Why utilities and clean energy advocates are battling over a Southeast energy market

Why are clean energy groups and big corporate electricity buyers so opposed to a plan to create the first regional energy-trading market in the Southeast U.S.?

Answering that question requires a bit of a dive into the esoteric world of regional energy market structures, and in particular, the differences between bilateral energy trading, an energy imbalance market and a full-scale regional transmission organization (RTO) or independent system operator (ISO). But in simple terms, it boils down to conflicting views of whether the move will help or hinder the region’s shift to a cleaner and more cost-effective grid.

RTOs and ISOs manage the bulk electricity systems serving about two-thirds of the country’s population. The regions without them include most of the Western U.S. outside California, where utilities are joining energy imbalance markets, and the Southeast, where transmission systems are largely controlled by the region’s biggest vertically integrated utilities, Duke Energy and Southern Company, along with the massive and federally owned Tennessee Valley Authority.

Last year, these three utilities proposed a new form of market to serve their region, called the Southeast Energy Exchange Market (SEEM). The Federal Energy Regulatory Commission is reviewing the plan and is expected to make a decision in August.

SEEM proponents say it would provide a much more efficient way to trade power than the old-fashioned bilateral trading methods now in place, based on 15-minute trades across a transmission network spanning 11 states. Those incremental improvements could cut tens of millions of dollars per year for its prospective members, which at present include more than a dozen other investor-owned, public and cooperative utilities with about 160 gigawatts of generation capacity serving about 50 million people, according to proponents of the plan.

And it would do so while avoiding the complications, and potential pitfalls, of creating a full-scale RTO, they say. As Noel Black, governmental affairs vice president for Southern Co., said in a May statement, ​“In addition to bringing economic and environmental customer benefits, we also have worked to avoid adding significant new layers of bureaucracy to the region.”

But a panoply of renewable energy trade groups, environmental activists and corporate energy buyers’ associations fear that SEEM could forestall a broader move to open up the Southeast market to energy competition.

In fact, these groups warn, it could allow Duke, Southern and other regional utilities to secure more revenue for their fossil-fired power plants by allowing them to sell their power to one another — without facing competition from third-party solar, wind and battery projects that are cheaper as well as cleaner.

“Rather than establishing a more robust wholesale market that creates a platform for integrating and developing clean energy, SEEM’s bilateral transactions are likely to prolong the uncompetitive fossil generation that’s owned by the utilities,” said Bryn Baker, policy director for the Renewable Energy Buyers Alliance, which represents large corporate energy buyers including Amazon, Google and Walmart.

According to independent analysis from these groups, a much broader market reform initiative could save the Southeast hundreds of billions of dollars per year over the next 20 years, much more than the $100 million to $150 million that an analysis sponsored by SEEM backers projects it could save over the next two decades. Broader reform could also spur far more clean energy development than the region’s biggest utilities are now planning for.

Achieving those greater savings would require open access to shared transmission networks and competitive energy markets open to independent power producers as well as utilities, these groups say — in other words, the features provided by RTOs and ISOs.

SEEM’s proponents say that a full RTO or ISO would be a step too far, however. They claim the incremental improvements to the region’s existing bilateral energy-trading regimes would avoid the complications, and potential pitfalls, of creating a more integrated system like those that cover most of the country.

“With 160,000 megawatts already committed to participate, it is our intent for SEEM to pass along benefits of scale to customers,” Southern Co.‘s Black said in a recent statement. ​“In addition to bringing economic and environmental customer benefits, we also have worked to avoid adding significant new layers of bureaucracy to the region.”

SEEM critics, however, counter that the market has been created without significant input from non-utility stakeholders and that it lacks transparency and accountability to parties outside the utilities that would participate in it and manage it.

That’s why they’re asking the Federal Energy Regulatory Commission (FERC) to reject the SEEM proposal as it stands and instead launch a process that brings multiple stakeholders together to explore broader market reforms.

“There was a pretty strong and collective response from many groups around deficiencies in the proposal,” REBA’s Baker said. ​“That’s why I think we saw FERC issue a deficiency letter.”

How SEEM has reached its current impasse

Baker is referring to FERC’s decision in May to demand more information from SEEM backers before it will consider approving the plan. SEEM utilities replied last month with an extensive filing that delves into matters of independent oversight, transparency of market operations and how its 15-minute energy market would ​“clear” trades between participants.

