U.S. and provides an analysis of the impact these policies have had on private sector investment in the industry. The paper also looks at innovative financing mechanisms the industry has recently developed including Securitization, YieldCo, and Green Bonds. This presentation is the latest in a series of white papers from the U.S. Partnership for Renewable Energy Finance.

Investing in the Clean Trillion: Closing the Clean Energy Investment Gap, by Mark Fulton & Reid Capalino – Ceres (Jan. 2014)

This report offers ten recommendations for investors, companies, and policymakers to increase global clean energy investment to $1 trillion per year by 2030. These recommendations focus on ways to mobilize investor action to scale up clean energy investment, promote green banking and debt capital markets, and reform climate, energy, and financial policies.

Roadmap to a Low Carbon Electricity System in the U.S. and Europe, by David Nelson – Climate Policy Initiative (June 2014)

This report provides a detailed path for regulators to create price signals that drive investment in a low-carbon electricity system. Part 1 of the report focuses on innovations in markets and business models. Part 2 focuses on innovations in financing structure to incentivize investment.

Working Paper: State Green Banks for Clean Energy, by Hallie Kennan – Energy Innovation (Jan. 2014)

This working paper describes the role of state green banks in facilitating the deployment and commercialization of clean energy technologies. Similar to a public-private partnership, state green banks use initial government funding to lever private investment in clean energy and energy efficiency. This paper discusses the purpose, goals, and structure of state green banks, highlighting Connecticut’s Clean Energy Finance and Investment Authority as a case study. It concludes with a list of the strengths and weaknesses of state green banks as a tool for clean energy financing.

The Challenge of Institutional Investment in Renewable Energy, by David Nelson & Brendan Pierpont – Climate Policy Initiative (Mar. 2013)

Institutional investors, which together manage assets over $70 trillion, often have investment objectives that are aligned with the investment profile of infrastructure. At first glance, access to this large pool of capital and the alignment of objectives should help lower the costs of financing renewable energy. The authors of this study find that while these investors could supply a significant share of the total required investment, various factors limit the extent to which they can invest in a way that could lower the cost of financing renewable energy. Furthermore, financial regulation of institutional investors, regulation of energy markets, and renewable energy policy, often create additional obstacles to renewable energy investment.

The Impacts of Policy on the Financing of Renewable Projects: A Case Study Analysis, by Uday Varadarajan, et al. – Climate Policy Initiative (Oct. 2011).

The authors of this paper studied six large-scale renewable electricity generation projects in the United States and Europe to evaluate how policy affects project economics, as well as the cost and availability of financing. The ultimate goal of this analysis is to draw lessons that can be used to help policymakers design policies that help reduce the cost of financing for renewable energy.