Policy Studies Energy and Environment

Integrating reliability-must-run practices into wholesale electricity markets

In grid-integrated wholesale power markets operated by independent system operators and regional transmission organizations (simply referred to here as ISOs), the reliability of the bulk power system is a necessary foundation for the market’s efficient operation. However, at times, reliability practices can inadvertently work to undermine market efficiency. One such practice is the use of reliability-must-run (RMR) agreements to keep a retiring generator in service to meet reliability standards. The effect of such rules is often to bias investment toward the cost-of-service regulated transmission grid and away from the market-driven generator and competitive retail sectors. The result is a less innovative and less dynamic power system than would otherwise emerge over time.

As ISO market designs have matured, ISOs have substantially reduced the use of RMR agreements. In the period between 2005 and 2011, ISO use of RMR agreements fell from about 130 to 35. However, since 2011, use of RMR agreements have periodically risen and thus are a frequent source of controversy because of their cost and market effects. With the currently high pace of generation retirements, particularly among older thermal generators, the prospect of a resurgence in use of RMR agreements suggests that ISOs should pursue reforms to ensure RMR agreement terms work to support rather than undermine markets.

Accordingly, this paper examines various ISOs and their experience with RMR agreements, and focuses on changes in ISO rules that enable reduced use of RMR agreements and limit adverse consequences on markets. The primary market design principle involved is that of “incentive compatibility”: market rules should work to coordinate the economic interests of diverse market participants with the reliable and efficient performance of the shared system. When the use of RMR agreements is supported by appropriate market rules—particularly pricing rules that reflect the implied scarcity of useful resources—then reliability standards can be met at lower cost and in ways that support market-driven investment and promote long-run system efficiency.

The present analysis identifies four guidelines for review of existing RMR practices: when reliability principles dictate out-of-market actions by ISOs, energy and reserve prices should reflect resource scarcity; rules governing RMR service should provide for transparency in operation and with respect to cost of service; ISOs should enter into RMR agreements only when the benefits of meeting reliability standards through the agreement exceed the costs; and finally, ISOs should consider cost-effective alternatives to RMR agreements when such alternatives will adequately address the potential reliability needs.

Image by David T. Stephenson

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