Aligning Power Markets to Deliver Value

By Mike Hogan, The Regulatory Assistance Project

  • View the policy recommendations from Power Markets.
  • Download the executive summary [PDF].
  • Download the full Power Markets paper [PDF].
  • View the version printed in Elsevier’s Electricity Journal.

The Situation

Power markets come in many shapes and sizes, from traditional monopolies to broadly competitive systems. These markets have been designed to accommodate traditional fossil and nuclear generators, and customers who simply use energy and pay their bills. Fast-growing technologies like wind and solar power, and new opportunities like demand response, energy efficiency and distributed energy resources, don’t fit the traditional mold. Old market designs have become barriers to new resources and innovation, and must be changed.

All markets – competitive and vertically integrated – can be adapted to enable an affordable, reliable transition. Aligning market rules and regulations to the opportunities presented by the evolving energy mix can create new opportunities for innovation, improve reliability and lower costs, bringing big benefits to consumers, the economy, and the environment. The key themes are: (1) ensure that markets recognize the value of efficiency as a resource, (2) update system operations to unlock flexibility in the short term, and (3) update investment incentives to drive flexibility in the long term.

To unlock flexibility, markets must be faster, with fewer and larger balancing areas, better forecasting of weather and its impacts on both supply and demand, and more frequent dispatch decisions. They need to reward flexibility, to match demand and supply dynamically. New customer-side technologies, like demand response, efficiency, and smart grid services, need to be allowed to compete toe-to-toe with traditional generators.

To drive investment, markets need to encourage new entrants, like third-party aggregators of demand-side resources.  They need to reflect the true value of all the services more flexible resource investments can provide, sending better price signals in energy, services and forward capacity markets. Market administrators need to be more proactive in anticipating developments in variable generation, demand response, distributed production and energy efficiency when developing markets for resource investment.

Americans are demanding a new relationship with the energy they use – and new technologies are responding. But old market rules must be upgraded in order to foster innovation instead of stifling it. America’s Power Plan aims to help regulators and grid operators work together to meet American demand for clean, affordable and reliable electricity.