IEEE Power & Energy Magazine - November/December 2017 - 28

A key question in adapting the wholesale markets is whether
the full set of market products is sufficient to facilitate the relatively
efficient entry and exit of resources while also ensuring reliability.

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In some markets, the impact of renewables is very clear.
For example, as shown in Figure 3, by May 2017 the more
than 9 GW of grid-connected solar production in CAISO-
combined with more than 6 GW of solar behind-the-meter
and high hydropower conditions-had pushed average dayahead energy prices during solar production hours down to
nearly zero (the prices were actually negative during many
hours, but on average they remained above zero). Although
low electricity prices may be good for wholesale buyers,
such prices make many existing generation plants unprofitable in the short run, resulting in their planned or threatened retirement.
Herein lies a key challenge for renewable expansion in
competitive markets. Weather-driven energy sources exhibit
variability among multiple time scales. Their output can
change based on diurnal patterns and seasonal trends and as
a result of larger global weather events, such as the El Niño
southern oscillation. The challenges become how to 1) design
market rules and operating schemes that take advantage of
wind and solar when they are available, while ensuring sufficient operational flexibility from all resources, and 2) ensure
that adequate capacity is available during times when the sun
does not shine and the wind does not blow.
The potential solutions to these challenges are likely to
lead to new types of market arrangements (as already evident in several regions), but starting with adaptations of
existing wholesale market designs. Transparent prices for
the range of power services are still the best guide to what
is happening on the grid. The degree of regulatory and market modifications will be influenced by the timing of the
changes in power system operations and markets-i.e., these
systems were originally intended to respond to incremental
changes in the overall stock of infrastructure, but renewable

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figure 3. CAISO's Southern California Edison load
aggregation point prices (hourly averages), January-April 2017.
28

ieee power & energy magazine

expansion is happening extremely quickly in some regions
and so requires a rapid market design response.
A key question in adapting the wholesale markets is
whether the full set of market products is sufficient to facilitate the relatively efficient entry and exit of resources while
also ensuring reliability (recognizing the fact that, depending on the region, renewable resources are entering markets
with financial incentives or procurement requirements different from those of conventional resources). The metric is
revenue sufficiency: if one source of market value declines
but the resource is needed for operations and/or reliability,
then another revenue source must be available. Hence, as
wholesale energy loses value for the reasons described previously, markets for capacity, ancillary services, and other
reliability services can help pick up the slack.
Of these, the most important will be capacity payments, which (after energy) constitute the largest source of
resource revenue in most U.S. ISO markets (Texas being
the exception). Capacity markets have proved difficult to
design: challenges include 1) how to pay for the needed
capacity but still value some surplus and 2) how to limit
capacity payments to only the amount needed, in addition
to other energy market revenues, while keeping the generators available and operable. However, capacity markets
have attracted new types of resources-notably, demand
response-and their role as a backstop for keeping existing conventional generation revenue sufficient is likely to
become more important.
Several factors now considered in only a limited fashion
by most wholesale market designs will have to be improved
to make this transition work. First, renewable resources themselves will have to be accurately rated for their contribution
to resource adequacy. ISO market operators have only a few
years of experience with the simulations needed to calculate
wind and solar effective load-carrying capability; most still
rely on simpler approximations. If a wide range of possible
capacity contributions arises as a function of weather, then, as
renewable capacity expands and more is counted toward capacity requirements, longer-term capacity mechanisms might be
required to provide payments to conventional resources (which
are needed despite declining energy market value). Most ISO
capacity markets are one year or three years ahead. Are longerterm arrangements needed, based on renewable energy penetration forecasts? In addition, in markets such as California,
capacity requirements and value are also being affected by
behind-the-meter solar, over which there is currently little control or production forecasting.
november/december 2017

Table of Contents for the Digital Edition of IEEE Power & Energy Magazine - November/December 2017