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Market Design of 1980s Not Fit for Today’s Markets

Sorted by Rodney Kelloway

The renewable flood is creating havoc in wholesale electricity markets

Perry Sioshansi in the April edition of Energy Informer advises that the inexorable growth of renewable generation, pushed by low carbon requirements and mandatory targets such as renewable portfolio standards (RPS) in many parts of the US and pulled by financial subsides and tax incentives have resulted in plummeting prices making them increasingly the cheapest source of electricity the world over. Paradoxically, this phenomenal success is now poised to hamper their continued growth, as examined in Clean energy’s dirty secrets the lead article in the 25 Feb 2017 issue of The Economist.

As described, the main problem is that the competitive wholesale markets that were introduced in the 1980s and 90s to make sure the lowest cost generation resources were dispatched in the so-called merit order (visual right) are increasingly breaking down in an age where a growing share of the generation is renewable – that is zero marginal cost.

This tends to:

  • Lower average wholesale prices throughout the year, as evident by the experience of Germany, for example,
  • Reduces the number of hours conventional thermal plants are dispatched , eroding their profitability; and
  • Reduces or eliminate mid-day peak prices where conventional plants typically made much of their money.

Yet, as everybody acknowledges, these same conventional plants are increasingly needed to serve as backup to variable renewables, as illustrated in the California Duck Curve.

Market operators around the world who are increasingly facing these challenges have mostly resorted to making exceptions to pay certain critical conventional plants to keep them solvent. Some market operators have introduced formal capacity payment schemes to encourage future investments in conventional generation while others make exceptional or out of merit order payments to existing plants to prevent them from shutting down.

While such exceptionalism has kept the lights on thus far in places like Germany and California, near unanimous agreement is emerging among many experts that it is not a cure for fundamental flaws in competitive wholesale markets designed for an era when different cost fossil fuels were competing for dispatch and where renewables were barely a blip on the radar screen. In its latest state of the market report, Joe Bowring , the market monitor for PJM , highlights this – and a number of other issues – more on this in next issue of EEnergy Informer.

As observed by Malcolm Keay of Oxford Institute for Energy Studies in The Economist article, “The (traditional) utility business model is broken, and markets are too.” Keay has proposed a scheme where customers must decide in advance if they wish to have a secure supply of electricity at a premium, or if they wish to buy what he calls “as available” electricity when and if it is available at the prevailing price – as reported in an earlier issue of this newsletter.

While proposals such as this go a long way to address many of the problems of wholesale electricity markets, even more fundamental re-thinking is needed as the traditional notion of consumers and electricity service are becoming blurred.

As extensively covered in prior issues of this newsletter, technological innovations are leading to disruptions that question the traditional roles and the rules of the distribution network and the value proposition of service.

Sonnen: Buy battery, get free juice

Australia, is a sunny place with plenty of open space and an abundance of detached residential homes. With high retail tariffs it already has 1.5 million solar roofs, making it the highest penetration of residential solar PVs on a per capita basis. Its energy mix, traditionally dependent on cheap and abundant domestic coal, is carbon-heavy, which is another reason why many customers prefer to make their own juice from carbon-free sunshine.

This combination of factors has made Australia ripe for experimentation on novel ways not merely to turn consumers into prosumers, but prosumagers, by including distributed storage.

Sonnen , a solar PV and battery maker with considerable experience in its home German market, is reportedly offering free juice to consumers who buy or lease one of its storage devices. If the new offering succeeds, the company promises to disrupt the traditional retail electricity business model.

According to Sonnen’s Australian head, Chris Parratt , “The deal is, you buy a Sonnen battery to go with your solar and don’t pay for electricity anymore,” adding, “It’s like a mobile phone plan, where the customer purchases the phone up front and gets a plan, if you like. Or, if you use finance, you pay nothing up front, and pay monthly installments instead.”