Does the Southeast need wholesale power markets in order to hit its renewable goals?

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The institution of real-time, wholesale energy markets–especially if markets are paired with regionally planned transmission–are critical to accelerating the growth of renewable energy in the Southeast, according to a new report released by the American Council on Renewable Energy (ACORE), the American Clean Power Association, and the Solar Energy Industries Association (SEIA).

The report, Energy Market Design and the Southeast United States, said that unlike the system used elsewhere in the country, where Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) coordinate resources to create a least-cost system, the Southeast’s vertically integrated monopoly utilities both generate and distribute electricity without a centralized wholesale market. This means that what they offer is what the customer gets, and that’s the end of that.

For context, nearly 70% of the nation’s electricity moves through organized wholesale power markets where electricity is bought and sold among generators, utilities, and traders before reaching end-use customers.

The basic arguments for setting up real-time, wholesale energy markets is that they save customers money on their electric bills, allow for more effective implementation of consumer-supported renewable energy, and make it easier to implement new and emerging energy technologies onto the grid.

Real-time markets use competition to drive the construction and use of least-cost resources. The report outlined that, as price signals govern generator investment and dispatch decisions, the grid’s resource mix will continue to change as the lower-cost resources clear auctions to bid another day. More expensive resources retire.

Under the system seen in the Southeast, when electrons move across a utility footprint the transmitting utility adds a charge for the service. When and if those electrons flow to another utility, that utility adds its own charge. These charges stack, raising consumer costs above the actual cost of providing service. This is known as “rate pancaking,” and is not seen in real-time markets.

A larger market area also opens the door for a more diverse power mix, making it easier to get on-line renewables of all kinds, and overall enabling more rapid grid decarbonization.

A breakdown of SEEM

A collection of 17 Southeastern utilities across 12 states are already seeking regulatory approval to formalize and expand a bilateral contracting framework they plan to name the Southeast Energy Exchange Market (SEEM). This structure is not a real-time wholesale energy market, but is used in the context of the report to examine the benefits of markets, and what a real-time market would mean for the region.

The Southeast’s vertically integrated utilities have long shared power across their service territories using bilateral agreements. But SEEM proposes to formalize and expand this arrangement using a system of supply and demand matchmaking that augments utility-self supply and power purchase agreements via the trading excess power over underutilized transmission capacity. Requirements to balance generation and load would remain under the purview of the utilities, and access to the SEEM platform by independent power producers seeking to develop projects within the SEEM footprint would not be guaranteed.

Under SEEM’s platform, bids and offers are proposed to match every 15 minutes, as opposed to the 5-minute RTO/ISO standard, which the authors said could give an advantage to slower-ramping resources, like nuclear and coal-fired power units.

In addition, SEEM’s auction clearing prices would be calculated using a “split savings” method that splits the difference between bids and offers, which would be brought together by an electronic trading platform, rather than the locational marginal clearing prices of the RTO/ISO standard.

The trading platform would be governed by the SEEM participants, each one having a vote weighted according to its load. A  market auditor would be brought in to regularly examine SEEM’s functioning; this auditor would be hired by and report to the very same participants it would be assigned to audit, which is suboptimal.

The SEEM proposal has been modeled by consulting firms Guidehouse and Charles River Associates, which found that the footprint would–at a minimum–realize $47 million in net benefits, a real-life savings of a couple cents per customer.

A real-time alternative

Because many of the power providers in the SEEM footprint have significant commitments to reducing emissions and businesses and households within the SEEM footprint currently pay some of the nation’s highest retail electric bills, getting as much low-cost renewable capacity on-line as fast as possible is a no-brainer.

Competitive, real-time wholesale energy markets could provide an easy solution, as their competition-driven model leads to lowest-cost resources that will only get cheaper as the costs of renewable energy and energy storage continue to decline as expected.

In the Southeast, building new solar is already cost-competitive with the marginal cost of continuing to operate existing thermal energy sources.

While RTO/ISOs regularly reach new highs for reliable renewable energy usage, supplying more than 80% of power demand in SPP and CAISO at various points in time, the current SEEM model doesn’t promote the same growth and usage.

The report outlined that SEEM’s 15-minute transaction interval and the lack of an independent entity overseeing open access to transmission service by independent power producers, whose new development is all but guaranteed to be renewable, may stymie growth in the full SEEM footprint.

Furthermore, the current proposal extends the load-serving capability of otherwise uneconomic existing generation, which helps insulate the inflexibility of those resources, giving them a longer service life than would otherwise be economic. It essentially makes a coal plant more viable by filling in any load gaps.

Though the report did state that the institution of a real-time, wholesale energy market in the Southeast may not solve all of the area’s generation and transmission needs, it is a proven market structure for implementing low-cost renewables across almost the entire rest of the country.

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