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⚡"Market Design for the Energy Transition"

The Energy Transition Show

Photo by Matthew Henry / Unsplash

Table of Contents

Host: Chris Nelder
Guest: Eric Gimon | Energy Consultant
Category: ⚡ Renewable Energy

Podcast’s Essential Bites:

[6:39] “Ever since I got involved in the modeling of high variable energy systems […] I've been kind of fascinated with this idea [that] if the model is telling you that you can put these resources together to make an economically viable system that meets the needs of consumers, why does the economic model, the pricing model not seem to work? Where's the disconnect? And it slowly dawned on me over time that a lot of the disconnect in people's minds […] is that people think too much about the short term market, the real time market. What is the price of electricity at a given five minute interval or hour interval, and so on? Which is set in terms of the marginal cost of electricity in that moment. So where people really get going on these […] theories is like, the marginal cost is zero and so these resources are dominating, therefore, this market can't work, because the price is going to be zero all the time, then really high the rest of the time.”

[7:45] “Now, the thing is that people don't finance resources directly from the real time market, that would be a crazy man thing to do. People enter contracts, and they have counterparties on contracts. And so people interact with the market at a distance through long term instruments. And so it led me to this idea of power markets as not just what's happening in real time market or day ahead market. But really the whole sequence of economic activity and transactions that precedes that. And each activity in this sequence affects the next. So if you think about real time, you have to think about day ahead markets, if you think about day ahead markets, you need to think about monthly futures, and the trading activity going on and monthly futures. And then there's your head commitments, and then you get further and further up to long term markets, where you have PPAS, or hedges and so on, that are really contracts that span a large number of years, 10 to 25 years. And each of these markets kind of depends on the other. And if you want to have the proper context for thinking about the impact of zero marginal cost resources on markets, you have to think about that whole cascade.”

[9:11] “One way to understand this is maybe in terms of something like the lunar lander game. So if you go to a Space Museum, […] there are these games where you're supposed to be Neil Armstrong, and you're landing the lunar lander on some surface. And you've got the camera from the lander looking down the surface of the moon, and you've got an indicator how fast you're going and your inclination […] eventually you land the lander without crashing. And moving from kind of when you first invest as a generator or you participate as the load all the way to the real time moment, there are a number of activities that correspond to kind of adjusting these little rockets or making attitude adjustments. And the way you do that is through these markets. So you have a rough sense of your need 10 years out, maybe a couple years closer, you realize you've lost some customers, you gained some customers, you adjust. You get into the actual year, you have a better understanding of how your wind and solar might perform and in what you might be missing or not missing, you adjust again, and you keep adjusting. And at the end of the day, you land the lander, you meet supply and demand in real time, and everybody's happy, theoretically.”

[10:24] “Now, what makes that work? Well, the first thing that makes that work is that throughout this thread, you're talking about a common commodity, the kilowatt hour that gets delivered. So that every time you're trading and adjusting, you're adjusting and trading and the same thing. You don't want to start at 20 years out, and then you get to three years out, and suddenly you're talking about a different thing.”

[10:46] “The second thing is, in a market oriented design, you're depending on having a multiplicity of actors participating in the market that gives you information about what's valuable, what's not valuable. How much is it worth to generate at 4pm versus 2pm, or in July versus February, and so on. And the idea is nobody's got perfect information. The market collects that information by having a number of transactions that settle on a price. But that's really dependent on people interacting in that kind of voluntary way. If you force people to buy 10 years out, and then they have to buy again, a day out, they're making very different kinds of decisions. Whereas if they're 10 years out, they're making a guess on their end as to why it is worth locking it into a contract now versus later. […] And so there's an equilibrium, a balance that happens between the various markets in the cascade that's very dependent on this voluntary structure.”

[11:48] “And then finally, the third principle is about equal access, non discriminatory, transparent, and liquid. […] These markets really depend on bringing in the wisdom of the crowd, bringing in a lot of different actors and players, and being aware of what other people are doing. If you start segregating and siloing the information, then that information sharing is not happening. And that market can't do a good job of basically bringing up a price that's reflective of the broad realities in the context. So the three of those together […] are quite important in making the cascade work, but they don't actually exist in the systems today.”

[13:20] “I like to think of the US today as […] three broad categories in [the energy] market. There's an energy only market, which is basically Texas. There are capacity market constructs that we see in the Northeast […]. And then there's these hybrid markets, like in the Midwest […] and in the West […]. So I would say Texas […] is probably the closest to embodying this cascade that I'm talking about, but no market is perfect. […] But it's interesting to me that a state that is so pro oil and gas and and really not so excited about green is deploying just as many, if not more wind and solar than California, which extensively is the bluest of states and wants to be better than everybody else in the class. And I think a lot of that comes down to the efficiency of their market design, which hopefully they won't blow up in an effort to support oil and gas.”

[14:31] “And then second, you have the energy markets, the mandatory capacity markets. So these markets have done a really great job at working on equal access, transparency, liquidity, and I think they can be proud of that. But where they tend to fail, is in the other principle voluntary and commodity. […] Participation in the capacity markets is not voluntary. […] The point is capacity markets represent a significant part of the revenue going through his energy markets. So the fact that that is not a voluntary decision on the part of the loads, is problematic for this energy cascade. And effectively, what it does is creates this new product called capacity that's not really directly tied to energy or energy provision. And so it means that you're doing your risk management now through two sets of commodities, the energy commodity, and this capacity commodity. And in the past, maybe that wasn't so much of a problem. But as the resources become more and more heterogeneous today, it's creating more and more issues.”

[16:14] “And then finally, the hybrid markets are a little harder to get your head around. […] Really, the resource adequacy problem is done at kind of a state level. And a lot of the participants in those markets are actually monopoly utilities that have guaranteed return on […] their generating assets. And so each state looks at their capacity needs in their own way, and is very reluctant to lean on the overall system.”

Rating: ⚡⚡⚡⚡

🎙️ Full Episode: Apple | Spotify
🕰️ 40 min | 🗓️ 10/13/2021
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