How You Get Your Electricity: Organized Power Markets

Organized power markets are not perfect, but they serve a vital function in the electricity grid

Until fairly recently, most Americans got their electricity in the same way: their local utility generated it at massive nuclear, coal, oil, or gas plants; stepped up the voltage to move it long distances from those plants over high-voltage transmission lines; stepped down the voltage; and then provided it to factories, homes, and businesses over its local distribution system. This was essentially a regulated monopoly, and ratepayers had no choice in providers and no control over the cost.

But in many states, deregulation and a challenge to local monopolized electric utilities would come just as it had to commercial airlines a decade earlier. It began in 1988 with federal legislation, the Public Utility Regulatory Policies Act (PURPA), followed by the 1992 Energy Policy Act, and cemented by the Federal Energy Regulatory Commission’s (FERC) Acts 888, 889, and 2000. These Acts broke up some of the utilities’ vertical integration, which then required utility-owned power plants to be sold to a third party or transferred to an unregulated affiliate. They also supported the creation of Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs), bodies that administer power markets within their footprint, purchasing electricity from these new independent power providers (IPPs) and selling it to local utilities or even non-utility retailers, who then resell it to customers.

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These organizations also monitor, coordinate, and control power flows and transmission in their territories, and ensure that there’s always a sufficient supply of electricity to precisely match the need, called “load balancing.” That’s no easy task, and it requires an enormous amount of monitoring and control technology, skill, and experience. There are three such entities in the northeast and mid-Atlantic US: the NY Independent System Operator (NYISO); the Independent System Operator, New England (ISO-NE), and the largest among them, the PJM Interconnection, originally named for Pennsylvania, New Jersey, and Maryland, with a footprint that today includes all or part of 13 states and the District of Columbia. The Midcontinent Independent System Operator (MISO) manages the generation and transmission across 15 U.S. states and the Canadian province of Manitoba, and CAISO, the California Independent System Operator, manages generation and transmission for that state and administers a load-balancing operation for other western states.

But not everyone joined the club. Florida’s electricity operations are overseen by a different kind of entity, the Florida Reliability Coordinating Council (FRCC), which includes investor-owned utilities, cooperative utilities, municipal utilities, one federal power agency, power marketers, and independent power producers. There, electricity is purchased not through a market but via bilateral contracts between generators and local utilities. And the power for most of Texas is administered by ERCOT, the Electric Reliability Council of Texas, the only US entity outside the jurisdiction of the Federal Energy Regulatory Committee (FERC). Texas’ utilities decided after the passage of the Federal Power Act in 1935 that it would not send any electricity outside the state, thus avoiding federal oversight. That led to the creation of the Texas Interconnected System in 1941, which eventually morphed into ERCOT.

Most large energy markets administer two main types of transactions — energy and capacity. Energy is just what it says: its electricity, bid into the market by generating facilities at a specific price per megawatt-hour (MWh) based on the projected need in the day-ahead market for the next day, and the spot or “real-time” market, for immediate needs. Bids are “stacked” from lowest to highest, and the market price sets (“clears”) at the point where supply meets demand, based on the bid and accepted price of the last megawatt needed. Interestingly, once that price is set, all bids receive the final clearing price, regardless of the generators’ original bids. The second market is for “Capacity” which provides payments to power plants based on their generation capacity and an agreement to provide a specific amount of that capacity when called upon by the grid operator. These payments help cover their typically-large overhead, and they’re a vital source of income to provide for both scheduled and unscheduled maintenance and keep the plants available when called on. Here again, Texas is the outlier, with only an energy market, which many observers believe has led to system failures, most notoriously during 2021’s Winter Storm URI, which brought unprecedented cold weather and snow to the state, resulting in widespread power outages for days.

The organized power markets are not perfect. Among others, controversies continue about pricing advantages and models for new and renewable generating resources that receive some form of state subsidies. But these entities serve a vital function in ensuring a reliable and resilient electricity grid, as well as helping ensure fair and reasonable electricity prices for ratepayers.

NEXT: Curtailment of Renewable Energy: What’s the Problem?

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