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Reassessing RTO Risks

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Patrick McGarry's picture
Senior Director / Customer Success PCI

Patrick recently joined PCI as a Senior Director in May, 2019. He owns over 32 years of experience in commodity trading and owns an extensive record working closely with energy market...

  • Member since 2004
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  • Jul 6, 2021
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“Experience is the hardest kind of teacher. It gives you the test first and the lesson afterward.

 

Oscar Wilde

Perspective.

We gain perspective through experience. Especially extremely difficult experiences.

Hopefully, all our experiences enable us, especially leaders, to develop a broader perspective that incorporates the feelings and values of others.

Regarding Winter Storm Uri and the subsequent financial impact in RTO markets, many different perspectives exist.

Some people experienced financial windfalls and others received a permanent body blow that will impact communities for many years.

When it comes to the free market, winners and losers will always exist.

But can we afford to continue to allow unabated volatility to continue to exist in RTO markets?

During my thirty-two years of experience on bond and energy trading floors, I know that luck is often confused with skill or wisdom. So, with a serving of humble pie served after your filet mignon celebratory dinner, you need to ask yourself a few questions.

What if my company was the bug instead of the windshield?

Could I survive? Would my stakeholders survive?

 

 

Its Not a Price Cap

Whether they be $2,000 or $9,000, we need to be clear on a simple point regarding price caps.

They are not price caps.

They are targets.

In a sense, they become goals. Goals provide long term vision and short-term motivation.

My point is not to discuss the pros and cons of price caps, or even how they are arbitrarily set. Rather, I am raising the point that price caps with arbitrary duration periods introduce unmanageable price and volume risks in today’s RTO markets.

We know this to be true because Texas ratepayers will be ultimately saddled with about $38 billion in excess energy costs.

We know this is true because the decision to set wholesale electricity prices at $9,000 per megawatt-hour for an extended period basically made many market participants’ Risk Policies obsolete.

And not just in ERCOT.

Winter Storm Uri was as also a significant event for SPP & MISO.

 

Keeping the Lights On

 

During my twenty years of working in the public power community, I became intimately aware of the sense of service and pride towards serving a community that you call home.

I also noticed a similar level of passion and commitment during my one year with an IOU.

Whether people work in public power, private or an electric cooperative, these folks remind me in many ways of our military.

They stand on a post and say, “Not on my watch.”

In ways like how we feel about our children, they would do anything possible to fulfill their core mission to provide power in the most reliable and cost-effective manner possible.

During my attendance at the APPA conference a few weeks ago, I met and spoke to many people who shared the heartache to see not only rolling blackouts, but also the experience of walking into the office of their CFO to explain how they just spent anywhere from $10,000,000 to $40,000,000 on natural gas to serve load.

Full well knowing the long-term financial impact of spending unbudgeted millions.

Want to gain a different perspective?

Listen to people who were responsible to make these decisions and then look in their eyes.

When you do, I just do not see how we can allow it to happen again.

Especially when you consider the roles could be reversed in the next extreme event.

 

Circuit Breakers

 

In Oklahoma, Oneok Gas Transmission (OGT) reached what might be the highest natural gas hub in history at an average of $1,192/MMBtu on February 17th.

The spot price of OGT was $2.92/MMBtu during the first week of February.

RTO markets do not control the price of natural gas. But they sure do experience the brunt of ballistic prices.

The people working at RTO markets take reliability with the same passion and commitment as the utilities. They would move heaven and earth to provide reliability during artic blasts or summer heat swells.

They know lives hang in the balance.

Would we rather have these folks focused on reliability or finance during these extreme periods?

Would it hurt for regulators to introduce “circuit breakers” in the natural gas market in a manner like our stock market?

An opportunity for everybody to catch a breath and perhaps gain a broader perspective?

Should we consider establishing a different set of market operations during these crisis moments? Do participants really need to commit to a four-day decision when directed to procure fuel at any cost?

Is it necessary to monetize the never spoken but widely understood truth that market operators and participants will generally pay any price to keep the lights on to keep us safe?

In any fight, a good corner person knows when to toss the towel into the ring and stop the fight.

Circuit breakers could take the decision-making process away from those in the ring and allow the market to calm down.

And allow regulators to make a thoroughly considered decision regarding emergency pricing procedures.

 

Here’s to Never Forgetting

 

Before he became widely considered one of the greatest college basketball coaches in history, Mike Krzyzewski experienced failure as the head basketball coach at Duke.

Coach K went 38-47 during his first three years and lost 109-66 in the 1983 ACC tournament to Virginia.

At 2 AM the morning after the loss to Virginia, Coach K gathered at a local Denny’s with a small circle of friends and supporters. One of Mike’s friends raised a glass of water and made a toast.

“Here is to forgetting tonight”

Coach K then raised his glass and made a toast.

“Here is to never forgetting tonight.”

Mike Krzyzewski was always looking at failure as a way to lead to success. Perhaps better than any other coach in history.

Duke won the next sixteen matchups with the University of Virginia.

In a similar way, FERC, NERC and RTO/ISO Markets need to work together to never forgetting what happened in February.

People are not perfect, and neither are the markets that people create.

All risk can never be eliminated.

But the price and volume risks of arbitrary price caps with arbitrary duration introduce levels of risk that need to be addressed immediately.

We need to stop placing people who operate these markets and serve their communities in impossible situations with unknown financial impacts.

Some days you’re the bug, some days you are the windshield.

You just never know which it will be.

