No RTO, no problem: Rethinking regulated markets in the US electricity heartland

In a recent article, we explored the multifaceted trends, challenges, and opportunities reshaping the US electricity market. This in-depth look revealed the significant changes brought about by policy shifts, the accelerated integration of renewable energy, patterns of increasing energy consumption, and significant developments in the Western electricity markets.

The regional transmission organizations (RTOs) and independent system operators (ISOs), regulated by the Federal Energy Regulatory Commission (FERC),[1] are independent, nonprofit entities that serve two-thirds of our nation’s electricity demand. The remainder is managed by vertically integrated utilities (VIUs), cooperatives, and municipalities. The formation of RTOs in the US began during the electricity market restructuring of the 1990s. Over time, these organizations expanded to cover a significant portion of the country. RTOs and ISOs are multifunctional entities with responsibilities that include managing transmission and energy flows across their markets, conducting transmission planning, ensuring the reliable operation of the electric grid, providing nondiscriminatory access to transmission services, and overseeing wholesale energy market transactions. By coordinating resources within their footprint, they enhance reliability and reduce costs through competition and innovation, often leading to lower electricity prices.

The California Independent System Operator (CAISO) is a prime example of an RTO in the West, while notable gaps exist in RTO/ISO coverage in the Southeast, Northwest, and Southwest regions. This landscape of RTOs and ISOs underscores the complex and evolving nature of electricity market structures in the US.

[1] Except ERCOT in Texas.

Energy imbalance markets (EIMs), illustrated by orange labels in figure 1, play a vital role in the mission of optimizing resources within the electricity sector. Their primary goal is to seamlessly manage electricity generation and transmission infrastructure resources while engaging with the market to minimize the cost of electricity generation and meet demand efficiently. Moreover, EIMs extract maximum value from unused generation capacity through strategic market trading. This process unfolds over various time horizons, with one essential feature setting EIMs apart: real-time, automated electricity exchange. In a world where decisions must be made within 15-minute windows, EIMs provide a vital lifeline, rendering manual inputs and phone calls obsolete.

The diverse benefits of EIMs

What distinguishes EIMs from other initiatives is their unique ability to deliver a multitude of advantages embraced by a wide array of stakeholders. It’s a rare occurrence to witness an initiative that garners unanimous support from investors, customers, environmental groups, and regulators alike. Key benefits include:

The drivers of EIM benefits

EIM benefits are contingent upon several key factors, including:

[2] To help explain the financial benefits of EIMs in practice, consider a scenario where a solar farm in California generates excess electricity on a sunny day. Without an EIM, this excess could be wasted, or the solar farm might need to reduce its output. However, with an EIM like CAISO’s WEIM, this surplus can be quickly sold to a load serving entity or a utility in a region needing extra power, say in Arizona, where perhaps there’s increased demand due to a heat wave. This transaction optimizes dispatch plans in real time, ensuring cost-effective operations for the solar farm. Additionally, by selling this excess energy, a solar farm hundreds of miles away avoids the need for a utility company in Arizona to ramp up a gas-fired plant, saving on fuel expenditures and reducing greenhouse gas emissions. During periods of particularly high renewable generation, the market price for electricity can drop significantly, even turning negative. In such cases, consumers or entities in Arizona might be financially incentivized (effectively paid) to consume this excess energy, stabilizing the grid and benefiting from low or negative pricing.

[3] Participants include generation companies, utilities, independent power producers, demand response providers, balancing authorities, and transmission owners and operators.

The emerging market developments – the Western Energy Imbalance Market (WEIM), the Western Energy Imbalance Service (WEIS), and the Southeast Energy Exchange Market (SEEM) – operate in distinct yet interconnected regional contexts, shaping their potential influence on energy generation, grid management, and decarbonization efforts. Analyzing these developments helps us understand the challenges and opportunities they present.

Developments in the West: WEIM and WEIS

The Western United States presents a unique electricity market structure. CAISO manages only a part of this system, with nearly 40 separate balancing authorities overseeing the rest. Despite extensive discussions over the past decades, a comprehensive West-wide RTO has not been established. However, recent years have seen growth in organized market solutions, particularly in real-time bilateral market services.

1. WEIM: Operated by CAISO, the WEIM is a real-time market that leverages CAISO’s market optimization tools to provide services to utilities outside its RTO. It offers intra-hour optimization of electricity generation, leading to significant cost savings.
2. WEIS: Offered by the Southwest Power Pool (SPP), this service extends benefits similar to those of the WEIM to utilities in the West, providing a voluntary, low-cost market option.

