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With Blackouts in Capacity-Market Dependent PJM, Texas Has Its Answer on Whether It Needs Mandated Reserve Margin (The Answer is "No")
Although the superior policy was already clear for a variety of reasons, the institution of involuntary firm load shed in PJM, due in part to a lack of available generating capacity (click here for story), provides Texas with the inescapable conclusion that requiring a mandated reserve margin to be met is not a solution to resource adequacy issues, and would not prevent rotating outages despite the billions of dollars it would cost Texans (either through a capacity market or other mechanisms).
Simply put: Customers in Ohio, Pennsylvania, and Michigan are paying billions of dollars in capacity payments to meet a mandated installed reserve margin, but were still subjected to involuntary load shed during Tuesday's heat (which although unseasonably warm, certainly didn't result in anything close to an all-time peak and easily should have been met by installed capacity).
This is because, as PJM has conceded, the record demand for September came at a time when many power plants were offline for seasonal maintenance.
In short, while customers in PJM were paying to meet a mandated reserve margin to meet a minimum level of installed capacity, customers had no guarantee that this installed capacity would be available.
And that's what the bottom line is when it comes to resource adequacy, reliability, or whatever you want to call it -- meaning the avoidance of having to call involuntary load shed.
Indeed, PJM's experience is entirely consistent with Texas -- where in the two instances in the last decade that rotating outages have been instituted, installed capacity has been well-above the target reserve margin, and simply mandating that this reserve margin be met would not have prevented the rolling outages. Going back further in Texas history, instances of rolling outages have occurred in times where the old integrated utilities exceeded their minimum reserve margins.
Clearly, load shed events are driven primarily from unforeseen, unanticipated, and unforecast transient events. Meeting a mandated reserve margin is not designed to keep the lights on during such transient events, as has been seen with PJM's experience.
The only way to prevent these involuntary load sheds is therefore to build a dynamic, interactive grid, that allows a greater number of customers to partially reduce load, rather than forcing a smaller number of customers to come completely off the system through rotating outages.
Fortunately, Texas is well on its way to achieving this dynamic grid, through a $2.5 billion investment in smart metering, and reliance on scarcity pricing to send the correct signals to load serving entities, and their customers, to voluntarily reduce load under stressed conditions.
Now is not the time to depart from this successful strategy in order to pursue some white elephant, such as a mandated reserve margin, that has proven it cannot, and will not, keep Texans' lights on.
Instead, Texas should remove barriers to more efficient energy market pricing. This should include evaluation of a price cap in excess of the approved $9,000 level, or elimination of the price cap entirely, expansion of the percentage for eligibility for the small-fish-swim-free rule (or elimination of this threshold entirely), implementation of Loads in SCED or similar mechanisms to allow full participation by load in the real-time energy market, and additional measures to ensure limited reliability-type deployments do not lead to reversal of scarcity pricing. If deemed appropriate, an operating reserves demand curve would also increase the intervals of scarcity pricing to ensure resource adequacy.
Critics say that these measures do not guarantee reliability, but we have just seen that mandated reserve margins do not assure reliability either. The difference is, the mandated reserve margin forces customers to pay billions in excess costs for no tangible benefit and no assurance of reliability, while under the energy-only market with scarcity pricing, customers are not mandated to pay billions in new costs, can hedge their risk and exposure, and are incented to take voluntary actions to reduce load, for their own economic reasons, rather than being involuntarily curtailed.
Finally, it must be noted that the involuntary load shed came in the most mature and generator-friendly capacity market, PJM's Reliability Pricing Model. This is the gold standard that capacity market supporters most often cite as the model for Texas to copy. This is the one with the sloping demand curve, the one with the most robust "buyer-side" mitigation rules, and all the tools needed for "proper" capacity price signals (though generators keep seeking more market design changes to raise the capacity price).
But the point is, this wasn't ISO New England (which came very close to load shed last winter despite meeting its mandated reserve margin due to unavailable, but paid-for, capacity, and which has been forced to rely on out-of-market-solutions for reliability for this coming winter), where capacity market supporters can dismiss any reliability problems as not the result of the capacity market's failure, but rather, poor market design choices (vertical demand curve, insufficient buyer-side mitigation, etc). No, the involuntary load shed has occurred in PJM, which is considered by capacity owners to be the best-designed capacity market. If PJM's capacity market can't keep the lights on any more than an energy-only market, can any capacity market?
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September 12, 2013
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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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