One of the most egregious aspects of ISO-NE’s capacity payments design is to make capacity payments to wind projects. Wind cannot guarantee performance in the future. Those payments are an outright gift at ratepayers expense.
Meredith, Herman Wouk, in his play "The Caine Mutiny Court Martial", described the Navy as: "a master plan designed by geniuses for execution by idiots."
We appear to be proceeding, without a master plan, to create an electric grid designed by idiots for execution by geniuses. Unfortunately, I expect we will discover that we have a significant shortage of the required geniuses.
Ex nuclear machinist mate here. I've always believed that the navy was amazing in it ability to teach completely unskilled teenagers how to run and service some of the most complex systems in the world.
Good write up Meredith, I remember the moniker "Reliability through Markets", one of the many attempts to control the grid by CAISO. It was nearly always a train wreck.
The idea of designing markets using theoretical models reminds me of Elinor Ostrom’s classic, Governing the Commons. Here’s a quote:
“The intellectual trap in relying entirely on models to provide the foundation for policy analysis is that scholars then presume that they are omniscient observers able to comprehend the essentials of how complex, dynamic systems work by creating stylized descriptions of some aspects of those systems.”
Market design is wholly compatible with Ostrom’s insights—all existing RTOs/ISOs have evolved over time in response to experience, rules and rule changes are often driven by users who simply want the market to do its job.
There are problems to be sure, but the core market design is security constrained bid based economic dispatch as developed by engineers and economists in the 80s and 90s. Capacity markets have been a constant problem, but they are not part of the core energy market design.
Good article Meredith. It reminds me of the difference between planned communities and those grow organically. Milton Keynes in the UK was a joke for many years for things such as concrete cows. It has emerged as something more of a success in large part because of some of the smart urban planning elements such as the grid. Putrajaya in Malaysia is another example of a planned city. I guess some plans are better than others but “market design” is bit of an oxymoron.
As one of the people who made a recent post disagreeing with Meredith's take on RTO markets in her book (although I like her book), I thought I would provide a brief disagreement with this post as well.
Markets have always had rules, whether by custom or law. For example, the ancient Romans had rules about the weights and measures used in markets, much like the street market in Meredith's picture, that were intended to prevent fraud. These rules constitute the markets' design, even if not created by market designers.
For many years, the market design in the electric industry was cost-based sales, with the costs reviewed by the local regulator or by FERC, depending on the nature of the transaction. These rules benefitted the many lawyers and consultants who litigated the rate cases needed to determine the cost-based rate, some of which droned on for several months. Did the design benefit ratepayers? Not always. The rates customers paid always included the costs of the rate litigation, and in the late 1970s cost-based regulation resulted in high rates, including the costs of large nuclear and other generation facilities whose construction was abandoned because it turned out the plants were not needed. It was because the cost-based rate market design was seen as failing customers that the industry moved to one that is characterized as "market-based," although the markets continue to be highly regulated.
Which gets us to the markets run by RTOs. The mere fact that those markets have a market design does not tell us whether their markets are good or bad. Rather, you have to evaluate the design of the market. I don't know anything about the FCC market that Meredith describes, but it seems like that was a bad market design. As I explain in my post on my Substack (Explaining the Grid), the RTO markets are designed to set prices at the marginal cost of producing energy or capacity, which is what classic economic theory posits is the most efficient market price, regardless of the technology involved. I happen to think that is a good goal, others are free to disagree. The RTO markets are struggling with how to deal with highly subsidized wind and solar generation. No good solutions have yet been found, and for a while at least it was political poison to even try. So that is a problem with RTO market design.
But if we want to abandon the RTO markets, then we will have to replace them with other markets with their own designs. They won't necessarily be better or worse. It will depend on the design.
I think market systems can be designed well but I feel that electricity has proven not to be a service that it works for. As in your book prices have not fallen in RTO areas, but actually risen a bit relatively. More importantly, even if a market can efficiently deliver a more ideal system eventually, I think that Texas has shown that the consequences of learning how to do it can easily outweigh any potential benefit
Winter Storm Uri cost Texas $200 billion dollars and over a thousand deaths. I believe recent estimates of the "levelized cost of blackouts" are around $30,000/MWh. It's totally impossible for individual market participants to pay these prices so the tragedy of the commons, which markets are supposed to avoid, means that you have to use special rules to try to get the reserve capacity and reliability built into the system that the market can't
These costs are so high that it calls into question the potential benefits of a leaner market oriented system. After reintroducing more reliability and reserve into your system after finding out that it was too far cut to the bone, your theoretical payback time for the costs of introducing the system and experiencing failures must be tremendously long
One of the most egregious aspects of ISO-NE’s capacity payments design is to make capacity payments to wind projects. Wind cannot guarantee performance in the future. Those payments are an outright gift at ratepayers expense.
Meredith, Herman Wouk, in his play "The Caine Mutiny Court Martial", described the Navy as: "a master plan designed by geniuses for execution by idiots."