These services have demonstrated substantial benefits, with the WEIM alone generating over USD 4.5bn in savings[4] for various utilities[5] since its inception in 2014 (see figure 2). Recognizing these advantages, several initiatives aim to expand market participation in the West. These include CAISO’s Extended Day-Ahead Market (EDAM) initiative, Western Power Pool’s Western Resource Adequacy Program (WRAP), and SPP’s Markets+ initiative. Additionally, some utilities are considering joining the SPP RTO, potentially extending its footprint into the Western Interconnection.

[4] According to the WEIM savings methodology.

[5] As listed in CAISO’s WEIM Benefits Report Q3 2023.

Drivers of market developments in the West

In the Western US, a confluence of policy mandates, renewable energy integration, and market dynamics is steering the region towards a sustainable energy future.

State and federal policies: State policies like California’s ambitious energy storage goals, targeting 52 gigawatts (GW) by 2045, and Nevada’s renewable energy targets of 50% by 2030 are catalysts accelerating the adoption of renewables. This policy-driven momentum, enhanced by incentives from the federally legislated Inflation Reduction Act, is reshaping the energy landscape into one that is increasingly reliant on sustainable sources. This change is further reinforced by market trends, where the growing emphasis on renewables, fluctuating wholesale prices, and the rise of distributed generation reflect a transformative phase in electricity demand and investment patterns.

Historical expansion and energy interchange: The formation of SPP’s WEIS in 2021 and its expansion into the Western Interconnection was a strategic milestone in the US electricity sector, which was traditionally fragmented into the Western, Eastern, and Texas interconnections. This move bridged two major power grids, the Eastern Interconnection and the Western Interconnection, and addressed the historical lack of synergy due to limited transfer capacities, identified by NREL’s Seam Study in 2020 as only around 1,300MW of direct connection. SPP’s integration represented not just geographical expansion but a significant shift toward a more interconnected, resilient power system. It brought together the wind energy-rich SPP region with the solar-abundant Southwest region and the hydropower-rich Northwest, crucial for managing the growing electricity demand driven by electrification. This enhanced the interchange of diverse energy resources, fostering grid resilience and sustainability, vital for addressing resource adequacy considering increasing renewable reliance.

Planned resource retirements and renewable energy integration: The transition of the US electricity markets toward renewable energy is marked by both strategic shifts and tangible developments. Over the last decade, the US portion of the Western Interconnection[6] has seen significant changes in its generation portfolio. Approximately 23GW of resources have been retired, including about 18GW of coal and natural gas resources. Conversely, there has been an addition of around 72GW, with solar and wind resources contributing nearly 47GW. Looking ahead to 2030, this trend is expected to continue. Projections suggest the retirement of nearly 17.5GW of resources, including 13.3GW of coal and natural gas generation (see figure 3). Meanwhile, around 18.2GW of new resources are anticipated, with solar and wind accounting for 12.3GW across the US portion of the Western Interconnection (see figure 4).[7] This shift is necessitating a rethinking of grid infrastructure. The inherent variability and intermittency of renewables pose challenges to traditional utility structures. These challenges are being addressed by energy imbalance market offerings like CAISO’s WEIM and SPP’s WEIS. These markets facilitate a more flexible and efficient management of renewable resources, ensuring grid stability and effectively reducing renewable curtailments. The integration of renewables, therefore, is not just about incorporating new energy sources into the grid, but also about reshaping the entire grid’s dynamics to enhance stability and efficiency in an increasingly renewables-dominated landscape.

[6] The Western Interconnection is the geographic area consisting of the electric grid in the western part of North America, which includes: a) all of Arizona, California, Colorado, Idaho, Nevada, Oregon, Utah, and Washington, b) parts of Montana, Nebraska, New Mexico, South Dakota, Texas, and Wyoming, c) two Canadian provinces, British Columbia and Alberta, and d), part of Mexico.

[7] Western Electricity Coordinating Council’s 2022 report: Western Assessment of Resource Adequacy.

Source: Western Electricity Coordinating Council (WECC), Rabobank 2024

Implications for key players in the Western EIMs

Some of the key players in the Western EIMs are renewable energy developers, vertically integrated utilities, and transmission owners. The new market models impact these stakeholders differently.

Renewable energy developers: EIMs focus on real-time energy balancing, offering new opportunities for integrating renewable sources like excess wind from the SPP region and solar from the CAISO region into the grid. This reduces the risk of energy curtailment, ensuring better utilization of renewable generation. However, developers can face challenges due to the short-term nature of these markets, which can lead to revenue volatility and require a nuanced understanding of market dynamics. Technological advancements in forecasting and energy storage are crucial in this landscape, aiding in grid stability and resource adequacy. While these markets open doors to broader regional trading, renewable energy developers must navigate their complexities strategically to harness their full potential.

