Different Resources, Different Thinking - Electricity Market Redesign

When electricity markets were established in the 90s, it was a synchronous world, but that ain't the world of the future

Photo by Susan Gold on Unsplash

Our Synchronous Past

When power industry deregulation began in the mid-1990s, essentially all generating resources were synchronous generators. They provided both energy and the essential reliability services we need to maintain reliable grid operations - frequency support (inertia) and voltage support (VARs). So, when electricity and ancillary services markets were originally designed, it was an implicit assumption that these essential reliability services were included in the energy offered into markets by generating resources - they were just part of the package. As long as markets delivered resource adequacy, it could be assumed that markets would also deliver reliability.

But things have changed. Inverter-based resources (IBR - wind generation, solar generation, and battery energy storage systems) have gone from non-existent 20 years ago to increasingly large proportions of the resource mix, and the physical attributes of these generating resources are very different from the synchronous resources our original markets were designed for.

While IBR provide lots of energy, they do not provide the same essential reliability attributes as synchronous resources, and this is creating many operational challenges for system operators. I’m confident that this will change over time as we learn to harness the capabilities of power electronics through grid forming inverter controls and other technological advancements, but this will take some time to develop.

Different Resources, Different Thinking

In Alberta, as in many other jurisdictions, the change in resource mix is driving the need to redesign our electricity market to maintain resource adequacy, reliability, and operability, and this effort has already been initiated by the Alberta Electric System Operator (AESO).

As the redesign discussions progress, my hope is that we take this opportunity to truly think differently about the resource mix of the future, and not let our old paradigms and assumptions bias how we think about market design changes. We will have a resource mix with fundamentally different physical characteristics going forward, so we must be cautious not to simply apply traditional thinking and solutions to new problems.

We must strive to make market design changes that are resilient to future uncertainties. To do this, we must avoid anchoring bias, which is a bias toward existing information and past experience when making decisions about the future.

Questions To Consider

When I try to think differently about electricity markets, these are some questions that come up for me:

• Have we spent enough time defining the problem(s) we’re trying to solve, or are we already anchored on solutions?

• Is there a simple way to include frequency and voltage support in the economic price signal so that generators offer not only energy, but a “bundle” of attributes into the electricity market? For instance, similar to markets that trade different grades of crude oil (WTI and Brent), perhaps we can “grade” energy based on its characteristics, so that energy that includes inertia and VARs is valued higher than energy that doesn’t include these other characteristics. A MWh of energy from a synchronous generator has a higher operational reliability value than a MWh of IBR energy, so how can we signal this economically?

• How can we think differently about the role of ancillary services? Should we differentiate between the services required for contingency management and regulation and those required for managing the variability caused by weather-dependent variable generators?

• Should the system operator employ a minimum real-time system inertia level as an operational “reliability limit” to ensure that the generation mix that is dispatched via the merit order maintains a minimum acceptable level of reliability and operability? Just like price caps and floors, should we establish a “reliability floor”?

• Should variable resources be responsible for firming their variability, either via on-site energy storage or via paying for the necessary incremental ancillary services?

• How can we keep it simple? What are the minimum number of changes we can make to our energy-only and ancillary services market designs to get markets that provide both reliability and energy? In other words, can we retain the simplicity of Alberta’s existing market design that has served us so well for all these years?

• What does “success” look like for our market 10 years from now?

Final Thoughts

In Alberta, our relatively simple energy-only electricity market and ancillary services market have served us well for 20 years. These markets were based on the assumption that most, if not all, of the generating resources implicitly provided frequency and voltage support, but that assumption is no longer valid. We asked for energy only and now, quite frequently, that’s what we’re getting - only energy. We got what we asked for :-)

So the question is, what should we be asking for now?

PS: For those who continue to insist we need a capacity market, I’ll remind you that Alberta has always had one. Its called the ancillary services market :-)