Electricity:

Markets Research group's Edelston says major changes necessary to ensure grid reliability

With many members of Congress questioning the impact of U.S. EPA's proposed rule for existing power plants on grid reliability, how closely should utilities and regulators be looking at the issue? During today's OnPoint, Bruce Edelston, president of the Electric Markets Research Foundation, discusses a new report that predicts historically low market reserves for regional transmission organizations (RTOs) because of power plant retirements.

Transcript

Monica Trauzzi: Hello, and welcome to OnPoint. I'm Monica Trauzzi, and with me today is Bruce Edelston, president of the Electricity Markets Research Foundation, EMRF, receives funding from the utility industry and utility stakeholders. Bruce, thank you for joining me.

Bruce Edelston: Thank you, Monica.

Monica Trauzzi: Bruce, we're hearing growing concerns surrounding grid reliability, particularly on the heels of EPA's proposed rule for existing power plants. Senator Murkowski has focused in on this, saying that she is greatly concerned EPA's rules, particularly in combination with one another, will result in a grid that is less stable and less reliable. How seriously should lawmakers and regulators be taking a look at this reliability issue?

Bruce Edelston: I think lawmakers need to take a very serious look at it. Even before the President announced the new climate rules, the foundation which I had, had initiated a study to look at whether or not there was sufficient capacity adequacy being planned for the electric grid into the future, and we just released that study in the past couple of days and found that not even looking at the President's climate plan, particularly in restructured markets that rely on market forces, that their reserve margins are declining and that they may be in trouble, even some in the next couple of years in terms of having enough resources. Of course, the President's climate proposal and the EPA rules will just exacerbate that problem.

Monica Trauzzi: All right, so that distinction between the deregulated and regulated markets. You see different things happening in the various regions.

Bruce Edelston: Yes.

Monica Trauzzi: Walk us through those.

Bruce Edelston: OK, well, we looked, the foundation was for to originally look at being sort of a watchdog on the development of markets in this country for electricity, and we looked at both in this most recent study by Christensen Associates. We looked at both types of markets - the traditionally regulated markets and the restructured markets, and found that the traditionally regulated markets are really doing fine in terms of ensuring adequacy, as one would expect, because they operate under state regulation and are required to build sufficient capacity to meet both present and future customer needs. In the restructured markets, they are still struggling to meet future needs. As I mentioned, the reserve margins in many of those restructured markets is going down, and we found - the study found that the market solutions that are still being looked at it and still being tried in those areas aren't working, and there probably isn't a market solution to the problem, that they need to start looking at much broader solutions, maybe introducing even more regulation into those markets to make sure that they'll have sufficient capacity.

Monica Trauzzi: But the thinking is that these are all surmountable challenges, is it not? I mean, is there any evidence suggesting that these are not surmountable?

Bruce Edelston: Yeah, the study concluded that these problems aren't surmountable, at least ...

Monica Trauzzi: Are not?

Bruce Edelston: Are not, at least using market mechanisms that are being tried today, and there's several reasons for that that were found by the study. First of all, the political and regulatory institutions that surrounds the restructured markets, including state regulators and including FERC, have placed non-market goals on these entities on these restructured markets, like price caps and like renewable portfolio standards or renewable standards that make it very different for the markets to work correctly. The markets that have developed are very short-term; the longest are three years, and nobody's going to make investment in long-term generation baseload plants with only a three-year assurance of cost recovery. So the fact that the markets are very short-term oriented is going to make it very different to solve the problem using markets.

Monica Trauzzi: Renewable portfolio standards on the whole are working, though, across the country.

Bruce Edelston: They're working. I mean, they're meeting their intended purposes, but they're also creating problems within the competitive markets, the restructured markets. The best example is the production tax credit, which, as I'm sure you're aware, has created negative pricing in a lot of hours, and that's made it more difficult for nuclear and coal plants in those regions to make the kind of money they need to keep operating. As you know, at least two nuclear plants have retired in restructured markets and there's possibly more to come.

Monica Trauzzi: But isn't that just a function of how markets work and competition?

Bruce Edelston: Well, it is a function, but you have to remember that there isn't really true competition in these markets because of the fact that you have regulators intervening, and you don't have true competition with the production tax credit because that's skewing the market in unhealthy ways. So the problem is if you don't have true competition, can those markets really work?

Monica Trauzzi: So a new generation of utilities is coming. What are the policies that are needed to jump-start the investments that will get utilities there?

Bruce Edelston: Well, we think that probably some kind of obligation to serve has to be reinstituted so that utilities or retail suppliers, in the case of states that have retail access, know that they have to have capacity available for the long-term to meet their needs, and once they have that obligation, then we think there'll be more investment in long-term generation, like nuclear or like coal, that meets new environmental standards or even natural gas that's built for the long-term. But without any assurance of cost recovery beyond three years, as the markets are structured today, that just might not happen.

Monica Trauzzi: But they have to provide electricity and produce electricity somehow, right? So baseload capacity, there are only a few options to choose from.

Bruce Edelston: That's right. That's right, but right now, particularly in restructured markets, they're only choosing one option, and that's natural gas, and that's creating all kinds of problems with respect to volatility and deliverability. It's not clear that there's enough pipeline infrastructure to serve all the gas plants that are going to be needed in those areas. And the price is certainly volatile. I understand just yesterday in the heat wave we're having here in D.C. that the wholesale price of power in PJM, which is the local, the regional transmission operator that serves D.C., the wholesale prices doubled just yesterday because the temperatures went so high. So there is a lot of volatility in restructured markets as well.

Monica Trauzzi: Do you think industry is effectively embracing the changing dynamics and their future, the new business model?

Bruce Edelston: Well, I'm not sure that I'm a believer in the new business model, and the study that we did was sort of neutral with respect to business models. The issue is whether or not we have enough capacity in the future no matter what model is used by the utilities that are participating in the markets, and like I said, some utilities are doing a better job than others in ensuring future capacity adequacy.

Monica Trauzzi: All right. We'll end it there. Thank you for coming on the show.

Bruce Edelston: All right. Thank you.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

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