Vertically integrated utilities (VIUs): VIUs’ participation in these markets enhances the utilities’ operational flexibility and efficiency, particularly in balancing supply and demand in real time. This is key for integrating renewable energy sources and managing their variability. EIMs also offer these utilities broader market access for energy trading, aiding in times of excess generation or energy shortfall. While this aligns with regulatory compliance and public policy goals, especially in renewable integration and emissions reduction, it comes with challenges. Utilities may face substantial initial investments in technology upgrades and infrastructure modernization. Balancing these costs with the long-term operational and environmental benefits is a crucial aspect of their strategic adaptation to EIMs.

Transmission owners: Transmission owners encounter a landscape ripe with both new challenges and opportunities. Participation in these markets enhances grid efficiency and reliability, facilitating the effective balancing of energy. This can lead to increased utilization of the transmission infrastructure, creating potential revenue opportunities through higher transmission utilization fees. As more energy is traded across regions, the demand for transmission services rises, potentially boosting revenue for these owners. However, this advantage comes alongside the need for substantial investments in infrastructure and technological upgrades to handle real-time operational demands. Additionally, transmission owners must navigate the complexities of dynamic market operations and manage associated risks.

Developments in the Southeast: SEEM

The Southeast Energy Exchange Market (SEEM) is a notable development in the Southeast, involving major utilities like Duke Energy, Southern Company, and Dominion Energy. SEEM was established to create a more efficient electricity market in the Southeast, enhancing the utilization of generation and transmission resources, thus reducing costs and improving reliability for utilities.

Key features of SEEM

Drivers of market developments in Southeast

SEEM emerged in response to a blend of policy shifts, technological advancements, and market conditions unique to the Southeast US. This development mirrors the energy imbalance market evolutions in the West, though the Southeast has distinct drivers motivating SEEM’s establishment:

Lack of an RTO/ISO: A key factor in the development of SEEM is the historical absence of an RTO or ISO in the Southeast. This lack has led to a disjointed market structure. In other regions, RTOs/ISOs play a crucial role in managing the electricity grid, ensuring reliability, and fostering competitive electricity markets. Their absence in the Southeast has necessitated alternative approaches to achieve similar objectives, one of which was the formation of SEEM. SEEM aims to improve the efficiency of electricity trading within the region and enhance grid reliability in the absence of a unifying RTO/ISO structure.

A market dominated by VIUs: The Southeast market is notably dominated by large VIUs such as Duke Energy, Southern Company, Dominion Energy South Carolina, and the Tennessee Valley Authority. These entities manage the entire electricity supply chain, from generation to transmission and distribution. Their collective influence and strategic interests are pivotal in determining how SEEM functions and integrates with the broader energy market in the Southeast. The involvement of these entities, ranging from large utilities with expansive resources to smaller investor-owned utilities (IOUs) and cooperatives with more localized focus, ensures that SEEM’s framework addresses a wide spectrum of interests and operational realities across the region.

VIUs’ commitments to decarbonize and grow their renewable energy portfolio: VIUs’ commitments to decarbonize are significant drivers for SEEM. In recent years, there has been an increasing push within the Southeast for cleaner energy and reduced greenhouse gas emissions. VIUs have set ambitious decarbonization targets aligned with state policies. For instance, both Duke Energy and Southern Company have committed to achieving net-zero carbon emissions by 2050. These commitments require substantial shifts in their generation portfolios, including growing reliance on renewable energy sources. Duke Energy, for example, is expanding its regulated renewable energy assets significantly, with plans to grow to over 30GW by 2035. Similarly, Southern Company expects to have over 14GW of renewable resources by 2024, a considerable increase in its renewable capacity. Dominion Energy, aligning with this trend, is focusing on solar energy, which is projected to become a mainstay of its electricity generation fleet by 2040. These expansions in renewable portfolios are not only in response to regulatory mandates but also reflect a strategic move toward a more sustainable and economically viable energy future.

Resource retirements: Another critical driver for the development of SEEM is the anticipated retirement of coal and natural gas resources in the Southeast region. By 2028, it is expected that around 10.5GW of coal and natural gas resources will be retired (see figure 5), as seen in figure 5 below. This transition is not just a response to environmental and regulatory mandates. It also reflects the economic realities of aging infrastructure and the decreasing cost competitiveness of these traditional energy sources. As these older, less efficient power plants are phased out, there is a growing need to integrate newer, more sustainable energy sources into the grid.

Implications for key players in the Southeast Energy Exchange Market

Similar to the Western EIMs, SEEM brings together various stakeholders, including renewable energy developers, VIUs, and transmission owners. Each of these key players faces unique opportunities and challenges in this evolving market landscape.

