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The MW and MWH Aren't Commodities - And Why That's A Big Problem For Centralized Electricity Markets

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Vince Duane's picture
Principal, Copper Monarch LLC

Experienced C-suite executive with a 30 year history working across a broad spectrum of the energy industry. Strong strategic and communication skills in Legal, External Affairs, Regulatory...

  • Member since 2023
  • 3 items added with 225 views
  • Feb 23, 2023

A lot of attention in recent years has focused on subsidy and support programs to advance clean, renewable electricity supply penetration and the challenges these interventions pose to ISO markets trying to get prices "right" to meet economic and reliability objectives.  What's also becoming increasingly apparent is that the character of these new technologies gravely complicates the single clearing price auction model ISOs use in energy, capacity and certain ancillary service markets.  In this op-ed, co-authored with former FERC Commissioner Tony Clark, I argue the root of the problem is an assumption in the pricing model that all MWs offered and all MWHs injected, from whatever source, can be treated as fungible.  Holding to this assumption has always been tricky, as anyone aware of the complex price formation and market settlement rules in ISOs can attest.   With a supply stack increasingly comprised of resources having inherently different operating attributes, it seems the single clearing price model (despite its advantages and consequently our natural reluctance to confront its failings) will result in more volatile, less reliable and less economically sound outcomes.  The time has come to stop thinking of the products bought and sold in ISO markets as commodities.

When Is A MWh Not A MWh?


Matt Chester's picture
Matt Chester on Feb 23, 2023

How does the shift towards distributed assets (both generation but also storage and demand response) interact with this trend-- I imagine that's all a part of the same 'rethinking' of power markets, right? 

Vince Duane's picture
Vince Duane on Feb 24, 2023

I'd say so Matt.  ISOs and the markets integral to their operations are facing an ever diversifying array of technologies and more two-way interconnected facilities, including distributed assets.  Whether they participate in ISO markets and on what terms is a big question.  With the emergence of "virtual" power plants, these markets will have to decide if they can continue to treat all injections as fungible because it is that predicate that justifies a single clearing price.  

Julian Silk's picture
Julian Silk on Feb 23, 2023

One question that might be considered is whether the generation of each fuel type - coal, NG, nuclear, wind, solar, hydro, etc., might be considered a commodity instead.

Vince Duane's picture
Vince Duane on Feb 24, 2023

Thanks Julian.  Theoretically, I think you're right.  Market segmentation based on a grouping of resources that have more-or-less the same operational characteristics could be the answer.  I wouldn't think it necessary to defined distinct markets by technology or fuel type, however.  Probably just delineations of a broader sort - dispatchable v. non-dispatchable; firm over a period of time v. variable as examples.   My concern, however, is that any market segmentation will make structural market power an even bigger problem than it is already. And add to the already hideous complexity of these markets.

Vince Duane's picture
Thank Vince for the Post!
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