Q&A with Rana Mukerji: Evolving Energy Markets for the Grid of the Future
Several decades ago, as an energy consultant with GE, Rana Mukerji helped to design the energy markets that serve as an integral part of the New York ISO’s management of the energy grid.
Today, Mukerji is our Senior Vice president of Market Structures, where he uses his deep knowledge and experience in economics and engineering to prepare today’s markets for the grid of the future.
Mukerji recently sat down to discuss how the markets are changing to meet the needs of a grid increasingly based on intermittent, renewable resources, and how to make sure the grid stays reliable as we get closer to a 2040 goal of a zero-emissions grid.
Q: Tell us about yourself.
A: I'm an electrical engineer, and I also have an MBA. I did my undergraduate electrical engineering in India. I got a full scholarship to do my graduate studies at Rensselaer Polytechnic Institute in the early 1980s. I was interested not only in the technology of things, but also the economics.
After RPI, I worked for GE for 10 years in their systems Consulting Group, and ended as the general manager of it.
At the time, most energy grids were run by utilities that owned both the generators and the distribution systems. Bill Hogan, a Harvard University professor, along with several other academics from MIT and Harvard, started working on the concept of competitive power markets and the associated consumer benefits these markets would provide. I was very interested in this new paradigm.
Also, during this time, energy leaders around the country were looking to move to a markets-based energy grid, and GE’s consulting group was tapped to create the computer models, which would be used to simulate how these markets would function.
From there I took on a job as Head of Global Transmission Services with ABB, a large European company, in Zurich, Switzerland and in Raleigh, North Carolina. But I found I missed working on energy markets. Then the V.P. job at the NYISO opened up. As it happens, my wife is from Albany, and we always wanted to come back to the Northeast. This was a dream job, to design and implement the markets that I had helped conceive a decade earlier.
Q: You’ve played a big role in developing the current energy market model used around the country. What do we mean by “energy markets” and their benefits to reliability?
A: Energy markets are like a commodities market, with one major exception: electrical energy can only be stored in very limited quantities. Other commodities such as oil, gas, wheat, or pork bellies, can be stored. Electricity is different. The amount of energy on the grid being consumed must, at all times, be equal to the amount of energy being generated. This is true 24 hours a day, 7 days a week. To run the energy grid, you need operators to balance the flow between generation and consumption. And you need energy markets that work both a day ahead and in real time to incentivize and pay the energy generators to be available to generate the power we need to meet demand.
To do that, we have three markets: the energy market, ancillary market, and capacity market. These three markets work together. In simple terms:
- Energy markets secure resources to supply the demand on a minute-to-minute basis.
- Ancillary markets procure a variety of additional services to protect the electric system and balance supply and demand to meet system needs instantaneously.
- Capacity markets provide incentives to energy resources to maintain additional energy reserves over a longer period. Through the capacity market, we determine how much capacity is needed to meet the expected peak demand for the year plus a margin of additional resources to call on, if necessary.
Working together, these markets keep the system reliable in real time and also drive system response so that if we have a sudden need, for example if the wind suddenly dies down, other resources can ramp up and fill that need. The purpose of the energy market and ancillary services market is to meet the reliability needs in real time, and the purpose of the capacity market is to make sure that we have sufficient resources in the longer time frame.
These markets provide what we call “price signals” to generating resource owners that incentivize operations. You don't get paid unless you perform. There's a very big premium on availability.
Q: What exactly do we mean by “price signals?” How do they help promote development of energy resources and reduce emissions?
A: One of the things that energy markets have done is put the risk on the on the investor, so there's no regulated return. You have to make your investments and bear the investment risk to get returns. So how do you make investments in that environment? You build the most efficient plant you can get because it can out-compete the plants which are already in the system. The energy markets promote increased efficiency.
