Examining Market Structure for Electricity

Examining Market Structure for Electricity

When they were formed twenty years ago, RTO/ISOs were supposed to develop competitive markets for electricity that resulted in the lowest possible price for electricity for consumers in the regions covered by RTO/ISOs.

As shown in an earlier article, the RTO/ISO auctions are structured to favor wind and solar over baseload power plants, whether they be natural gas, nuclear or coal-fired. The auctions have been driving nuclear plants out of business. See, The Market for Electricity is Rigged 

An important policy question is: 

Have the RTO/ISOs achieved their intended purpose of achieving low-cost electricity for consumers? 

If not, they have failed.

Using data from the Energy Information Administration (EIA), its possible to determine whether RTO/ISOs or traditional regulated markets have achieved the lowest cost electricity for consumers.

This illustration shows the location of the seven RTO/ISOs and the states they serve. RTO/ISOs provide electricity to two-thirds of the population, while traditionally regulated markets provide electricity to the remaining third.

Listed below in the table are the seven RTO/ISOs and the traditionally regulated areas with the average price for electricity in 2003 and in 2017, together with the percent increases for each region and area.

At first blush, it would appear that RTO/ISOs have failed to deliver the promise of low prices for electricity.

As a group, RTO/ISOs had a 64% increase in the residential price of electricity, while traditionally regulated markets only had a 53% increase.

But two of the RTO/ISOs only had a 30% increase, which leaves open the question as to whether RTO/ISOs have failed.

A closer look at these two RTO/ISOs shows that the NYISO had a disproportionate share of its electricity, 22%, generated by hydro. All the other RTO/ISOs only had very small percentages from Hydro except CAISO, which had 12.3%.

This large amount of hydro provided an anchor for prices that stabilized them. The new NY State mandates for wind and solar, etc., will show whether the NYISO can continue with only modest price increases.

An examination of ERCOT data did not establish any obvious reason why ERCOT was able to keep price increases at bay. It wasn’t wind and solar, because ERCOT only had the third highest amount of wind and solar in 2018, at 18.6%, while CAISO had 22.9% and SPP had 24%.

It’s fair to conclude, that RTO/ISOs, in general, have failed to achieve the lowest possible price for electricity, but that there may be situations where an RTO/ISO can succeed.

Because RTO/ISO auction markets are rigged, and are driving baseload power off the grid, it’s important to look deeper into the data.

In general, RTO/ISOs have failed to achieve the lowest prices possible for electricity, so the question remains, should we abandon RTO/ISOs for traditionally regulated markets?

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2 Replies to “Examining Market Structure for Electricity”

  1. Hi Donn.
    Good article and interesting evaluation!
    I thought about one thing, then I decided I was wrong, but still, I think my first thought had some validity.
    NY-ISO, ERCOT, and CAISO are ISO’s that cover only one state. In my opinion, such ISOs can act more like the old-style regulated utilities. That is, they have a clear mandate to keep the costs down for the people of that state. They have no excuses.
    The multi-state ISOs, on the other hand, can always blame some other state or the ISO itself for their high prices. It reminds me of the famous line from Thatcher about “running out of other people’s money.”
    So, I was very happy with this thought about one-state ISOs.
    And then, I remembered California!
    But I still think there is something to my one-state comment. However, in California, ideology can override almost everything else. (I used to live in California.)

    • Thanks. I haven’t seen anything to distinguish one state ISOs with multi-state RTO/ISOs. They use the same auction structures and have similar policies. The only distinction that I do see, is that multi-state RTO/ISOs each state may impose different out of market mandates.
      I’m looking forward t your book.