Achieving Public Policy Goals through Competitive Wholesale Electricity Markets

By Anthony Giacomoni

One major issue currently confronting wholesale electricity markets throughout the United States is the need to integrate public policy initiatives with wholesale electricity markets. Many states are aiming to reduce greenhouse gas emissions by subsidizing various clean energy resources. Such initiatives have the potential to undermine the competitiveness of these markets if design changes are not carefully implemented. In response to these concerns, several Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) (California ISO (CAISO), ISO New England (ISONE), PJM, and New York ISO (NYISO)) have kick-started or supported initiatives to help harmonize these two, often competing, objectives.

California ISO

CAISO is currently working with the California Air Resources Board (ARB) to address concerns with its Energy Imbalance Market (EIM) greenhouse gas (GHG) market design first implemented in 2014. ARB is concerned that the current market design does not fully capture the impact on emissions of imports into CAISO that serve CAISO load.

Presently, any import into California is subject to California’s cap-and-trade program and to mandatory GHG reporting regulations. Due to the way that the EIM dispatch is currently performed, there are concerns that low GHG emitting resources are being dispatched to support imports into CAISO while higher emitting GHG resources are being dispatched to serve demand outside of CAISO.

Under its new proposal, CAISO will perform a two-pass dispatch. In the first pass, CAISO will calculate a base dispatch for the region outside of the CAISO area, assuming zero net imports into CAISO; in the second pass, net imports into the CAISO area will be allowed, but they will be restricted to the incremental dispatch above each unit’s base schedule as determined in the first pass. This method will help minimize the impact on emissions in the region outside of CAISO caused by the cap-and-trade program. A full description of CAISO’s EIM Greenhouse Gas Enhancement market design can be found in its recently published revised draft final proposal.

ISO New England

In New England, the New England Power Pool (NEPOOL), which is the participant voting organization for wholesale electricity market matters in the six New England states, began an initiative in 2016 called Integrating Markets and Public Policy (IMAPP). The goal of IMAPP is to identify potential changes to wholesale electricity markets that may be implemented to advance state public policy objectives in New England. Since its formation, the group has had regular meetings to discuss potential market reforms.

In the interim, ISONE is looking to implement some market design changes in time for its 13th Forward Capacity Auction (FCA) slated to take place early in 2019. Earlier this year, ISONE presented a proposal for changes to the FCA, called Competitive Auctions with Subsidized Policy Resources (CASPR), in order to account for state subsidies for clean energy resources. The proposal will create a two-stage auction aiming to gradually accommodate subsidized resources into the Forward Capacity Market (FCM), while avoiding their negative effect on the capacity clearing price. The first stage of the auction will determine the amount of cleared capacity and the capacity clearing price based on a competitive framework. In the second stage, resources that obtained capacity supply obligations in the first stage will be able to transfer their obligations to subsidized resources that did not clear in the first stage. These subsidized resources will be paid the lower second stage auction clearing price.

PJM

To account for state policy initiatives, PJM has been exploring potential changes to both its wholesale energy and capacity markets. Earlier this year, PJM released three papers that offer preliminary proposals to encourage discussion on the interactions between state environmental issues and the operational integrity of PJM’s markets.

One paper proposed potential design changes to its capacity market, which is called the Reliability Pricing Model (RPM). According to the proposal, PJM will operate a two-stage auction. In the first stage, subsidized resources will be included in the determination of the amount of cleared capacity, while in the second stage, the effects of the subsidies will be removed in the determination of the clearing price. Changes to PJM’s RPM are being considered as part of its Capacity Constructs/Public Policy Senior Task Force (CCPPSTF), which is responsible for identifying necessary changes to the RPM due to state subsidies by the end of 2017.

A second paper explored some initial thoughts surrounding the implementation of a carbon price in its energy market. PJM acknowledges that the states comprising its region have diverse objectives and it will be challenging to get them all to agree on a common framework. Nevertheless, a coordinated carbon policy could be promoted through the PJM market for a sub-group of volunteer states prepared to adopt a common set of business rules.

New York ISO

While CAISO, ISONE, and PJM are all seeking near-term solutions, NYISO is exploring long-term approaches. In late 2016, NYISO kicked-off its Integrating Public Policy Project (IPPP).

The IPPP consists of three different phases with the first phase being a study to investigate the advantages and disadvantages of various carbon pricing schemes on NYISO’s wholesale electricity markets. NYISO hired the Brattle Group to perform this task. Phase two includes an assessment of the impacts of New York’s Clean Energy Standard (CES) on its electricity markets. The CES requires that 50 percent of New York's electricity come from renewable energy sources such as solar and wind by 2030, with a progressive phase-in schedule starting in 2017. Phase 3 will assess whether any additional market products or structures will be required to meet anticipated reliability needs.

All four grid operators are taking different approaches with the same goal of harmonizing public policy initiatives with competitive wholesale electricity markets. Maintaining competitive electricity markets notwithstanding the out of market actions being undertaken by various states presents an immense challenge to market operators. It is critical that any changes to market design to account for such actions be thoroughly studied and analyzed before implementation in order to ensure they achieve their the desired effects. If not, the competitiveness of their wholesale electricity markets may suffer, potentially resulting in long-term and unforeseen consequences.

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