Sponsored and Written by: Amy Farrell, Senior Director, Market Development, American Petroleum Institute
The electric sector has been evolving dramatically over the past two decades due to policy changes at the federal and state level, technology advancement, and fundamental shifts in underlying fuel markets. With these changes, reliability of the electric grid has become a focal point. From the implementation of the federal Mercury and Air Toxics Standards rule to the polar vortex of 2014 to the finalized Clean Power Plan, electric grid reliability continues to be called into question despite continued performance. Diversity of fuel is often cited as an answer to maintaining grid reliability, especially in restructured markets. However, upon closer inspection, diversity of fuel is not the appropriate solution to maintain grid reliability; rather, the solution is a diversity of attributes.
The electric system resource adequacy framework has been designed to ensure that system operators have access to sufficient capacity to maintain grid reliability under peak load conditions. Traditionally, this has focused on procuring enough capacity, in the form of megawatts (MW), to meet peak load plus a reserve margin (generally set near 15% of peak load). Additionally, system operators procure operating reserves that are tied to the value of the system’s largest single possible “contingency” event, which has historically been seen as the loss of the largest single generator on the system. These MW are considered fungible and homogenous, and system reliability measures are based on the ability to meet peak demand during a small subset of hours during the year, irrespective of the capacity sources’ operating capabilities during the remaining hours.
This approach was appropriate when the electric system consisted of relatively stable and predictable loads served by large, centralized generators. This is no longer the case. The grid today is characterized by an increasing amount of both variable and distributed energy resources (VERs and DERs) that are rapidly making the current electric system operational models obsolete. The changes will only accelerate as VERs and DERs continue to grow into the future. A new model of resource adequacy — one that focuses on the capabilities and attributes of supply sources, rather than just the amount of capacity — needs to be developed and adopted.
A potential solution is to value attributes and services, rather than just energy and capacity, thus increasing the revenues that supply resources gain from ancillary services markets. Measuring reliability through services and resource capabilities can result in a resource adequacy model that is able to adapt to a changing world, yet still provide sufficient revenue to supply resources needed to maintain reliability. Policy discussion and implementation should focus on the “diversity of attributes” needed for reliability, rather than promotion of specific resource types based on fuel source. This change in focus will lead to a more reliable and cost-effective generation mix. Put simply, the conversation around capacity and energy resources should concentrate on what these resources do, where they do it, and how they do it, not what they are. In a recent paper on investment in competitive markets, PJM wrote:
…[I]t is true that certain fuel-type generating facilities might naturally provide a particular attribute valued by an ISO/RTO. Other factors being equal, a coal facility with coal in the yard offers greater dependability than a natural gas peaking facility with non-firm fuel supply. Likewise, a coal or nuclear facility will provide greater inertia to the bulk power system than a solar panel, and a battery will provide faster and more controlled frequency response than a natural gas combined-cycle facility. However, from the perspective of the ISO/RTO, it is the attribute (e.g., dependability, inertia or frequency response) that is needed in the correct proportion, not necessarily a certain ratio of fuel type, even if that fuel type may be closely associated with the desired attribute.
The types of attributes that could be considered as adding value include the following:
- Able to be dispatched when called upon
- Able to provide load following to support integration of VERs
- Able to provide reactive power and voltage support
- Able to be located close to load centers
- Able to provide blackstart service
- Ability to cycle on and off in a timely manner.
- Able to start up and ramp to full power quickly
- Able to operate 24/7
- Scalable to the amount needed in any particular location
- Cost-effective to construct and in a timely manner to facilitate system planning
Other attributes that could be of importance from a public policy perspective include:
- Domestically sourced fuel
- Fuel storage capability (either on-site or virtually through offsite storage and transport contracts)
- Fuel flexibility
A few of these attributes (e.g. regulation energy) are already procured through market mechanisms in some regions, providing a value to those services. But most are not included in any type of model that assigns a value to the specific attribute being sought. Some regional operators have started to think about what additional attributes could be included in resource adequacy models and market constructs, especially in California where the level of VERs and DERs is reaching significant percentages and volatility is high. These efforts are to be applauded but should only be considered as a good beginning. Much work remains to examine what services are truly needed to maintain grid reliability and to identify the best market mechanisms to induce the necessary investment for supply resources to provide those services. Similarly, where identified attributes are not conducive to being procured through a market, we should explore pricing through some form of administrative system that reflects the value the attribute contributes to keeping the lights on.
With our nation’s resource mix and electricity grid rapidly evolving, our conversation around reliability must also evolve. Although my time on the Financial Research Institute’s (FRI) Advisory Board has been brief, I believe it is well-suited to provide a forum for this conversation. I see value in the organization’s efforts to recruit diverse perspectives though its membership recruitment and in its effort to drive decision makers and stakeholders alike to think about the pressing policy questions of the day though its Hot Topics, Points of View and Annual Symposium.
 PJM Interconnection, Resource Investment in Competitive Markets, May 5, 2016, at 42.