Wednesday, March 9, 2016

The Oddness at the Heart of RTO

RTO graphic from FERC
Regional Transmission Organizations

Tomorrow, I will be at the ISO-NE Consumer Liaison Group meeting in Connecticut. (I blogged about this meeting a few days ago.)

I would like to share my research, and my feelings, about the deep oddness at the heart of American RTO markets.  RTO (Regional Transmission Organization) markets are those in which electricity generators (power plants, etc) and electricity transmitters (transmission and distribution companies) are generally different companies. The different types of companies interact by participating in complex auction processes.  In contrast, non-RTO markets contain (mostly) vertically integrated utilities.  In non-RTO areas, usually the same companies are in charge of both generation and distribution.

I recently wrote an article for Nuclear Engineering International magazine "Pay for Performance on the U.S. Grid." This article shows how the supposedly cost-saving auctions have diverged farther and farther from anything resembling a free market. It also shows how the RTO markets basically punish reliable plants, and support unreliable plants.  

In this figure, based on Entergy research, we see that nuclear plants get around 85% of their revenue from selling kWh, (energy) while gas plants get 40% to 80% of their revenue from other sources (capacity payments, ancillary services payments.)  In this figure, based on information from James Bride of Energy Tariff Experts, we see how Capacity Payments make up the revenues for gas peaker plants. (I don't own the figures, so I have to link to them.)

If gas plants had to subsist on the prices they received for energy, if gas plants main income was the money they receive for selling kWh on the grid, it would be much harder for gas plants to undercut nuclear pricing!

I encourage you to look at the figures and read the article.  My article has a reasonable title: Pay for Performance and the U.S. Grid.  When I think about it, I refer to it as The Oddness at the Heart of RTO.

RTOs don't even save money

Well, all those complicated auctions were supposed to prevent big nasty integrated electricity companies from ripping off consumers. (The companies would rip off consumers after they had "captured" their regulators, of course.)  So, did it work?  Did the the RTO auctions and free markets lower prices for electricity?  I would argue that RTOs are not really free markets anyway (read my article), but in the meantime....did RTOs save money for the customers?

Well, no.  Or maybe yes, maybe no.

Here's another chart, this one is part of a paper prepared for NESCOE,  New England States Committee on Electricity, which "represents the collective perspective of the six New England governors in regional electricity matters."   The paper was published in December, 2015.  "Electric Restructuring in New England--A Look Back" prepared by Reishus Consulting LLC.
From a study at UC Berkeley, as reported in NESCOE review

This is a chart of retail prices over time. Note that the Restructured States (RTOs) have the highest prices for retail electricity. Yes. That's the red line at the top of the chart.

It must be added, however, that the Reishus Consulting paper also describes other studies that claim to find lowered retail electricity costs due to restructuring.  I would say that the statement that "RTOs save money for consumers" is not currently proven, to my satisfaction, and it looks as if they don't.  After all, that top cost line is the restructured (RTO) states.

The effect of RTOs

In short, RTOs may or may not save money for consumers. My opinion: probably they don't.

Undoubtedly, however, RTOs make to make it harder  for reliable plants to survive, and easier for unreliable plants.

All the nuclear plants that are in danger of closing are in RTO areas.


Ike Bottema said...

The RTO energy auctions are presumably based on energy sales or capacity or some combination. As I understand it, the formulations are limited by dictated regulations. How difficult would it be to tweak these regulations by, for example, mandating long-term energy contracts that both gives utilities the assurance that base-load is guaranteed and imparts to power producers the incentive to invest further into efficient power production facilities?

Also shouldn't there be consideration of CO2 levels in this pricing structure? That, for example, there are cost penalties for the amount of CO2 produced per unit energy delivered and price premiums for CO2-free production.

No doubt what I'm suggesting is an unrealistic expectation. That said, something is required or the United States will continue to fritter away both competitive advantage while exacerbating CO2 emissions.

Robert Hargraves said...

Ike, Anyone who uses my New Nuclear Flag graphic gets a free lapel pin. Please send me your postal mailing address.