Vince Duane spent almost 17 years as general counsel at PJM, the nation’s biggest RTO. But he now says the RTOs’ market model — based on single-price clearing auctions and locational marginal prices — no longer works in a world of renewable resources with little or no operating costs that don’t respond to price signals.

In a new paper Duane and former FERC Commissioner Tony Clark, a senior adviser for law firm Wilkinson Barker Knauer, challenge what they call the “the prevailing orthodoxy … that the road to the decarbonized, advanced technology grid of the future goes through a Regional Transmission Organization.” Duane, ousted from PJM in the wake of the GreenHat Energy default, is now principal of a consulting firm, Copper Monarch.

“The cracks in the foundations of RTOs are not just cosmetic,” they write, saying “regulators and the RTOs themselves need to reassess wholesale markets from the ground up as the electricity delivery system transitions to a grid much different from the one of the past.”

The authors explicitly challenge nine former FERC commissioners who wrote a joint letter last month urging the commission to expand organized markets to the West and Southeast to aid decarbonization efforts and save ratepayers money. “Organized markets are more essential than ever as our nation decarbonizes the power sector,” they wrote. “As the pace of decarbonizing the grid accelerates, we are convinced that the time for organized market expansion is now.” (See Ex-FERC Officials Urge Commission to Expand Organized Markets.)

Clark and Duane don’t dispute “the rationale behind the original RTO paradigm, and its historic benefits.” They also agree that the grid will continue to see increases in renewable energy and that the footprints of the largest RTOs and ISOs are helpful to maximizing the value of such assets.

But they say they disagree with “unbridled RTO boosterism” because the markets’ model is “misaligned with public policies that seek to advance grid decarbonization.”

They cite “lethargic interconnection queues offering little cost predictability [and] capacity markets that frustrate a state’s policy preference to increase renewable resource penetration.”

RTO markets are constrained, they say, by their inability to tolerate shortages, demand’s limited responsiveness to price signals, structural market power and the “non-linear economics and idiosyncratic behavior” of generators with different operating characteristics and performance parameters.

Single-clearing price auctions assume that electricity is a commodity, with one kilowatt hour fungible to the next, they note. But that assumption no longer holds, they contend, with renewables’ insignificant operating costs and intermittence.

They are also critical of RTO price formation, saying it “combines abstract art with impenetrable science.”

Both inflexible baseload nuclear plants and wind and solar plants act as price takers.

Other inflexible plants, such as those with minimum commitment blocks, are ineligible to set clearing prices.

“Taking this liquidity off the table means that LMP outcomes are not as competitive as many might assume,” leaving fossil units, usually natural gas, to set clearing prices, they write. Ironically, they say, “in order for a renewable resource to obtain positive revenue from selling its energy in an RTO market, it must rely on a carbon-emitting fossil resource to set a positive LMP.”

Yet RTOs depend on price signals to ensure sufficient supply to maintain reliability. “Having a supply stack that effectively thumbs its nose at price” undermines that construct, they say. “Non-dispatchable intermittent resources will inject energy when it’s sunny or windy without regard to the RTO’s price signal.

“What happens when price is no longer an effective tool for fulfilling the tasks that RTOs were created to complete?” they ask. “If an increasing portion of the grid is characterized by socialized fixed charges and generation that neither sets prices nor responds to price signals, the impact will be profound.”

They acknowledge that “breakthroughs in storage technology, or a very different paradigm for participation of demand … might save the RTO’s single-clearing price auctions.” But they are dubious, contending that “direct retail ‘price responsive demand’ has, by and large, never lived up to its promise.”

And while they cite the “pragmatic appeal” of having RTOs centrally plan transmission for areas best suited for wind or solar generation, they say it “upends a lot of the design purpose of LMP.”

“Does this mean RTOs can’t serve as a vehicle to advance decarbonization? No. But we are inclined to think RTO wholesale electricity markets, which are a defining feature, will have to be re-thought from the ground up,” they write. “This isn’t going to come easily or quickly — particularly considering structural and governance features of the RTO,” a subject they promise to explore in a future paper.

“Given these existential challenges to the RTO model,” they write, “policy makers should be cautioned against embracing RTOs as the only way to achieve future energy goals, especially in the absence of an identifiable fix to their structural weaknesses.”

Q&A

Clark and Duane answered questions about their paper in a July 12 interview with RTO Insider Editor Rich Heidorn Jr. Here are some of the highlights, edited for clarity and brevity.

