Energy-only VS Capacity markets, AESO quick look and analyst report, and more.

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Wholesale Electricity Markets: Energy-only vs. Capacity Markets

There are three primary types of wholesale electricity markets - capacity markets, energy-only markets, and ancillary services markets. In this article, we cover capacity markets and energy-only markets, however, each market type significantly influences the generation, pricing, and management of power.

Key Takeaways

1. Energy-only markets and Capacity markets are the two primary types of electricity markets, with each significantly influencing the generation, pricing, and management of power.
2. Energy-only markets, such as ERCOT and AESO, pay power producers only for the electricity they produce and send to the grid. They are characterized by high operational efficiency and lower costs during normal demand periods but can face volatility and reliability issues during unexpected peak demand periods.
3. Capacity markets, like MISO, compensate power producers not just for the electricity they generate, but also for maintaining the capacity to produce electricity in the future when it might be needed. They are marked by increased grid stability and predictability in pricing but can lead to higher consumer costs and potential overinvestment in capacity.
4. The fundamental difference between the two lies in their system design philosophy—energy-only markets rely on real-time market signals to drive efficiency, while capacity markets emphasize preparedness and reliability, potentially at the cost of economic efficiency.

So, What is an Energy-Only Market?

In an energy-only market, power producers are paid only for the electricity they produce and send to the grid. The prices in these markets fluctuate based on supply and demand. For example, during periods of high demand or low supply, prices can spike, providing strong incentives for producers to generate more electricity. This model is prevalent in ERCOT , where the market encourages efficiency and alignment of supply with demand, despite the potential for high price volatility, which was notably problematic during the Texas power crisis of 2021.

What is a Capacity Market?

Conversely, a capacity market compensates power producers not just for the electricity they generate, but also for maintaining the capacity to produce electricity in the future when it might be needed. This setup is designed to ensure that there is enough reserve power to meet peak demands, which can help stabilize the grid during critical times. The Midcontinent Independent System Operator (MISO) is a typical example of a capacity market. While this can lead to more stable electricity prices, it may also result in higher costs as consumers pay for potential, unused capacity.

Key Differences

The primary distinction between these two markets lies in their approach to dealing with uncertainties in demand and supply:

• Energy-Only Markets: These markets do not provide direct incentives for maintaining excess capacity. Instead, they operate under the principle that price signals will encourage sufficient electricity production. However, this can lead to issues during unexpected peak demand periods.
• Capacity Markets: These markets involve paying for potential performance. Producers are compensated to keep additional capacity on standby, thus ensuring reliability during demand surges. However, this often translates into higher costs for consumers, as they fund the maintenance of unused reserve power.

Energy-Only Market: ex. ERCOT (Texas) and AESO (Alberta)

Pros:

• Market Efficiency: In ERCOT and AESO power prices are primarily determined by supply and demand. This direct pricing mechanism can lead to high operational efficiency as it incentivizes electricity generation only when needed.
• Lower Operational Costs: There are no payments for unused capacity. This can result in lower electricity costs during periods of normal demand, as seen in Alberta, where the government believes this model supports competitive pricing and innovation.

Cons:

• Volatility and Reliability Issues: Energy-only markets like ERCOT have experienced significant challenges, such as during the Texas power crisis in February 2021, when extreme weather conditions led to unprecedented demand and insufficient supply, causing massive blackouts and price spikes.
• No Incentive for Excess Capacity: Since payments are made only for energy sold, there is little financial incentive to maintain reserve capacity. Alberta’s system faces criticism for potentially lacking the buffer to manage sudden spikes in demand or unexpected drops in supply. However, Alberta has made significant efforts to mitigate this.

Examples:

• ERCOT: The 2021 Texas blackout is a case in point where the energy-only market’s lack of reserve margin contributed to the grid's inability to handle sudden, extreme weather conditions.
• AESO: Alberta's market is praised for cost efficiency and fostering a competitive market for investments, but it risks system reliability without the obligation for generators to maintain extra capacity.

Capacity Market: MISO (Midcontinent)

Pros:

• Increased Grid Stability: MISO’s capacity market requires generators to have enough reserve power to meet peak demands, significantly enhancing grid reliability, especially during adverse conditions.
• Predictability in Pricing: By compensating generators for standby capacity, prices are generally more stable, avoiding the high spikes typical of energy-only markets.

Cons:

• Higher Consumer Costs: Consumers pay for both the energy consumed and for the capacity to produce energy that may not be used. This leads to generally higher costs reflected in consumer energy bills.
• Potential Over-investment: There is a risk of over-investment in capacity, which may not always be needed, leading to inefficiencies and increased costs without proportional benefits.

Examples:

• MISO: This market operates with a focus on long-term reliability, which was beneficial during periods of high demand and prevented instances like those seen in Texas. However, the costs associated with maintaining extra capacity are passed on to consumers, leading to debates about the efficiency of such a system.

