Wholesale market reforms could keep lid on power prices, group says

By the OGJ Online Staff

HOUSTON, Aug. 30 -- A state regulatory group called for an overhaul of US wholesale electricity markets to allow more competition between load management programs and supply responses to help keep the lid on prices.

A report prepared for the National Association of Regulatory Utility Commissioners (NARUC) estimated up to one-half the expected growth in electricity demand in the next few years could be displaced by load management, energy efficiency, and pricing reforms.

But in a competitive market, the report said, generators have no financial incentive to promote either efficiency or load management, and "they profit handsomely from high peak prices." Likewise, wires or transmission companies profit from increased throughput, while energy efficiency programs can hurt the bottom line.

Noting summer US peak load increased 95,000 Mw from 1994 to 1999, the equivalent of adding a new, 6-state New England to the nation's electrical demand every 14 months, the report said projections of future demand will further strain the system, require huge capital investments, and carry a substantial environmental penalty.

Meanwhile, utilities have cut back load management demand-side programs. The industry avoided building 29,000 Mw and avoided electric consumption at a utility cost of less than 3¢/kw-hr in the decade up to 1994, the report said.

But spending on these programs has declined about 50% since 1993. NARUC said "urgent" efforts to restore these programs under crisis conditions are under way in some states, "with attendant logistical, marketing, and cost problems" in an off-again, on-again atmosphere.

In addition, up to 17% of commercial and industrial customers' load could be managed in response to short-term price signals, NARUC estimated, lowering peak demand and electricity costs across regional markets.

Standing in the way is a market organized to block demand-side price signals from market participants, the report said. Because of structural barriers, "neither providers, nor load-serving entities, nor end-users see the real value that demand-side responses can provide the market and the grid," it said.

The report called for a series of changes to reform wholesale electricity market, making them more accessible to load management responses, including:

-- Demand-side bidding should be incorporated into markets, revealing the slope of the demand curve. When this curve is exposed, markets will then clear at lower quantities and lower prices, especially in peak periods.

-- The system used by wholesale markets and wire companies to assign load responsibility should be overhauled so that service providers would have incentives to seek customers who use less peak power.

-- Bidding rules should permit market participants to plan consumption and generation decisions in advance, but they should also permit additional adjustments in response to real-time conditions. The report said this is one of the principal advantages of "two-settlement" or "multisettlement" systems.

-- Wholesale markets for ancillary services should permit demand-side resources to bid their services on a technology-neutral basis in ancillary services markets. Controllable load can provide most balancing services as well as controllable generation, the report said.

-- Proposals to build generation and transmission facilities should be tested against demand-side and distributed resource options to see if they are the lowest cost means to correct reliability problems.

-- With respect to transmission congestion, the costs are often hidden in averaged rates, or paid for through uplift charges to all buyers in a region. Locational prices can reveal the cost of congestion and the value of demand management, according to the report.

-- Electricity rates should be reexamined for their effect on consumption, peak demand, and reliability. Retail rate caps should be modified to align rates and costs and to encourage customers to manage loads better. Wires company rates should be based on performance-based, per-customer revenue caps, not on per-unit price caps.

"Heat waves are natural events, but blackouts and price spikes are the result of government and private choices," the report observed. Energy efficiency investments are a low cost means of "peak proofing," the national electricity system, helping keep it intact during heat waves, cold snaps, and other challenging events, it said.