Volatility in the Power Markets Inevitable
Last week, I spoke at the Flexible Power Symposium. I will note for my readers that I was rated as one of the highest speakers for the symposium. Many told me first hand, I was the best speaker. Speaking on a stage is natural for me, given my youth background as an aspiring actor. I had the privilege of attending the High School for the Performing Visual Arts in Houston. However, my analytical mind got the best of my aspirations as I looked at my probabilities of success and my required income.
Nonetheless, my talk consisted of laying out the issues confronting the energy markets. I titled my presentation “Unintended Consequences from Good Intentions in the Electric Markets”. As typical of my style of presenting, the slides were much less important than what I had to say. I focused on the three areas on which, as a society ,we should strive for in the electric markets – Renewables, Environmental Policy, and Better Market Design. I made it clear to the audience, I am pro-renewable and environment, but I am also cognizant of the trade-offs. This is probably where I may lose some of you. The externality of the fossil generation is real. The plant is emitting potentially harmful chemicals. However, as in life, there are trade-offs and the corresponding externalities. Extreme environmentalists like to ignore this other side of the equation. Having low cost generation, though more environmentally harmful, offer externality factors of greater expanded use of power which can generate jobs, save lives, and include making society feel better (e.g. comfortable temperature). As I noted in my discussion of the MATS rule by the EPA, our choices to spend for environmental improvements need to be balanced with alternative for use for that capital (financial and human). In addition we really need to understand what our goals are when we plan to spend resources.
Many speakers ahead of me already discussed the variability of renewables in terms of generation. The interesting points in the variability discussions, the wind is hourly whereas the variability of solar is in minutes. In addition, wind is quite spatially consistent. Wind blows simultaneously at the same levels for large regions. Whereas solar can have some balancing effect if there is large regions of solar. I also pointed out the choice of renewables given the higher cost, does take away from the economy as energy is only a means to an end. Many models only consider the wholesale power price, but given renewables are largely done through power purchase agreements (PPA) which are rolled into rates wholesale power prices are less relevant when it pertains to consumer pricing.
Environmental policy already in effect will retire coal units. Many of the coal units support many of the ancillary services: of the electric market – load, following ability, voltage and reactive load support, unit frequency response and system restoration or black start. In a Catch-22, the price signals of each of these services are essentially non-existent due to the large sunk cost in these facilities. There is bound to be a bumpy path as the units get removed from the system and the price signals for investments in these services catch up.
Market design, to regulate or to de-regulate, that is the question. I talked about the pros and cons. Ultimately many markets are already on the path of de-regulation. These markets are bound for market volatility as returns required for investments are higher in de-regulated environment. In addition, high return industries naturally move in business cycles (over to under investments).
In conclusion, given the three areas of renewables: environmental policy, market design, and the future electric markets are bound to see volatile pricing. There will be winners and losers. The losers may be the rate payers as they could see higher prices with less reliability. The winners will be those who have the flexibility and the forethought to skate to where the market will be not where it is now.
Please do consider All Energy Consulting to help you understand where the markets will be and how best to align your organization to capture the change.
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