We appear to be proceeding, without a master plan, to create an electric grid designed by idiots for execution by geniuses. Unfortunately, I expect we will discover that we have a significant shortage of the required geniuses.
My husband and I both got a good chuckle out of this!
Blue Jacket’s Manual forever!
Ex nuclear machinist mate here. I've always believed that the navy was amazing in it ability to teach completely unskilled teenagers how to run and service some of the most complex systems in the world.
Like a nuclear reactor.
And all done with sliderules
Love this comment - good one!
Good write up Meredith, I remember the moniker "Reliability through Markets", one of the many attempts to control the grid by CAISO. It was nearly always a train wreck.
The idea of designing markets using theoretical models reminds me of Elinor Ostrom’s classic, Governing the Commons. Here’s a quote:
“The intellectual trap in relying entirely on models to provide the foundation for policy analysis is that scholars then presume that they are omniscient observers able to comprehend the essentials of how complex, dynamic systems work by creating stylized descriptions of some aspects of those systems.”
Market design is wholly compatible with Ostrom’s insights—all existing RTOs/ISOs have evolved over time in response to experience, rules and rule changes are often driven by users who simply want the market to do its job.
There are problems to be sure, but the core market design is security constrained bid based economic dispatch as developed by engineers and economists in the 80s and 90s. Capacity markets have been a constant problem, but they are not part of the core energy market design.
Good article Meredith. It reminds me of the difference between planned communities and those grow organically. Milton Keynes in the UK was a joke for many years for things such as concrete cows. It has emerged as something more of a success in large part because of some of the smart urban planning elements such as the grid. Putrajaya in Malaysia is another example of a planned city. I guess some plans are better than others but “market design” is bit of an oxymoron.
Thank you for the Mirowski/Nik-Khan book reference. Reading now.
Great to see you discussing mirowski in relation to RTOs!
As one of the people who made a recent post disagreeing with Meredith's take on RTO markets in her book (although I like her book), I thought I would provide a brief disagreement with this post as well.
Markets have always had rules, whether by custom or law. For example, the ancient Romans had rules about the weights and measures used in markets, much like the street market in Meredith's picture, that were intended to prevent fraud. These rules constitute the markets' design, even if not created by market designers.
For many years, the market design in the electric industry was cost-based sales, with the costs reviewed by the local regulator or by FERC, depending on the nature of the transaction. These rules benefitted the many lawyers and consultants who litigated the rate cases needed to determine the cost-based rate, some of which droned on for several months. Did the design benefit ratepayers? Not always. The rates customers paid always included the costs of the rate litigation, and in the late 1970s cost-based regulation resulted in high rates, including the costs of large nuclear and other generation facilities whose construction was abandoned because it turned out the plants were not needed. It was because the cost-based rate market design was seen as failing customers that the industry moved to one that is characterized as "market-based," although the markets continue to be highly regulated.
Which gets us to the markets run by RTOs. The mere fact that those markets have a market design does not tell us whether their markets are good or bad. Rather, you have to evaluate the design of the market. I don't know anything about the FCC market that Meredith describes, but it seems like that was a bad market design. As I explain in my post on my Substack (Explaining the Grid), the RTO markets are designed to set prices at the marginal cost of producing energy or capacity, which is what classic economic theory posits is the most efficient market price, regardless of the technology involved. I happen to think that is a good goal, others are free to disagree. The RTO markets are struggling with how to deal with highly subsidized wind and solar generation. No good solutions have yet been found, and for a while at least it was political poison to even try. So that is a problem with RTO market design.
But if we want to abandon the RTO markets, then we will have to replace them with other markets with their own designs. They won't necessarily be better or worse. It will depend on the design.
Great article - once again you have raised the bar for us all. Much more reading necessary to follow up on this one - thanks!
Wonderful piece, thank you. There is so much that goes into where we are as a society about what has brought us to this difficult place.
I think market systems can be designed well but I feel that electricity has proven not to be a service that it works for. As in your book prices have not fallen in RTO areas, but actually risen a bit relatively. More importantly, even if a market can efficiently deliver a more ideal system eventually, I think that Texas has shown that the consequences of learning how to do it can easily outweigh any potential benefit
Winter Storm Uri cost Texas $200 billion dollars and over a thousand deaths. I believe recent estimates of the "levelized cost of blackouts" are around $30,000/MWh. It's totally impossible for individual market participants to pay these prices so the tragedy of the commons, which markets are supposed to avoid, means that you have to use special rules to try to get the reserve capacity and reliability built into the system that the market can't
These costs are so high that it calls into question the potential benefits of a leaner market oriented system. After reintroducing more reliability and reserve into your system after finding out that it was too far cut to the bone, your theoretical payback time for the costs of introducing the system and experiencing failures must be tremendously long
This is a fine debunking of a pernicious myth, Meredith. Well done.
Brava!