Higher electricity prices have drawn sharp attention to the design of organized wholesale electricity markets—particularly to areas where residential customers’ rates will increase because multi-...
Locational pricing makes the network secure, since the utilities and other market participants get 'paid' to monitor the grid.
The recent pressure on the board and stakeholders of the Midwest Independent Transmission System Operator (MISO)-to postpone the startup of energy markets and concentrate instead on "reliability"-is truly unfortunate. It allows opponents of restructuring to continue to pose a false choice: You can have markets or you can have reliability, but never both.
Such rhetoric has a nice ring, but that's about all. It's like faulting your quarterback for not being a team player because all he does is pass for touchdowns.
In reality, we've learned just the opposite-that reliability and commercial efficiency are not only compatible, but also mutually reinforcing.
Of course, ever since the blackout of Aug. 14, 2003, we've seen regulators, politicians, and company executives embrace reliability as the one issue needing attention. That is easy to understand. We should welcome it but not get sidetracked by "solutions" that hold out little promise.
For example, among the most discussed solutions today are legislation (mandatory reliability standards), investment (massive transmission upgrades), and capital redeployment (boosting distributed generation, to bring resources closer to load). Such solutions are worth examining. Some may even be desirable. Yet they do not offer the fastest, surest, and most efficient way to enhance the reliability of the North American electric grid.
What's missing in these proposals is what we've learned through actual hands-on experience: that a competitive price for power, derived honestly from bids of willing buyers and sellers, will actually enhance reliability-provided (and here's the kicker) that the price reflects the actual physical state of the grid. And how is that discovered? Through a regional dispatch constrained by the demands of network security and communicated freely to all market participants.
The concept is simple and elegant: The market in effect "pays" the utilities and traders to monitor the condition of the grid with every transaction. And what's more, this fix is already well known in our industry. It's called locational marginal pricing (LMP).
Some still persist in separating the notion of reliability from the economic incentives we offer to transmission customers. That's not smart. In truth, LMP markets go beyond economics. LMP markets actually help ensure reliability.
Standards: Not Enough Incentive
Much has been made of the lack of mandatory reliability standards and penalties in most of North America. 1 However, it is doubtful that this would be the fix for reliability that many think they will be.
For an illustration as to why this might be so, assume it is a hot day all over the Eastern Interconnect (one of several consecutive ones) and a utility that might be short is tempted to "lean" on the system rather than purchasing in the very expensive bilateral market. Under very plausible scenarios, the utility could save millions of dollars in a single day by using "inadvertent" energy produced by other utilities and generators in the region. By meeting its customer needs by procuring power in this manner, the utility would probably affect the region's frequency, which