RTO Insider: You explicitly challenge nine former FERC commissioners who wrote a joint letter last month urging the commission to expand organized markets to the West and Southeast to aid decarbonization efforts and save ratepayers money. The former officials wrote that “more than 80% of renewable generation has been deployed in the organized market regions, and emissions are falling faster in such regions.” That seems like a counterfactual to your thesis. Why are they wrong?

Tony Clark: Well, I think they’re wrong for a number of reasons. … Simply expanding a model, which is really struggling under the weight of the grid transition as it’s happening right now, would seem to be problematic. But secondly, I don’t know that I would necessarily agree with the underlying assumption that it’s RTOs that had been responsible for [the growth of renewables]. I think state public policies are a big part of it. Some of the mega trends that are in the industry are part of it. But if you look outside of the organized markets, you see a lot of retention of things like nuclear power … which is very difficult to do in some of the more restructured regions.

… I’m certainly not anti-RTO at all. I mean, I had authorized some of my utilities to join them when I was on the [North Dakota Public Service] commission. But I think there’s also an understanding that they arise out of particularly historical context, and there are reasons that certain areas of the country for reasons of geography and market construct and resources that they had available, haven’t joined to this point. And it would seem to me to be a mistake to simply mandate that that model be spread everywhere. And in fact, that will probably just become a flashpoint in the FERC-state relationship, if it were to happen.

RTO Insider: Some might say that you guys are carrying water for the monopoly utilities, such as those that are supporting the Southeast Energy Exchange Market. So I have to ask you this: Was this funded in part or in total by any of WBK’s, or Copper Monarch’s clients? And if so, who?

Tony Clark: In terms of clients, we, of course, don’t disclose our client list. I would say in terms of why we write things like this, we hope it’s provocative; we hope that it starts a discussion — a needed discussion — and hope it’s taken in that vein.

Vince Duane: These are very much thoughts that I have had for quite a few years. And I think any of my … former colleagues at PJM, at the executive level would say, “Yeah, that sounds a lot like what Vince has been talking about for quite a while now.” I have spent 17 years of my life working with the organized markets. And I think there’s a particular genius associated with locational marginal pricing. And what troubles me most is that we seem to have forgotten just how central price is to the RTO functions, not just the market and economics, but even controlling day-to-day security. … And it has distressed me for quite some time seeing us chip away at that. … We just have to ask ourselves a very honest question, which is: Are we going to continue to adhere to this form of competitive model? And if so, can we realistically expect it to survive in light of the policy directions we’re taking? And it’s not just about pursuing renewable resources, it’s about the way we’re pursuing them, which is to support and subsidize. If we were having a discussion about carbon pricing at a federal level and the RTO model, I think you’d get a very different answer, at least from me.

RTO Insider: I was just about to ask you about that. Your paper is about 7,000 words long … yet, there’s not even a single mention of carbon pricing, which some say would address the RTO-climate disconnect. Why did you not address that?

Vince Duane: It was perhaps a bit of a myopic focus, on my part, anyway, on the direction that policy has been heading, both at the state and at the federal level, and at the regulatory level with the commission in Washington over the last several years. And while there has been talk about carbon pricing — and I think there’s a widespread view as to the logic of it — there’s also, I think, a widespread perception that for political practical reasons, what have you, it’s just not as an attainable objective in the short- to medium-term. But you know, you’re correct … I would say, we would be having a very different discussion about ISO/RTO markets and the overall model, if we were talking about carbon pricing.

Tony Clark: It does strike me that if carbon pricing is to be the policy and incorporated into the RTOs … you would need to then strip away some of the other sort of out-of-market constructs and subsidies and things like that. I personally don’t know that just layering a price on carbon, on top of a quote-unquote “market” that is riven with a lot of other distortions really accomplishes what you hope it would do. It would just add a price on a really complicated market that doesn’t need any more complexity and may not fix the underlying problem.

Vince Duane: I would just prefer to see the ISOs carry a much more straightforward message than, frankly, I believe they have, which is a message that says we need to be talking about carbon pricing … because our efforts to accommodate the supportive mechanisms and subsidy mechanisms that create non-bypassable charges and distort price have fundamental and unsustainable implications to what we think you all liked about ISOs, which was the ability to run a central, non-discriminatory open dispatch and harness competitive forces and put risk on those that are best able to manage. That’s the kind of thing that’s in the balance. And it distresses me that ISOs have become, I think, so wary of expressing that kind of opinion that you don’t hear it. So I’ve kind of enjoyed the opportunity, post-PJM in my career, to be able to say some of these things, because … at the end of the day, we want to see a debate on these issues, because we think they’re being swept under the rug.