But this reply to FERC’s deficiency letter hasn’t satisfied opponents, who have filed their own critiques of the utilities’ response. Here’s one sample from Jeff Dennis, managing director and general counsel of Advanced Energy Economy, an industry trade group that joined the Advanced Energy Buyers Group and the Solar Energy Industries Association in filing an opposition statement to the SEEM proposal at FERC.

“We asked FERC for more process, both to make sure that SEEM won’t create new risks and to provide an opportunity for states and customers to have a voice regarding the future of wholesale markets in the region — something the SEEM sponsors didn’t do,” Dennis wrote.

Solar Energy Industries Association President Abigail Ross Hopper agreed, saying that the revised proposal ​“fails to create an open and competitive wholesale energy market at the expense of ratepayers and the environment.”

These concerns have been echoed by a large group of clean energy and environmental groups, including national organizations such as the Sierra Club, Vote Solar and the Natural Resources Defense Council, and regional groups such as the Southern Alliance for Clean Energy and North Carolina Sustainable Energy Association.

In their FERC filing, these and other public interest groups argued that the ​“minimal revisions to the SEEM proposal” filed last month ​“do not remedy the lack of transparency, due process, and independent monitoring in this untested market construct.”

“As proposed, the SEEM proposal is unjust, unreasonable, and prone to undue discrimination and therefore must be rejected,” the groups wrote.

What SEEM is and isn’t: A taxonomy of different market structures

To SEEM’s opponents, its flaws stem both from what it is and what it is not.

On the first point, the ​“loose power pool” structure that SEEM proposes, as AEE and other critics describe it, runs the risk of expanding utilities’ existing monopoly on how power is generated, traded and sold across the region. That’s because independent power producers ​“continue to be excluded from the platform,” Baker said. ​“This is really a multiparty bilateral trading platform.”

At the same time, SEEM could allow utility members to bolster the profitability of fossil-fueled power plants that might otherwise face pressure from cheaper and cleaner alternatives, she said.

One big reason for this fear is the nature of the market-clearing algorithm that SEEM proposes. RTO and ISO energy markets are aimed at dispatching power plants on a ​“least-cost” basis, with the cheapest sources of power winning over those that are more expensive, which is why energy markets are credited with lowering power prices.

But according to Maia Hutt, an attorney for the Southern Environmental Law Center, the SEEM algorithm would allow utilities to set their own bidding costs, without a clear and transparent way to assess whether they’re based on the actual cost of the generation they’re bidding.

“In theory, the bids should reflect the bidder’s cost of generation, but that’s not always true and the relationship between generation costs and the bids submitted could be warped through market manipulation,” she said in an email.

The fact that SEEM participants can pick and choose which counterparties they accept bids from further weakens the market’s ability to choose the least-cost generation available, Hutt said. A so-called ​“toggle” function would allow a SEEM member to exclude potential trading partners, even if those partners have the lowest-cost power available at the time. Buyers could also craft bids in ways that could exclude smaller generators that can’t fill the entirety of a bid, even if they have lower-cost power that could fill part of it, she said.

Corey Sellers, Southern Company transmission policy and services general manager, replied to these critiques in an email, noting that SEEM members ​“designed the solving algorithm and split the difference matching approach to avoid opportunities to bias match prices towards bids or offers, ensure all are treated fairly, and solve for maximum region-wide benefits to customers. Customers will always see lower energy costs when a transaction occurs since benefits are created when buyers and sellers are matched.”

Still, these features distinguish SEEM’s proposal from the energy imbalance markets that have extended real-time energy trading across large parts of the U.S. West, the other major region of the country that lacks wholesale energy market structures.

A new report from clean energy trade groups SEIA, American Clean Power Association and the American Council on Renewable Energy (ACORE) notes that these energy imbalance markets, as extensions of existing RTOs and ISOs, include ​“centralized clearing prices, a transparent stakeholder process and an independent market monitor,” all features that SEEM lacks at present.

The lack of an independent market monitor — a standard feature of RTOs and ISOs — is another sticking point for SEEM opponents. While SEEM utilities have proposed sharing market information with FERC on a weekly basis and setting up an independent auditor position to examine complaints, critics say those steps aren’t a substitute for an independent office tasked with policing market operations.