Renewable energy developers: Under FERC’s open access transmission rules,[8] renewable energy developers gained opportunities to access transmission networks more equitably, fostering competition and innovation. However, SEEM’s structure, which is governed by major investor-owned utilities (IOUs), introduces complexities. The two-tiered transmission service and potential for exclusionary practices may limit the opportunities for these developers to fully leverage the market. While SEEM promises enhanced market efficiency and access, the governance and operational framework could favor IOUs, potentially impacting the integration and economic viability of renewable projects. Developers must navigate these challenges strategically, ensuring their projects align with the evolving dynamics of SEEM while advocating for fair market practices.

Vertically integrated utilities: VIUs like Duke Energy, Southern Company, and Dominion Energy, which are instrumental in shaping SEEM, stand to reinforce their market control. While SEEM offers a platform for streamlined energy trading and potentially boosts the operational efficiency of VIUs, it also raises concerns about alignment with the principles of FERC’s open access transmission rules. The control over transmission services and market rules could enable VIUs to favor their own assets, impacting market competition. This scenario necessitates a careful balance from VIUs, ensuring their operations within SEEM align with regulatory mandates for fair access while leveraging the market for operational and environmental efficiency.

Transmission owners: Transmission owners in the SEEM landscape encounter a scenario where their assets become even more pivotal. SEEM’s design for improved market efficiency relies heavily on the robustness of the transmission network. While this could lead to increased utilization and potential revenue opportunities, it also brings into question the adherence to open access principles. The two-tiered transmission system may result in preferential treatment for certain players, potentially undermining the objective of nondiscriminatory access. Transmission owners must navigate these operational challenges while maintaining a commitment to fair and transparent practices, ensuring that their role in SEEM aligns with the broader objectives of market fairness and competitive neutrality.

In an ideal scenario, where SEEM adheres to principles of transparency and open access, the landscape for all key players – renewable energy developers, VIUs, and transmission owners – would be markedly different. Renewable energy developers would find a level playing field, encouraging innovation and integration of clean energy sources. VIUs would operate in a more competitive and diversified market, prompting them to prioritize sustainability and efficiency in their energy portfolios. Transmission owners, pivotal in this fair market, would facilitate equitable energy distribution, ensuring optimized use of infrastructure and adhering to open access principles. Such a balanced ecosystem would not only propel the region toward a sustainable energy future but also cultivate a market environment where competition thrives, driving benefits for consumers and stakeholders alike. This envisioned scenario contrasts with the current state of SEEM, underscoring the potential of a market model that fully aligns with the principles of fairness and regulatory compliance.

These developments, the WEIM, WEIS and SEEM, in both the Western and Southeastern US illustrate a significant shift toward more structured and efficient electricity markets, reflecting a trend toward a more centrally organized market ecosystem for improved resource utilization, cost savings, and enhanced reliability.

[8] Open access transmission rules, established in the late 1990s, marked a significant shift in the electricity transmission sector. Prior to these rules, investor-owned utilities (IOUs) could monopolize transmission lines, favoring their own generation assets and restricting competition. The open access rules democratized access to the transmission network, requiring IOUs to offer fair and nondiscriminatory transmission service to all participants. These rules altered the landscape to enable increased competition, encouraging investment in new generation sources and promoting a diverse and competitive electricity market.

The new market developments in the Western and Southeastern US electricity markets are more than structural changes. They represent a strategic realignment of the energy sector toward greater efficiency, sustainability, and integration in response to contemporary challenges and opportunities.

In the Western US, the advent of CAISO’s WEIM and SPP’s WEIS signifies a move toward leveraging technological advancements and policy frameworks to foster a sustainable energy ecosystem. This shift is not merely about integrating renewable energy resources: It is a fundamental rethinking of how energy markets operate, emphasizing efficiency, collaboration, and environmental responsibility. The region is setting a precedent for how to dynamically balance the increasing demand for energy with stable and efficient market operations that benefit all stakeholders.

Meanwhile, the Southeast’s journey with SEEM stands at a critical juncture where traditional market models are being reevaluated. While SEEM aims to streamline energy trading and enhance resource utilization, it also brings to the fore crucial discussions about market fairness and competition, particularly in the context of FERC’s open access transmission rules. The model’s structure, which raises concerns over its potential to disproportionately favor established VIUs and IOUs, underscores the importance of ensuring that new market mechanisms align with broader goals of equity and open access.

Collectively, these market developments in the US electricity sector reflect a deeper recognition that the future of energy is not just about technological advancement or policy incentives. It also involves creating frameworks that ensure equitable access, promote environmental sustainability, and uphold market integrity.