 

Discussions
Matt Chester's picture
Matt Chester on Jul 6, 2021

Man, Patrick, I was with you until you had to throw in:

Duke won the next sixteen matchups with the University of Virginia.

Finally in recent years, my Hoos have leveled the playing field somewhat though :)

Seriously, though, thanks for a thought-provoking piece!

Richard Brooks's picture
Richard Brooks on Jul 6, 2021

Great posting Patrick. I completely agree: " We need to stop placing people who operate these markets and serve their communities in impossible situations with unknown financial impacts."

I'm a bit biased by my 14 years working for an ISO/RTO, but here is my view of the problems that are causing problems, such as those you cite.

The shift to markets was led by a shift away from "good engineering designs" for grid reliability and resilience to a purely economic design approach. This "economics first" design approach to ensure grid reliability is what led to the situation in Texas this past February, combined with an extreme weather event.

Grid reliability and resilience is, first and foremost, a technical problem to solve that requires the expertise of power system engineers, system planners, load forecasting and grid operations. Any market design that applies economics as the lead strategy to solve grid reliability and resilience will likely fail, when technical challenges present themselves during daily operation of the grid, as we witnessed in Texas.

As recently as June 2021, New England regulators are recommending an "economics first" market design for grid reliability, called FCEM, that is "supposed" to address the environmental impacts of carbon induced climate change, but, if implemented in its current form, will do nothing to ensure grid reliability and resilience by failing to acquire the "right grid services" needed to balance supply/demand, as the energy transition rolls on.

Patrick McGarry's picture
Patrick McGarry on Jul 6, 2021

Thanks for the feedback Richard.

I was deeply moved by some of the stories and conversations I heard at APPA. I am a free market person, but keeping people safe and alive in the worst of weather conditions must be priority number one. Keeping prices at $9000 for such an extended period made little sense to me. We should not have to bankrupt small towns and municipalities to operate these markets in a common sense way. Just my thoughts. Hope you and your family are doing well.

Richard Brooks's picture
Richard Brooks on Jul 8, 2021

Thanks, Patrick, and you as well. PJM market participants seem to be making some progress, as evidenced by a recent announcement from EPSA and REBA, in righting the ship to focus on reliability/resilience first and foremost and economic solutions, based on good solutions for reliability.

Michael Keller's picture
Michael Keller on Jul 13, 2021

Economics/reliability and and “carbon neutrality” are mutually exclusive.

New England appears to be hell-bent on achieving astoundingly expensive energy, with electricity a luxury commodity reserved for the rich. On the bright side, the place will likely become more bucolic as the residents flee.

Patrick McGarry's picture
Patrick McGarry on Jul 14, 2021

Thanks for the feedback Michael. And I love how you always find a positive! LOL! All the best-Patrick

Kent Knutson's picture
Kent Knutson on Jul 12, 2021

Patrick, thanks for sharing  . . . in reading the comments, I especially agree with Richards statement, "Grid reliability and resilience is, first and foremost, a technical problem to solve that requires the expertise of power system engineers, system planners, load forecasting, and grid operations. Any market design that applies economics as the lead strategy to solve grid reliability and resilience will likely fail, when technical challenges present themselves during the daily operation of the grid, as we witnessed in Texas." . . . most importantly, the part about the expertise of power system engineers.  Reliability is what matters most.  Thanks again for sharing. 

Patrick McGarry's picture
Patrick McGarry on Jul 14, 2021

Kent- Thanks for your feedback. I completely agree. Reliability is sacrosanct. All the best.-Patrick

donn dears's picture
donn dears on Jul 13, 2021

The real problem with RTO/ISOs is that they are rigging the auctions that result in insufficient reserve capacity by forcing wind and solar onto the grid, which forces nuclear and natural gas off the grid. With adequate reserve margins there wouldn't be blackouts, such as in Texas and California, and the issue of price caps would be remote. My Book, The Looming Energy Crisis, Are Blackouts Inevitable, provides the facts supporting my comments.

If you don't want to read my book, please read Meredith Angwin's, Shorting the Grid. It also describes how RTO/ISOs are damaging grid reliability.

By focusing on reserve margins based on baseload power, not wind and solar, spikes in natural gas prices would be a minor problem.

Michael Keller's picture
Michael Keller on Jul 13, 2021

Strikes me that the marketplace is more contrived and not based on economics.

Patrick McGarry's picture
Patrick McGarry on Jul 14, 2021

Donn- Thanks for the feedback. How about the PNW? Some folks are now advocating to breach the lower dams due to the impact to salmon. And they are already forecasted to be 5-10 gigs short of capacity by 2030. Its very hard to understand. Is the goal to reduce carbon or is it something else? All the best.-Patrick

Michael Keller's picture
Michael Keller on Jul 13, 2021

Energy transported by transmission and distribution systems is inherently monopolistic in nature. Strikes me the government attempting to replicate a free market inevitably leads to massive abuse.Traders and firms inevitably manipulate the markets to garner massive profits with little actual risk. History is replete with examples - anybody remember Enron?

My solution? Recognize the obvious, with the states regulating the quasi-monopolies within their borders. That is kind of what we see, but some states are prone to believing they have a “free-market”, when they actually do not. Texas and California come to mind.

At least with regulated utilities (and/or municipal utilities) the citizens have an ultimate say in the matter and can replace the politicians running the state or local entity. The alternative is the absence of any real form of checks-and-balances on the greed that invariably comes with monopolies.

Patrick McGarry's picture
Thank Patrick for the Post!
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