The electric power market needs a new paradigm to efficiently incorporate low-carbon energy sources, an analyst at Ontario-based Mowat Centre argues in a new paper, released in April.
To put it briefly: author Richard Carlson observes that the entry of renewable sources of energy into Ontario’s energy mix (as elsewhere) has added extra costs to the system to accommodate their variability, while at the same time driving the price of electricity down with their zero marginal cost. A major result has been to disincent further investment in the power system. The effect is starting to be felt in Alberta, he says, and New York’s nuclear plants are now receiving support to keep themselves running.
Ontario, with its hybrid market, has relied on the Global Adjustment to make up the difference. But “[a]s a result of the shift on the costs allocation to the GA,” Carlson says, “the HOEP [hourly energy price] is now primarily used by the system operator to optimize the economic dispatch of some resources – that is, as a signal for which available generators the IESO should dispatch first in order to meet demand. While the use of the HOEP for dispatch is a valuable service for the system, the HOEP no longer provides what is the primary function of a wholesale market, namely acting as a price discovery tool for efficient planning and investment.”
A February 25 article in The Economist made a similar point. In the EU, “[w]holesale electricity prices have slumped from around €80 a megawatt-hour in 2008 to €30-50 nowadays. The result has been havoc for the old-style utilities. ... EY, a consultancy, calculates that utilities across Europe wrote off €120bn of assets because of low power prices between 2010 and 2015. ... Solar ‘cannibalises its own competitiveness away,’ says Francis O’Sullivan, of the Massachusetts Institute of Technology. ‘It eats its own tail.’”
Another report from the German energy agency, DENA, mentions the same effect: “The electricity price on the wholesale market is in decline, but average household tariffs remain at around €0.28 per kilowatt hour, including taxes and fees, partially because they have to reimburse owners of renewable energy installations that benefit from the feed-in tariffs.”[1]
A number of systems in North America use capacity markets to address the issue, and the IESO is now engaging with market participants to design a version for Ontario. But capacity markets are not necessarily a cure-all for the problems with the wholesale commodity-only market, Carlson argues: “Where introduced, capacity markets tend to encounter frequent political controversies and interference and creeping complexity. ... A better solution would be to create a market for the desired outcome – namely, encouraging low/ non-carbon generation and rationalizing the long-term infrastructure investment this would entail while maintaining system reliability – and then allow the market to discover the most efficient technology to achieve this outcome.
“Ontario should begin with unbundling the GA and pricing its components separately. Rather than capacity, the IESO should focus on flexibility. After unbundling the GA, the IESO could introduce a flexibility market, whereby developers compete to provide short- or long-term periods of electricity at various times and at various locations. An example of such a market now would be California’s flexible ramping product, which is designed to enable economic bids to meet the need for greater flexibility.”
Pricing Outcomes: A Framework for a 21st century electricity market for Ontario is available at no charge at https://mowatcentre.ca/pricing-outcomes/.
See “A world turned upside down,” the Economist, February 25, 2017, here.
[1] https://www.dena.de/fileadmin/dena/Dokumente/Meldungen/dena_ESMT_Studie_blockchain_englisch.pdf