S3E7: William Hogan of Harvard's Kennedy School defends the LMP-based market used in regional wholesale power markets as the best and only way to facilitate the transition to a clean-energy grid

William Hogan, the Raymond Plank Research Professor of Global Energy Policy at Harvard's Kennedy School of Government, along with his colleague Scott Harvey, are the architects of the market structure employed in every competitive regional wholesale power market in the United States, known as the bid-based, security constrained economic dispatch model with locational marginal prices.

This market model has been the subject of criticisms from its inception some three decades ago,  but in recent years it has come under renewed attack from interests who claim it is inadequate to support a transition to a clean-energy grid comprised of many zero marginal cost intermittent renewable generation resources.

Hogan and Harvey authored a paper in October 2022 defending and explaining the market structure incorporating locational marginal pricing, or LMP. In this episode, Hogan elaborates and explains that, not only are critics wrong to suggest LMP markets aren't up to the task, but they are in fact the only means available to facilitate the clean-energy transition. "If you want an efficient market in the electricity system, this is all the only way to do it – that we know of," Professor Hogan tells the podcast. "This model is ubiquitous and successful. I call it successful market design."

Hogan scoffs at criticism that the LMP market design isn't the correct vehicle to accommodate increasing amounts of zero marginal cost renewable resources. Such criticisms fail to recognize the role that battery storage and demand-side resources will play in decarbonized markets, he says. "Even if you had 100% renewables (on the grid), there will be periods of time when you’re capacity short because you just didn't have enough of them. And then the demand side is going to be much more important because we're going to have to adjust demand. And implicit in the theory, or explicit in the theory, is that the price will be set by the demand side, not by the supply side, but it's the same marginal cost principle. You get the same answer in terms of economic dispatch. And you get the same pricing outcome across the grid. So absent the fantasy world of an infinite supply of zero marginal cost energy, that theoretical problem doesn't arise."

The empirical proof that  the criticism is misplaced is evident in the Western interconnect, where increasing numbers of utilities are joining the Western Energy Imbalance Market, which employs LMP pricing, primarily to accommodate the rapidly increasing amounts of renewable energy resources in the region. 

"This is a very powerful empirical argument that says, no, you’ve got it exactly backwards. It's not that we need to get rid of this. We need to strengthen it and expand it," Professor Hogan says. "Because the basic design works in theory and it works in practice, and all the other things that we have tried – I don't know how many of your listeners know but PJM tried something else first. And it didn't work. And New England tried something else first, and it didn't work. And California tried something else first, and it didn't work. And Texas tried something else first. And it didn't work. And then they all had to revise and reform and go through the agony of that process to get to bid-based security-constrained economic dispatch with locational marginal prices, which is now done across all of these. And New York started this from the beginning, the Midwest started this from the beginning, the Southwest Power Pool when it converted to an RTO started with this, so that's why it's now true in all of these markets in the United States."

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