We have had thousands of megawatts of units, I believe it's something in the tune of 13,000 megawatts of generating units, that have entered New York since the inception of the NYISO in 1999. In the past 21 years, more than 10,000 megawatts-worth of units have retired. These were primarily older, less efficient (and, therefore, more polluting) resources. That has produced tremendous environmental benefits.
The units that retired were coal-burning, or oil-burning units that had higher high-carbon content. What replaced them were largely natural gas, and more recently has been wind and solar. Because of these investments, we’ve had tremendous decreases in greenhouse gas emissions.
The other thing that has happened is increased emphasis on availability of units, because you don’t get paid unless you’re available. One of the anecdotes I heard early on was one of our former CEOs was doing a tour of a plant, and he saw a very expensive piece of equipment, a step-up generator that costs several million dollars and was just sitting there. He asks the plant manager, why do you have a spare just sitting around? And the manager basically said, “My unit is valuable. I cannot afford to have it sit idle for a month if I lose the step-up unit. It’s an insurance policy to have a spare sitting around.”
That’s the value of markets. It benefits the resource owner to stay online and participate in the market to get maximum revenue from their unit, and it benefits us, the consumers, because it increases reliability of the grid and reduces costs.
Q: How will these markets help us get to a zero-emissions grid by 2040?
A: We are facing a fundamental shift in the energy system. The system for the last 100 years has been what we used to call at GE “central station engineering.” Under this model, the larger the power plant, the more efficient it was. At the time there were about 400 major power plants in New York and that number stayed stable until relatively recently.
Today, we’re seeing the need to build a lot of renewables such as solar and wind, plus energy storage to meet the state’s environmental policies. And the other thing is there’s a lot more behind-the-meter activity, both solar and storage also driven by the state’s public policy. And we’re getting a lot of distributed resources, which are on the retail side, but can also be aggregated to participate in the wholesale market.
It’s a whole new distributed and renewable grid. And we have to rethink our market signals. We have to procure the right amount of resources, including the resources we need to offset the intermittency associated with the distributed and renewable resources in order to maintain reliability. You need to have sufficient resources to meet the needs in the future. While I believe the market is still fundamentally constructed correctly, with the changing resource mix we have to adapt some of those market rules to prepare for these changes.
Q: What kind of changes to do you see coming to the energy markets?
A: With these renewable energy resources, one of the key features is their intermittency. Wind doesn't blow all the time. Sun doesn't shine all the time.
The price signals have to be more impactful to incent faster response rates from generating resources. For example, if there's a cloud cover coming in, you have to instantaneously make up for that loss. You need fast-starting, high-ramping units.
It used to be energy markets that provided the main source of revenues for a generating unit and the ancillary services were kind of a very secondary sort of revenues. What's happening now is that the energy market revenues are going down because a lot of the wind and solar resources have high capital costs, but low operating costs, because sunshine and wind are free once the technology is paid for. Their operating costs are just maintenance. Essentially wind and solar resources can offer into the market at zero. That puts a depressive effect on the energy prices.
On the other hand, the intermittent nature of the renewable units puts a premium on response, which is provided by ancillary services. What we are seeing is that ancillary services are almost becoming the main event or will become the main event. The energy market is becoming secondary as a source of revenues.
The ancillary services market is going to drive the behavior that is needed. One of the things we have to look at is to make our ancillary services market more impactful to drive the kind of system response that we need to balance the power system.
The other thing we are doing is looking at aggregation of distributed resources, which also can be used to address intermittency. We are also coming up with new rules to allow for the aggregation of behind-the-meter resources so they can offer into the wholesale markets. We are also doing other price enhancements, for example structuring incentives for quick-start units, because they are vital for reliability.
Also, with New York connected with other ISOs around the Northeast, it helps you to be exchanging power more frequently with your neighbors when you have a lot of intermittent resources. We went from hourly exchanges to 15-minute exchanges as part of our Broader Regional Market initiative a few years ago. We're thinking of turning that 15 minutes into 5 minutes with Hydro Quebec. If you exchange power with your neighbors more frequently, you can help balance intermittency. In fact, Hydro Quebec has so much hydro behind its dams it can essentially act as one giant battery up north.
