…Fixing the Rigged Market for Electricity…
The simplest and best way to fix the rigged market for electricity is to return to the regulated market system still used by one-third of the country. See, The Market for Electricity is Rigged
Assuming, for a moment, this isn’t possible, several steps will be required to fix the market for electricity, but a simple first step would be to pay the bidders their bid price.
Everyday, each RTO/ISO conducts a day-ahead auction where each bidder submits its lowest offering price for every five minute increment of the day.
Here is a chart from the New England Independent System Operator’s website.
Let’s make the following assumptions.
Bidders A, B and C are from wind and PV Solar suppliers, while bidder D is a natural gas combined cycle (NGCC) supplier.
Wind and PV solar suppliers receive other payments or grants to cover their costs and can, as a result, bid as low as $0, though they may bid somewhat more.
Because of this, wind and PV solar are always the winning bidders as long as wind or solar is available. For example, if the sun isn’t forecast to shine there may not be a PV solar bidder.
Bidder D, in this example, is the marginal resource or price setter.
Typically, when there are no more wind or PV solar bidders, the next bid will be from an NGCC supplier because their costs are usually lower than bids from nuclear power plants.
Let’s assume Bidder D bids 6 cents per kWh.
As ISO NE notes on its website, D is the price setter and gets paid 6 cents per kWh for the electricity they produce.
But, bidders A, B, and C also get paid 6 cents per kWh.
Why are they being paid more than they bid?
Wind and PV solar providers merely need to be sure they bid below whatever any other supplier bids to guarantee they still get paid whatever the marginal resource or price setter bids.
And they can nearly always bid lower because they have other sources of income.
Wind for example, gets paid the production tax credit of 2.3 cents per kWh for every kWh they produce. They just need to be sure to win the bid so they can generate the electricity for which they get the 2.3 cent per kWh subsidy.
Paying bidders what they actually bid would help level the playing field.
Currently, the bidding system is a sham, even though the bidding process, known as a uniform clearing price auction, is common in auctions involving commodities.
However, this type of auction isn’t suitable for the electricity market.
A true commodity, such as wheat, is identical whether its grown in Iowa or Nebraska.
The problem with attempting to use this type of auction in the electricity market is that electricity from wind and solar isn’t available 24/7.
The bushel of wheat is available 24/7.
While seemingly subtle, the difference is huge.
A natural gas combined cycle or nuclear power plant can guarantee electricity is available 24/7.
It’s impossible for electricity from wind and solar to be available 24/7, unless sufficient storage is available to store enough electricity generated by wind or solar to make it available 24/7 … And that cost is huge and not included in the auction. See, Four Minutes for $150 million, for a discussion of storage.
The RTO/ISO’s are very opaque with the information they provide about the auction system, including obfuscations that impede understanding how the system works. See, From the Horse’s Mouth
Other writers who have written on RTO/ISO auctions include Meredith Angwin and Willam Post.
- I’m waiting for Meredith Angwin’s new book, Shorting the Grid, that should be out later this year as it will provide considerable information on this subject.
- Today’s article used information from William Post’s article “How Resources Are Selected And Prices Are Set In The Wholesale Electricity Markets.”
Summary
The type of auctions used by RTO/ISOs for determining whose electricity to purchase for use on the grid is not suited for the electricity market.
The process is rigged in favor of wind and solar even though they are unreliable and incapable of guaranteeing the availability of electricity 24/7.
The market is not competitive.
The uniform clearing price auction system is destroying the market for nuclear power and is unfairly rewarding wind and solar in preference to other methods that can guarantee the availability of electricity 24/7.
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Absolutely correct.
When I first learned about it, I could not believe it.
Rigged to the nth degree.
Wind and solar can bid a minimum MWh for those 5 minutes and will likely satisfy the bid.
Solar just stops bidding 70% of the hours of the year when solar in minimal.
Many thanks for your comment, and for the work you do in this area.
“Pay bidders what they bid” seems like a marketable slogan for legislation.
Who/how was it decided to use the uniform clearing price auction, which treats firm energy with intermittent energy?
Has any economist (like Jesse Jenkins?) done a study of “pay bidders what they bid”?
Don’t the “regulated” nonISO markets use the same auction policy?
I agree with the pay what they bid is fair.
I don’t know the answer to the next two questions.
Regulated markets have prices set by the regulators with the utility managing supply to meet demand. This is how it did work, and I’ll find out if there have been any changes.
It appears to me that a baseload supplier (e.g. coal, nuclear) should be able to bid on 24 hour blocks and the ISO would have to take the whole 24 hour block at the bid price (for 24 hours) if they wanted any of it.
Thanks for your comment. That would seem appropriate, but it’s not how the system works.