Extreme weather, including heatwaves and freezes, is stressing electric grids across the United States, threatening to leave millions without power at times when they’ll be relying on it most. Several grid operators, states, and members of the Federal Energy Regulatory Commission (FERC) have questioned  whether electricity capacity markets—those that are paid to have sufficient power supply available to meet energy demand—are actually providing reliable energy. A new paper suggests energy regulators have misunderstood the reliability problem: rather than improving monetary incentives for energy suppliers to provide reliable energy, the core issues threatening energy reliability is that nonperformance penalties are too low, and the process for measuring a resource’s expected performance and availability—known as accreditation—should be stricter.

Through exploring the histories of transmission operators like ISO New England and PJM, authors Joshua Macey, an Assistant Professor of Law at the University of Chicago Law School, and Jacob Mays, Assistant Professor of Civil and Environmental Engineering at Cornell, find that penalties for non-performance—or the inability to sell energy at the needed time—have been too low. In cases where multiple failures happen across the grid, the penalty can become even lower as it is shared amongst all entities. Because of this, energy suppliers are more incentivized to overpromise their contributions to energy reliability to make more money, knowing the penalty for non-performance is low. At the same time, the study shows that higher penalties for non-performance may not lead to stronger reliability because suppliers can file for bankruptcy rather than pay the fines. Currently, capacity market’s structure penalties to decrease when failure occurs across multiple entities, instead of rewarding the supplier for providing energy in time of need when others fail, or making those who fail incur larger penalties.

“We have been overpaying for gas for a decade. The most obvious path forward is to make sure penalties are high enough and come with a performance bond to ensure payments are made,” says Macey.

Macey and Mays examine why existing electricity capacity markets do not deliver on reliability, leaving systems exposed during extreme weather events. They look specifically at the current situation in Eastern U.S. systems, where correlated supply outages among natural gas plants and energy delivery systems present the most near-term risk.

In theory, accreditation is the process that transmission operators use to determine a resource’s value based on its availability to supply energy. Rather than looking at how often the resource is available when it is needed most, such as during an extreme weather event, the value is accredited to any time it is available, including times that are not necessarily meaningful. This creates a situation where generators are paid for when we do not need them, and not necessarily available when we do need them. For example, PJM has a 47 percent reserve margin, when the average amount that they should need is 15-20 percent. As a result, PJM is paying for a significant number of ‘available’ resources that are failing to supply energy when they are most needed.

“Our analysis suggests that the key challenge to avoid reliability issues is to combine stronger prices with stronger performance bonds, insurance or credit requirements, and to more actively regulate and monitor accurate accreditation,” says Macey. “It is not enough for a capacity market to be present. The details of its implementation are ultimately what will determine its success in operating during extreme weather events.”

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