Resilience and Emerging Issues 

in Wholesale Electricity Markets

Presented to:

2018 Energy Conference

Energy Information Administration

David Patton, Ph.D. 

Potomac Economics

June 4, 2018
© 2018 Potomac Economics -2-

• If you ask six people, your likely to get eight answers. 

 Proof: read the RTOs’ comments on resilience filed at FERC. 

 Concern: ambiguous terms can be adopted opportunistically to support many agendas; 

• In broad terms, resilience can address: 

 Network issues: 

– Hardening the system to be less vulnerable to catastrophic failures; and 

– Preparing to restore The system quickly after a catastrophic failure. 

 Reliability issues: having adequate available resources in the right locations to serve load.

• Examining and addressing network issues is a valuable focus for resilience. 

 Almost all serious blackouts are caused by transmission or distribution issues.

 Unfortunately, very little of the discussion is focused on these issues.

What is Resilience?
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• Addressing reliability issues in the name of resilience must be done carefully. 

• RTO’s are very good at reliability and most RTO systems are extraordinarily resilient 

from a reliability perspective

 RTOs probabilistically evaluate system contingencies and establish planning requirements 

to satisfy a 1-day-in-10-year planning standard. 

 However, not all types of contingencies are planned for and evaluated (e.g.,, pipeline 

contingencies, extreme weather events, etc.) 

• The RTO markets employ reliability and planning processes by: 

 Identifying the contingencies to plan for

 Quantifying the resources needed to respond to the contingencies

 Designing a market-based procurement to acquire the resources at least cost

• However, the energy markets are generally capable of maintaining reliability/resilience 

without relying on this planning process.

Resilience and Reliability
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• There are only a two fundamental products: energy and reactive power

 Most other products are essentially options on energy in different timeframes (regulation, 

operating reserves);

 Reliability and resilience are not products, they our expressions of demand for energy that 

exist only because the true demand cannot participate in the markets;

• How should reliability and resilience requirements ideally be established? 

 Ideally, they should be based on the fundamental value of the fundamental product: energy

 What is energy worth to its consumers?

“value of lost load” = $4000 to $25,000/MWh

 Reliability requirements could be established that correspond to this value – stop requiring 

additional capacity when its costs exceed the reduction in expected value of loss load.

• RTOs do not do this, instead they plan to satisfy a 1-in-10 year planning standard.

 This standard implies a VOLL equal to $200,000 to $300,000/MWh. 

The Tension Between Planning and Energy Markets
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• So. . .How can energy markets achieve reliability and resilience?

 Set VOLL to reflect the highest value load in the market and use it to price shortages by 

setting reserve demand curves = 

VOLL * Probability of Losing Load as reserve levels fall

 When resources are not sufficient to satisfy all of the energy and reserve needs, the value of 

the foregone reserves will be reflected in energy and reserve prices

 The expectations of the contingencies and other conditions that could lead to shortages (and 

associated shortage revenues) will motivate private investments to achieve an efficient level 

of reliability and resilience

• This approach is extremely robust and will address many issues, including:

 The entry of large quantities of intermittent resources as increasing shortages from 

intermittency results in increasing revenues for flexible, fast-ramping resources.

 Most fuel security issues associated with increasing dependence on natural gas; and 

Achieving Resilience through Energy Markets
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Example: MISO’s ORDC Compared to an Economic ORDC

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

$/MWh

Share of Operating Reserve Requirement

Current ORDC

Economic ORDC -

IMM Model

93 percent of 

OR shortages

in this range
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• Energy markets can provide strong incentives to address conditions or contingencies 

whose probabilities can be estimated

• They will likely be less effective in facilitating the participant actions needed to 

address extremely low (or unknown) probability events that would be catastrophic

 Participants are risk averse

 The costs, if the contingency happens, would be to large for the system to bear (in 

reality or politically)

• For example, the analysis in our upcoming annual report for New England evaluates 

the recently announced retirement of a LNG terminal in Boston harbor, showing that: 

 A pipeline contingency could cause ISO-NE to fail to serve 10 to 15 percent of the 

load in New England during a cold two-week winter period

 The economic and human costs of such an event are so large that making market-based 

procurements of a product that would insure against such an event is likely warranted

When Do We Need Planning to Supplement Energy Markets?
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• Most of the RTO markets are extremely resilient

 RTOs have been evaluating these issues for years and most concerns are overstated

 Fuel security in New England is the exception

• To improve the resilience of the RTOs in other regions and prepare than to respond to 

change conditions and generation mix, improve real-time price formation:

 Improve shortage pricing so it reflects VOLL and ensure that all shortages are priced

 Price transmission shortages (when transmission flows cannot be managed)

 Price high-cost emergency actions by operators that prevent shortages

 Increase participation and price-setting by demand in the real-time market

 Then...trust that the markets will respond

• Except in cases that energy markets cannot address, RTOs should avoid:

 Creating new products, pricing attributes, or making other market changes to generate 

additional revenues streams outside of the current energy markets

Conclusions