Comparing AESO with MISO and ERCOT

• Efficiency vs. Stability: AESO and ERCOT prioritize operational efficiency and lower costs, which can be beneficial during normal conditions but risky during extremes. MISO opts for stability and predictability, which protect against extremes but at a higher regular cost.
• System Design Philosophy: The fundamental difference lies in system design philosophy—energy-only markets (AESO and ERCOT) rely on real-time market signals to drive efficiency, whereas capacity markets (MISO) emphasize preparedness and reliability, potentially at the cost of economic efficiency.

Energy markets are complex frameworks with widespread implications across many sectors, from major industry players to individual households. The market's nature affects aspects from electricity pricing to the incentives for developing new power infrastructure.

AESO Analyst Report + Quick Look

Recap of Friday, April 12th through Sunday, April 14th

Friday observed lower-than-average prices throughout the day, averaging at 27.52 $/MWh, with on and off-peak hours at 27.23 $/MWh and 28.10 $/MWh respectively. Demand was low due to above-average temperatures, peaking just above 9,800 MW. Wind generation exceeded expectations by over 600 MW, averaging over 2,000 MW and peaking at 2,400 MW. Solar generation reached above 1,000 MW between 10 a.m. and 2 p.m., but dropped after 7 p.m. due to sunny weather in southern Alberta. Despite gas generator Keephills # 2 (KH2) going offline between 9:16 a.m. and 3:22 p.m., the high renewable generation and low demand kept prices under 30 $/MWh. Imports remained around 200 MW while exports increased above 500 MW in the morning.

On Saturday, prices remained low with a daily average of 45.20 $/MWh. Demand was low due to above-average temperatures, peaking just above 9,500 MW. Wind generation exceeded expectations by over 300 MW, peaking above 1,800 MW early morning and night; however, it dropped below 900 MW during some hours. Solar generation reached above 1,100 MW between 9 a.m. and 5 p.m., but dropped after 8 p.m. due to sunny weather in southern Alberta. Despite gas generators going offline and online throughout the day, the high renewable generation kept prices under 40 $/MWh for most hours.

On Sunday, prices peaked in the evening with a daily average of 90.69 $/MWh, and on and off-peak hours at 116.13 $/MWh and 39.81 $/MWh respectively. Demand was low, peaking just above 9,500 MW. Wind generation peaked above 1,700 MW early morning and overnight but dropped below 600 MW in the afternoon. Solar generation reached above 1,000 MW between 9 a.m. and 5 p.m., but dropped after 7 p.m. due to sunny weather in southern Alberta. Despite higher-than-expected gas generation, prices reached above 500 $/MWh in the evening due to the low renewable generation.

Section 2- A commentary on the expectations for today: Monday, April 15th

Demand is expected to increase significantly due to temperatures slightly above the seasonal average. Wind generation is expected to remain above 1,000 MW, peaking at 2,100 MW at night. Solar generation is projected to surpass 1,200 MW between 12 p.m. and 3 p.m., and drop after 7 p.m. due to sunny weather in southern Alberta. Gas generators Shepard (EGC1), Battle River 5 (BR5), and Fort Nelson (FNG1) are still offline, representing over 1050 MW not available for today. Exports through the interties are projected to exceed 300 MW today. Considering the high renewable generation expected, low prices are likely for most hours of the day.

Global Energy Storage Market Overview

As the world shifts towards renewable energy, the energy storage market is rapidly changing to maintain power grid reliability and stability. This overview examines the present and future of the energy storage market, with a focus on significant developments in key regions like China, North America, and Europe.

Global Trends

The shift to renewable energy sources such as wind and solar necessitates the development of energy storage technologies. These technologies are vital for handling the unpredictable nature of renewable power and maintaining a stable power grid. Currently, renewables make up 31% of global energy production, and this is predicted to rise to 42% by 2030 and 53% by 2050 to achieve carbon neutrality targets.

Energy storage is crucial for managing the fluctuations in renewable power and improving grid voltage quality through peak shaving and frequency regulation. This is increasingly important as the world relies more on distributed power systems and microgrids.

Regional Analysis

• China: Government policies strongly back China's energy storage market. Since the "Twelfth Five-Year Plan," energy storage has been considered a strategic industry. Current policies mandate that a certain percentage of renewable installations include energy storage systems. In 2023, demand from generation-side and grid-side storage made up 78% of the market, signifying considerable growth.
• United States: The U.S. experienced a slowdown in 2023 due to economic factors like interest rate increases, which raised capital costs and affected project returns. However, with incentives like ITC subsidies and the push for an energy transition, the market is projected to recover and surpass 230 GWh by 2030.
• Europe: Europe leads the market for residential energy storage, fueled by high electricity prices and recent energy shortages. The market is also adapting to the greater use of large-scale storage solutions in conjunction with solar and wind facilities, paving the way for future energy independence from traditional fossil fuels.

Challenges and Future Outlook

Despite short-term disruptions like supply chain constraints and economic recessions, the long-term outlook for the energy storage market is strong. The continued shift towards cleaner energy sources, supported by innovative technologies and beneficial policies, indicates a period of dynamic growth for global energy storage solutions.

As policies and technologies evolve, the sector is anticipated to undergo significant growth, mirroring the global commitment to sustainable energy practices.

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