Learning from History: Market Case Studies

Examining significant real-world events provides invaluable insights into how deregulated markets function under stress, reveal potential design flaws, and highlight the importance of risk management and regulatory oversight.

Case Study 1: ERCOT Winter Storm Uri (February 2021)

  • Event: Prolonged, extreme cold across Texas caused massive failures of power generation (gas supply froze, equipment failed) concurrently with record-high heating demand.
  • Market Impact:
    • Over 50% of generation capacity offline at peak.
    • ERCOT ordered widespread, multi-day load shedding (rolling blackouts) affecting millions.
    • Real-Time Market prices hit the $9,000/MWh cap and stayed there for ~70 hours.
    • Extreme costs led to numerous bankruptcies among REPs and Cooperatives (e.g., Brazos Electric, Griddy Energy) unable to cover wholesale power costs.
    • Highlighted lack of mandatory winterization, fuel security issues (gas system failures), and the financial risks of ERCOT's energy-only market design under extreme conditions.
    • Exposed vulnerabilities related to ERCOT's isolation from other grids.
  • Lessons/Aftermath: Mandatory weatherization standards enacted, market cap lowered to $5,000/MWh, increased reserve procurement, ongoing debate about market design reforms (e.g., Performance Credit Mechanism), heightened focus on gas-electric coordination and credit requirements. Demonstrated the catastrophic potential of underestimating extreme weather impacts and the limitations of price signals alone during physical system failure.

Case Study 2: PJM Capacity Market Turmoil & Winter Storm Elliott (December 2022)

  • Context: PJM operates the largest capacity market in the world, intended to ensure resource adequacy.
  • Issues:
    • MOPR Controversy (2018-2022): FERC-imposed Minimum Offer Price Rule (MOPR) aimed at limiting impact of state-subsidized resources caused market delays and uncertainty before being largely reversed.
    • Low Capacity Prices (early 2020s): Several auctions cleared at historically low prices, raising concerns about incentivizing new firm generation.
    • Winter Storm Elliott (Dec 2022): Despite the capacity market, ~23% of PJM's generation capacity failed to perform during extreme cold due to fuel issues and equipment failures. PJM narrowly avoided load shedding. Highlighted performance issues even with capacity payments.
    • Price Rebound (2024/25, 2025/26 Auctions): More recent auctions saw significant price increases, signaling tightening conditions and potentially incentivizing needed investment.
  • Lessons/Aftermath: Demonstrated that capacity markets don't guarantee performance without strong incentives and standards; led PJM to tighten performance penalties and review winter readiness; highlighted importance of fuel security (especially for gas) and inter-regional coordination (PJM imported power). Underscored the ongoing challenge of calibrating administrative capacity mechanisms and integrating state policies.

Case Study 3: CAISO Duck Curve and Renewable Curtailment

  • Context: California leads in solar energy integration.
  • Challenges:
    • The "Duck Curve": High midday solar output drastically reduces net load (demand minus renewables), followed by a very steep ramp-up in net load in the evening as solar fades. Requires significant flexible resources (fast-ramping gas, batteries, demand response, imports).
    • Renewable Curtailment: Increasing instances where solar (and sometimes wind) generation must be curtailed due to oversupply (generation exceeding demand + exports) or transmission congestion. Millions of MWh curtailed annually.
    • Negative Pricing: Frequent occurrence of zero or negative LMPs during midday oversupply periods.
  • Market Responses/Solutions: Development of flexible ramping products, massive deployment of battery storage (now significantly mitigating the ramp), expansion of regional energy markets (Western EIM, planned EDAM) to export surplus and import during ramps, ongoing transmission upgrades.
  • Lessons: High renewable grids require significant investment in flexibility (storage, transmission, demand-side resources) and sophisticated market mechanisms. Regional coordination is key to managing variability. Price signals (including negative prices) are driving adaptation, but physical infrastructure (transmission, storage) is crucial.

Case Study 4: Other Price Spikes and Insolvencies

  • PJM Polar Vortex (Jan 2014): Extreme cold, gas constraints, generator failures led to price spikes ($1000s/MWh). Stressed retailers and directly led to PJM's Capacity Performance reforms.
  • ISO-NE Cold Snap (Jan 2018): Prolonged cold strained fuel supplies (especially oil for dual-fuel plants), leading to elevated prices and concerns about fuel security. Prompted ISO-NE to implement programs incentivizing fuel inventory.
  • GreenHat FTR Default (PJM 2018): A financial trading firm defaulted on a large FTR portfolio, causing >$100M losses socialized to other market participants. Led to significantly tighter credit rules for financial players in FTR markets.
  • General Lessons: Underscores the need for robust hedging against tail events, strong credit requirements for all participants (including financial), and the importance of fuel security and resource diversity. Highlights how market failures can trigger regulatory and market design changes. Emphasizes that financial stability and physical reliability are deeply intertwined.

These examples illustrate that while deregulated markets can drive efficiency, they must be carefully designed, monitored, and regulated, and participants must actively manage inherent risks to ensure both financial viability and grid reliability.

Further Reading:

  • Reports from FERC, NERC, and ISO/RTO Market Monitors following major events (Search specific event names like "Winter Storm Uri FERC Report").
  • Academic papers analyzing market performance during crises (Search Google Scholar or university energy policy centers).
  • News archives from energy industry publications (e.g., RTO Insider, Utility Dive) covering these events.
  • ERCOT Documents related to Winter Storm Uri