Another feature of RTOs the SEEM proposal lacks is an ​“open access transmission tariff,” a set of rules that regulate how multiple parties share the transmission grid capacity that connects generators to where they’re delivering electricity.

A key feature of an open access transmission tariff is securing ​“non-discriminatory” access for all market participants to transmission owned by one utility. But as the American Council on Renewable Energy wrote in its recent paper, ​“There is no language in the SEEM filing that proposes to alter existing balancing practices or provide open transmission access to independent power producers.” That puts Tennessee Valley Authority, Southern Co. and Duke, the three utilities that own most of the region’s transmission capacity, in the position of dictating many aspects of how their transmission is used.

The SEEM plan does take steps to reduce the charges that transmission owners can assess on market participants using its wires — charges known as ​“rate pancaking,” which can add significant costs if left unaddressed.

But the environmental and public interest groups argued in their filing that this won’t ​“mitigate potential for monopoly utilities to exercise market power.” In fact, they argue, reducing these ​“pancaking” costs for SEEM participants but not for others could further privilege incumbent utilities against competitors, or even lead to higher costs for power plants seeking to move power across transmission lines to sell outside the region.

Deeper changes needed to decarbonize the Southeast’s power mix?

The arguments over SEEM are coming amid broader disputes over the Southeast’s energy future. Duke Energy, Dominion Energy and Southern Company have all pledged to reach net-zero carbon emissions by 2050. But all three have proposed building new natural-gas-fired power plants to replace coal-fired power plants they plan to close in the region that would be served by SEEM. The gas plants are being fought by many of the same groups that are opposing the SEEM proposal.

The American Council on Renewable Energy stated in its report that nearly 40 gigawatts’ worth of natural gas capacity is being proposed for the Southeast, while in much of the rest of the country natural gas is being supplanted by renewable energy as the resource of choice for future energy needs. Solar and wind power are now cheaper than new natural gas power plants in much of the country, and adding batteries to those intermittent resources can allow them to serve peak grid demands formerly served by natural gas.

But SEEM opponents point out that renewables can’t realize this advantage in markets that don’t offer them equal access to compete on cost against incumbent generators.

They also say that integrated markets can better organize the buildout of generation and transmission that meets an entire region’s needs, rather than forcing individual utilities to make these long-range investment plans in isolation from each other.

This feature of organized markets — enabling resources to be shared across regions — can yield much greater long-term cost and emissions reductions than those enabled by the 15-minute trading of electricity. A report last year from think tank Energy Innovation estimated that creating an RTO for the Southeast could allow TVA, Southern Co., Duke and other major utilities in the region to build much less redundant generation capacity, yielding an estimated $384 billion in economic savings over 20 years, or about 19 percent compared to a business-as-usual scenario.

The same market could also expand the opportunity for low-cost solar, wind and energy storage to grow to 131 gigawatts over the next 20 years, delivering a 37 percent greater reduction in carbon emissions compared to business as usual, the report found.

To help answer these questions, SEEM opponents want FERC to mandate a technical conference — an open process that allows the participation of multiple stakeholders — to delve into the pros and cons of a broader Southeast RTO. That’s a long and complex process, and it could happen with or without FERC approving SEEM in one form or another. But it’s a vital next step to explore what form of market reform is best suited to the needs of the region, they say.

This call is being backed in some of the states in the region. A South Carolina law passed last year calls for a study into the pros and cons of joining an RTO, and North Carolina has similar legislation — although that bill has faced a massive public relations attack from a Duke-backed group and has failed to move out of committee so far this year.

SEEM backers have sought to separate their proposal from this broader question of potential market reforms. ​“We encourage FERC to evaluate the SEEM proposal that is before them and not get distracted by a few commenters who advocate for a complete redesign of the existing Southeast market,” Noel Black of Southern Co. said in a June statement.

SEEM backers have also pointed out that their region has some of the lowest electricity rates and highest customer satisfaction scores in the country. At the same time, the region’s share of renewable energy stands at 6.4 percent of its total generation mix, compared to 17 percent across the parts of the country served by RTOs.

“Moving toward more robust…market structures is what’s going to accelerate the deployment of cleaner energy and more cost-effective resources,” REBA’s Baker said. ​“That’s the angle that we come to it from: representing businesses that want clean energy.”

(Lead photo: Andrey Metelev)