Electricity markets are both critically important and incredibly complex. The simple process of keeping the lights on throughout the day for millions of households requires grid operators, markets, and technology to work together in perfect harmony. In order to efficiently run these processes, grid operators have set up systems where electricity generators are separately compensated for providing power to the grid (“generation markets”) and providing reliability services to the grid (“ancillary services markets”). However, because the same generators are operating across both markets, policy changes in one market can impact operations in the other market.  

In this paper, E&E Lab Postdoctoral Scholar Jesse Buchsbaum and coauthors Catie Hausman, Johanna Mathieu, and Jing Peng study PJM, the grid operator in the Mid-Atlantic and Midwest. As PJM’s policies have changed over time, the amount of energy that grid operators have needed to procure from generators for reliability services has changed. This policy variation over time allows the authors to use both theory and an empirical analysis to estimate how changes in the ancillary services market can spill over into the generation market. 

The paper shows that when policy changes caused increases in the level of generation required for reliability, there were two main effects. First, coal-fired power plants were dispatched at lower levels of generation. Second, flexible natural gas combined cycle plants were dispatched more frequently. In combination, these two effects resulted in substantial shifts in generation from high-emitting coal plants to lower-emitting natural gas plants, leading to a decrease in carbon emissions. While the magnitude and direction of the change in emissions are likely to be different in other contexts, the paper’s main finding is that ancillary services market policy, while often overlooked, can have major impacts on generator decision-making and even emissions. These findings are particularly relevant in a world where the grid is becoming cleaner and generation is becoming more intermittent, as the reliability and resilience provided by ancillary services markets take on more importance.