South Carolina law pushes for power market reform, floats creation of RTO

Energy Daily • 10-07-20 • By Jim Day
Increasing pressure on the region’s utilities to follow through or expand on their plans to create a Southeast energy market, South Carolina Gov. Henry McMaster last week signed a law meant to push the state toward power market reforms that could include creating a regional transmission organization, creating a voluntary energy imbalance market or taking other actions to increase competition and lower costs.

The law, H. 4940, notes that South Carolina’s electricity service is primarily provided by vertically integrated utilities—namely subsidiaries of Dominion and Duke Energy as well as state-owned Santee Cooper—but that “the adoption of measures to reform the structure of the existing electric generation, transmission, or distribution service may further promote the development of and access to low-cost, reliable resources for the benefit of South Carolina consumers.”

The law comes as several of the region’s utilities—including Duke, Dominion, Southern Co. and the federally owned Tennessee Valley Authority—this year have been in discussions to create the Southeast Energy Exchange Market (SEEM), which as currently envisioned would be a voluntary trading platform meant to facilitate near real-time bilateral trades of surplus power across the region using any available transmission.

A recent study commissioned by the utilities said the fairly limited SEEM market would offer up to $47 million in annual benefits—rising to more than $80 million by 2032 in carbon-constrained scenarios—in large part by facilitating greater integration of low-cost wind and solar and allowing more participation by independent power producers.

Other studies, however, have pointed to much higher potential benefits up to $384 billion through 2040 that could come through creation of a federally regulated Southeast regional transmission organization (RTO) that would operate the bulk power grid and run a multi-state wholesale power market.

The law signed by McMaster (R) September 29 does not mandate any specific market reforms, but instead creates a legislative committee and advisory board that has until November 2021 to release a study of potentially sweeping changes to South Carolina’s electricity system.

Those could include creating an RTO or joining an existing one; launching a voluntary energy imbalance market (EIM) such as the Western EIM that now covers much of the West; or opening South Carolina’s power market to retail competition.

The large investor-owned utilities in the Southeast—and their state regulators—have generally opposed forming an RTO and accepting jurisdictional oversight by the Federal Energy Regulatory Commission.

Instead, the mostly vertically integrated utilities in the region have generally preferred to make their own generation and transmission decisions under the oversight of state regulators who often give great deference to utilities’ expertise.

State regulation also has enabled the utilities to protect their monopoly service territories and limit competition from merchant generators and power suppliers. In contrast, creation of an RTO would require them to hand over control of their power lines to a regional grid operator that would provide open access to all market players.

For their part, state regulators and legislators in the Southeast have historically opposed formation of an RTO because that would cede additional authority over electricity operations in their states to FERC.

However, lawmakers in North and South Carolina have recently shown greater interest in power market competition. Notably, the new South Carolina law mirrors similar legislation that has been proposed in North Carolina by clean energy advocates including the Solar Energy Industries Association (SEIA), which have been pushing to pry open southeastern markets to greater electric competition.

“[We] look forward to creating the market conditions needed to promote competition and empower South Carolinians to continue to choose low-cost solar power,” said Sean Gallagher, SEIA’s vice president of state affairs.

The willingness of McMaster and South Carolina lawmakers to explore possible market reforms comes in the wake of the 2017 fiasco in which South Carolina Electric & Gas (SCE&G) and Santee Cooper cancelled a half-built reactor project at the V.C. Summer Nuclear Station due to massive cost overruns. Amid outrage over costs to ratepayers, Dominion then bought Scana, SCE&G’s parent.

The new South Carolina law makes clear that the study of potential power market changes will not explore the possible divestiture or shutdown of any operating nuclear plant in the region, but instead will look at reforming the structure of existing generation, transmission and distribution service.

Among other topics, the study will make recommendations on possible creation of an EIM; requiring the utilities to divest their generation or transmission assets; enabling residential or non-residential consumer retail choice; and whether to authorize community choice aggregation, whereby municipalities could leave incumbent utilities to offer residents alternative rate plans.

On Tuesday, Duke officials said the company has been an active participant in discussions of energy market reforms in South Carolina, and that some of the reforms have the potential “to deliver greater value to our customers, increase system efficiency and leverage renewable energy.

“By passing this bill, the General Assembly has said it clearly wants to understand options within the electricity sector that could deliver more value to customers in South Carolina,” said Duke spokesperson Erin Culbert. “We hear them loud and clear and share that objective.”

She pointed to the SEEM proposal to create the bilateral trading platform as one proposal that could start delivering savings to customers in the Carolinas quickly and better integrate renewables with fewer curtailments.

The consortium of utilities working on the SEEM are planning to file a proposal with FERC before the end of the year. Utility affiliates in North and South Carolina will need to file the plan with state regulators at least 30 days before the FERC filing, which would likely put the filing sometime after October, according to Duke.

Dominion officials said Tuesday that they expected the South Carolina study to include an analysis of the SEEM proposal along with the various other reforms that could support delivery of affordable energy, and that implementation of the SEEM proposal would not necessarily preclude other reforms.

“It is important to recognize that moving forward with SEEM does not prevent any future involvement in an RTO or energy imbalance market,” said Dominion spokesperson Kim Asbill.

The recent study of SEEM benefits conducted by consultants at Guidehouse and Charles River Associates says the trading platform would provide 15-minute intervals for transactions making use of available non-firm transmission. The program would set the price by splitting the difference between the matched bids and offers—a method that is different from many other markets, where the price is based on the marginal generator’s offer.

“The SEEM can help participants manage periods of excess energy and high net demand ramping created by renewable integration,” the study states.

The benefits come primarily from lower fuel costs inherent in higher renewable penetration. However, the limited SEEM program would only provide savings of about 0.4 percent of total production costs in the region, rising to 1.1 percent of production costs by 2037 in the carbon-constrained scenario.

The SEEM also can be seen as a stepping-stone to more complex markets that could provide greater benefits, according to the study.

“For example, while a 5-minute market would be more complex and costly, it would likely facilitate greater renewable integration benefits and possibly a reduction in reserves held for balancing,” according to the study.

Maggie Shober, the director of utility reform at the Southern Alliance for Clean Energy (SACE), noted in a September 28 analysis of the SEEM study findings that adding even limited competition in the Southeast provides cost benefits over the current system.

“The SEEM is a very limited market, and really a technological improvement to the current way Southeast utilities trade energy bilaterally,” Shober wrote. “The benefits of SEEM are small, but so is the level of competition inherent in the SEEM setup.

“If the Southeast were to continue in this direction, toward greater levels of competition, we can see that the cost benefits to utilities (and their customers) can increase as well,” she added.