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Electricity Market Manipulation – Higher Costs, More Emergencies

By June 6, 2023Energy Rant
Image shows shape of Texas and text "Electricity Market Manipulation - Higher Costs, More Emergencies."

East of the Mississippi, we haven’t had a heat-induced stress test of the electric grid for a long time. I don’t remember names, but I remember weather events, places, and numbers well. The hottest summer of my life was 1988, with many days over 100F throughout the summer (every month). Many records fell, and several times on consecutive days. It was relentless. The next steamiest summer was 1995, while I was in graduate school in Madison. The temperature peaked at around 117F with a staggering dewpoint over 80F. It’s bad when sunglasses and bicycles fog over when you take them outside. The most recent hot summer was 2012, but that was nothing like 1988 or 1995.

Could the grid handle another 1988 or 1995 today? My intuition says no. Several consecutive days of 100-degree heat under a high-pressure dome would break the grid. A significant contributor would be the constant tinkering with bulk power markets. Governments and regulators cannot keep their hands off “free” markets, and therefore, they will fail.

A recent case study in market failure was winter storm Uri, which broke Texas’ grid managed by the Electric Reliability Council of Texas, ERCOT. First, the federal government, for decades, has given production tax credits and investment tax credits to wind and solar. This effective subsidy drives down the cost of production, forcing dispatchable generators out of business. I quoted FERC Commissioner Christie’s recent testimony, where he said that the problem isn’t too many renewable resources on the grid but that there is too little dispatchable coal and natural gas generation on the grid. That is a myopic view. It is easy to argue that subsidized renewable generation drove the dispatchable resources out of business, and therefore, too much renewable generation is the problem.

Second, competitive markets cannot adequately reward generators for delivery during stress tests every ten or twenty years, while reserve operating (capacity) margins decline over many years. Generators cut costs to get their resources to clear capacity and energy auctions. This is a double-edged sword that cuts and causes damage in both directions. If a generator fails to deliver, it (the company/investors that own it) gets whacked with a massive penalty that may drive it out of business. The beatings will continue until reliability improves. Generators supplying the PJM balancing authority were hit with $1-2 billion in penalties for nonperformance during last Christmas’s near blackout. The eventual fine total is $1.8 billion, and those generators holding the tickets are pleading to have them dropped.

That brings us to the third reason the grid will fail under a decadal stress test: regulators constantly moving the goalposts and turning the screws on the rickety market. Any request to dismiss fines for non-performance, if they align with the contract, must be rejected immediately. Not doing so sends a signal to more generators to cut costs further to clear capacity auctions and not perform during the next stress test.

Fourth, price caps, especially moving ones, keeps new generation on the sidelines. I will again use ERCOT, which had a price cap of $9,000 per MWh ($9 per kWh, which is, Mmmmm, about 200x the average wholesale cost). After the dominoic grid collapse during 2021’s winter storm Uri, the Public Utility Commission of Texas decided to reduce the cost cap from $9,000 to $5,000. How, in the name of all things holy, will that coax more generation online to avoid the next collapse? When your lips are chapped, stop licking them for short-term gain and long-term pain!

Fifth, last week, Texas Governor Abbott signed into law $1 billion in incentives for generators to be operational during periods of grid stress. This is dubbed a performance credit mechanism, i.e., capacity payments. But they won’t call it that because, for 25 years, Texas declared its energy-only market to be superior to capacity markets. Lawmakers claim, “The $1 billion cap on generator incentives will help protect consumers from dramatically higher bills.” So how does this work? An extra billion dollars will increase or decrease bills?

Texas is hereby schizophrenic. It’s an energy-only market, but generators get capacity payments. Energy prices are capped at $5,000 per MWh. Add revenue here, shrink it there. Nobody, except wind and solar generators, will enter the Texas Market. Oops, they are cracking down on renewables as well. Conclusion: “Free-market” Texas has the most manipulated electricity market in these United States. No sane investor will put thirty years of capital into this house of pain. Result: more shortages

Sixth, the minimum offer price rule, or MOPR, was developed in some markets to establish a minimum price so renewables would not drive reliable thermal power generators out of business. The FERC is on record first to require PJM to expand MOPR and then lose it altogether.

Seventh, if somebody complains about the rules in the middle of the game or they don’t like the outcome, change the rules or do it over. Market participants in PJM complained during PJM’s recent capacity auction, the FERC capitulated to their request. The auction produced “exceptionally high capacity prices” in the Delmarva region. Higher prices fetch more generation, which improves reliability. Well, we can’t have that! My pal, Commissioner Danly, again gets it right, “Consumers reap the benefits of market efficiency and competitive pricing. Those benefits become costs when the markets cease functioning because market participants — and investors — have lost confidence in them.”

I could find a couple dozen additional examples, but competitive markets are doomed because government employees – lawmakers, executives, and regulators cannot resist constant market manipulation. It’s rampant. Investors have no confidence because of these short-term goalpost movements, but also long-term unknowns like access to natural gas markets due to insane wars against natural gas pipelines and bans on connecting new buildings to natural gas distribution. Customers will reap what they sow – higher, more volatile prices, frequent emergencies, and, eventually, outages.

Jeff Ihnen

Author Jeff Ihnen

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