Joshua Macey, Colleague Author Paper on Electricity Capacity Markets
Why Grid Reliability Relies on Improving Electricity Capacity Markets
Extreme weather, including heatwaves and freezes, is stressing electric grids across the United States, threatening to leave millions without power at times when they’ll be relying on it most. Several grid operators, states, and members of the Federal Energy Regulatory Commission (FERC) have questioned whether electricity capacity markets—those that are paid to have sufficient power supply available to meet energy demand—are actually providing reliable energy. A new paper suggests energy regulators have misunderstood the reliability problem: rather than improving monetary incentives for energy suppliers to provide reliable energy, the core issues threatening energy reliability is that nonperformance penalties are too low, and the process for measuring a resource’s expected performance and availability—known as accreditation—should be stricter.
Through exploring the histories of transmission operators like ISO New England and PJM, authors Joshua Macey, an Assistant Professor of Law at the University of Chicago Law School, and Jacob Mays, Assistant Professor of Civil and Environmental Engineering at Cornell, find that penalties for non-performance—or the inability to sell energy at the needed time—have been too low. In cases where multiple failures happen across the grid, the penalty can become even lower as it is shared amongst all entities. Because of this, energy suppliers are more incentivized to overpromise their contributions to energy reliability to make more money, knowing the penalty for non-performance is low. At the same time, the study shows that higher penalties for non-performance may not lead to stronger reliability because suppliers can file for bankruptcy rather than pay the fines. Currently, capacity market’s structure penalties to decrease when failure occurs across multiple entities, instead of rewarding the supplier for providing energy in time of need when others fail, or making those who fail incur larger penalties.
Read more at Energy Policy Institute at the University of Chicago