To sum up how our philosophy is changing, instead of just reliability at the lowest cost, we now work under the philosophy of having reliability at lowest costs, along with the cleanest low-carbon system we can have.
Q: How do the markets promote energy storage?
A: Energy storage is very necessary, especially when the system is going to getting to be more intermittent in nature. If you have lot of wind and solar, we certainly need more storage.
About four years ago, we started working on how to value storage in our capacity markets. And we updated our rules to allow participation by energy storage resources that can store as little as two-hours-worth of energy in their batteries. This opens the doors for energy storage resources of two-, four-, six- or eight-hours-worth of storage. We have plans to extend the capacity accreditation concepts to other types of resources.
Proper scheduling of storage in the energy market is also very important. If you only have, say, five hours of storage, you need to schedule it. So when would you discharge the battery? Is it in the morning, or in the afternoon when it might be needed more and energy prices may be higher. We had to basically find a way to schedule the storage when it best meets the needs of the system.
We are now looking at a couple of things. We are looking at aggregation of storage resources as well as other types of resources into the grid. Also looking at co-located and hybrid storage, which allows developers to locate storage along with other resources at an interconnection point in the grid. This saves the developers money and contributes to reliability of the grid.
Q: The state is planning to add nine gigawatts of offshore wind to New York. How will the markets help with that effort?
A: Offshore wind is a very significant resource and I'm excited with what the state is doing. We are slated to get something in the tune of 9,000 megawatts of offshore wind by 2035. To give you a perspective of that, the overall energy demand on Long Island is around 4,500 megawatts. So 9,000 megawatts of wind cannot all go into Long Island; it’s too much. Thus, the plan is to get about two-thirds into New York City and one-third onto Long Island.
The questions we’re asking is how do you value offshore wind? What is 9,000 megawatts of offshore wind worth? In terms of resource adequacy, it could be worth, say, 3,000 megawatts, since we can expect offshore wind to operate at about a 30 percent capacity factor (due to the intermittent nature of wind). Essentially, you have to really do analysis and say that if I build 9,000 megawatts of offshore wind, can it effectively take the place of 3,000 megawatts of existing fossil fuel?
And to do that you not only have to look at resource adequacy, you need to look at transmission security. The concept basically asks, “how much transmission do you need to keep the lights on in certain densely-populated areas?” What if you’re depending on 9,000 megawatts of wind and say the wind suddenly dies down, or you lose the substations where the wind is connected to your system. Do you have enough capacity to feed that community?
In addition to offshore wind, we have several large, new transmission projects now being developed to bring wind power from upstate and hydropower from Quebec to southeastern New York. Therefore, we have to do a market design for how to value this clean energy to integrate it into those densely-populated communities in New York City.
Q: We just submitted to FERC a concept called Comprehensive Mitigation Review, which makes changes to how we value certain energy resources in order to promote renewable resources and energy storage. Can you explain the background behind this, and what it means for clean energy development in the future?
A: With electricity, you have to be vigilant about the exercise of market power. You might recall in the start of the markets two decades ago there was essentially a market meltdown in California. Generators were withholding from participating in the markets, for the purposes of driving up the price of electricity. This can also happen on the demand side, by large investors exerting their market power and causing energy prices to crash. Because of that,we have rules, called “buyer-side mitigation,” to limit this type of gaming of the system.
But some of these new clean energy investments could inadvertently trigger mitigation rules, because developers are making investments in new resources where they are not technically needed for reliability. Our changes to BSM basically recognize that these new resources are coming in not to crash prices, but to meet certain environmental objectives, which have been codified into law through the CLCPA. We have to fundamentally recognize that.
For more on our efforts to deliver the grid of the future, visit the 2040 Power Grid webpage.