Capacity Market Distributed Energy Resources Markets

Unlocking Distributed Energy’s Power With Intraday Markets

May 5, 2021

Our world is getting more electric. Electric vehicles, smart appliances, rooftop solar panels and even fully electric buildings are gaining ground every day. Grid experts dub these “distributed energy resources,” or DERs, and they come with a bonus: they can accelerate the reliable integration of wind and solar power and increase our power system’s reliability and resilience while lowering customer bills. The best way to unlock this potential is through wholesale power markets.

Yet despite their rapid growth, few DERs participate in wholesale power markets. Why is that? Power markets, originally designed for conventional large power plants, are ill-suited for fully valuing fast responding, small, and less predictable resources like DERs. A newly-published paper by Jonathan Newman (NRDC/University of Michigan) and Pamela MacDougall (Environmental Defense Fund) explains a promising new market design that would tap into the valuable benefits of DERs: An intraday electricity market. 

An intraday market is exactly what it sounds like – an energy market operating several times daily that brings more efficiency to the power grid, more economic opportunity to owners of electric vehicles and other distributed energy resources and accelerated clean energy development. These markets could turbocharge the integration of customer owned DERs in bulk power systems, while transforming our power grid to providing clean, reliable power at a fraction of the cost of conventional resources alone. 

With more variable resources like wind and solar power growing, grid operators value resources with these “flexibility” attributes. As power generation falls as the sun goes down, dishwashers are run and television sets turned on, multi-purpose resources like a fleet of electric delivery vehicles (which after all are batteries on wheels) could be tapped to help stabilize electricity supply. Then, as wind power ramps up overnight, those batteries could be re-charged and the vehicles ready to go in the morning.

One key to making that work is the intraday market, which would incent more owners of DERs to offer their resources into the power markets. This would add more flexibility and reliability to the grid, and facilitate higher levels of utility-scale wind and solar energy, while also improving the business case for the DER technologies themselves.

Current Markets are Designed for Large Power Plants

Power markets in most of U.S. dictate how electricity is “delivered” from power plants to homes and businesses every minute of the day. These markets operate as a form of auction, and nearly all of them consist of two parts: the day-ahead market and the real-time market.

Think of the day-ahead market like a weather forecast; reasonably accurate, but subject to change based on actual conditions 24 hours later. In the day ahead market, resources offer, or bid, electricity at a given price and quantity for production at a given hour the next day. If they “win” the auction, they are guaranteed the clearing price in the day-ahead market for that hour. A day-ahead market promotes price predictability for large plant owners and allows them to hedge against price volatility. It also allows the regional grid operator to “lock in” most of the needed power for the next day.

The real-time market is responsible for dispatching power to homes and businesses during the operating day when it is needed. In most markets it operates every 5 minutes of the day, 24 hours a day. It is the principal tool regional grid operators use to balance the power system in real time to assure the precise and reliable balance of energy supply and customer demand. The real-time market balances the differences between the day-ahead market commitments and the real-time demand for energy, taking into account the available power supply and transmission congestion.

A Day Ahead Market Is Ill-Fitted for Customer-Owned Energy

If DERs have grid reliability and other benefits, why aren’t more DERs in wholesale markets? Because the owner of electric vehicles, rooftop solar panels, and other DERs is different from the operator of a conventional power plant. Some of these technologies are weather dependent, and others’ primary purpose isn’t to generate electricity. That means that unlike traditional generation, their availability or response may not be known a day or more in advance of when they are required to provide power. For example, an operator of a fleet of electric delivery vehicles may not know until the morning of the delivery day when individual vehicles would be grid-connected and able to participate in the real-time energy markets.

The financial consequence of this uncertainty is that anyone who sells energy into the day ahead market and then doesn’t produce in the real-time market must pay both the real-time energy price to cover their shortfalls and other charges.

Imagine the fleet of electric delivery trucks is providing power in the evenings when they are parked. They commit to providing a certain amount of energy at 6 pm the next day, but in real-time, due to traffic, half of the trucks don’t park until 8 pm. This would mean that the fleet would both be penalized for not meeting its target and have to pay the sometimes much higher cost of energy needed on the real time markets to fill their gap for those two hours.

For this reason, many DERs avoid the day-ahead market because the financial risks are too great relative to the limited benefit. Consequently, more energy is purchased in the day-ahead market than may be needed, the grid is less flexible than it otherwise could be, grid reliability costs are higher, and the clean energy transition is slower.

The Solution: Intraday Markets

Owners of these resources would benefit from an opportunity to align their expected performance closer to dispatch in the real-time market, but with a price certain (just as with the day ahead market). Owners of DERs, for example EV fleet owners or building operators, naturally will have more information about their ability to perform within a few hours of the real-time market. The intraday market would give them the financial motivation to participate in the market by providing the opportunity for additional financially and operationally binding market settlements between the existing day ahead market and real-time market.

Intraday Markets Reduce Forecast Error

Source: TenneT Market Review 2016 (p. 12)

An intraday market also gives market participants better information closer to the real time in areas like energy demand and weather forecasts and unexpected generation and transmission outages.

An intraday market is less of a leap than a small jump because it is based on the principles of existing market structures. Some U.S. power markets already offer “look-ahead” price forecasts during the operating day, and the intraday market is based on the day ahead market in function and operation. Several European markets have run intraday markets for years, where trading volumes have risen significantly every year, mirroring the rise in both utility-scale renewable energy and DERs:

Source: EPEX SPOT 2019 Annual Report (p. 24)

An intraday market needs only a few attributes for success:

  • Gives participants the opportunity to hedge against volatile real-time prices when they have the data to determine their availability;
  • Provides a look-ahead of a few hours or less to reward more accurate weather and behavior forecasts; and
  • Encourages robust participation – higher levels of intra-day market participation, including by a diverse set of utility-scale renewable and conventional resources, improves market efficiency.

Whether run continuously or at discrete intervals (say, 3 or 4 hours), an intraday market would take advantage of DER capabilities that are otherwise wasted, which could enhance the integration of utility-scale wind and solar, improve grid reliability, and reduce the costs of relying primarily on large power plants.

The Federal Energy Regulatory Commission (FERC) regulates wholesale power markets run by regional grid operators. FERC already has taken groundbreaking steps to integrate energy storage and other DERs into the existing two-part energy markets. Now is the time for it and the grid operators to take the next step and consider intraday markets to unlock the full grid reliability and efficiency benefits of DERs.