RTO and ISO Explained: A Deep Dive into US Power Markets
The concept of a regional transmission organization (RTO) and independent system operator (ISO) grew out of electricity deregulation and FERC orders in the 90s and early 2000s. Some areas of the US wanted to bifurcate generator and transmission owners to bring competition to the market. What grew out of those conversations was market deregulation and thus the creation of RTOs and ISOs. In this RTO and ISO explained post, we’ll address common questions such as “What is the difference between an RTO and ISO?” and “How do RTOs and ISOs impact electricity consumers?” - all while shedding light on their purpose, and function, and what’s ahead.
Understanding the Basics: What Are RTOs and ISOs?
RTOs and ISOs in North America serve roughly two-thirds of total US electricity demand. The goals of these organizations are to operate the transmission grid, administer wholesale electricity markets, and provide reliability. There are currently seven RTOs and ISOs in North America - California ISO (CAISO), Electric Reliability Council of Texas (ERCOT), ISO New England (ISO-NE), Midcontinent Independent System Operator (MISO), New York ISO (NYISO), Pennsylvania-New Jersey-Maryland Interconnection (PJM), and Southwest Power Pool (SPP).
When you compare RTOs and ISOs to one another, they’re virtually the same with subtle nuances. Generally speaking, RTOs cover a larger geographic footprint compared to ISOs. In addition, RTOs and ISOs have different governance structures as well as how they price services (i.e. ancillary services) in their market. For most people who aren’t in the weeds, RTOs and ISOs are the same.
The Inner Workings: Functions and Market Structures
FERC orders 888, 889, and 2000 are key to understanding the ISO and RTO market structure, RTO and ISO governance, and RTO benefits and challenges. ISOs and RTOs work as a marketplace for the buying and selling of wholesale power. They’re generally set up as a non-profit approved by either the Federal Energy Regulatory Commission (FERC) or regional or local commissions. Market structure, governance, benefits, and challenges vary by RTO and ISO.
Order 888 acknowledged barriers to wholesale market competition and that those barriers need to be removed; Order 889 amended rules for establishing and governing the Open Access Same-time Information System (OASIS) and prescribed standards for its use and access; Order 2000 codified what it meant to be an RTO including its characteristics, functions, and rate-making policy.
RTO and ISO Future Outlook
As the ISO and RTO marketplaces have evolved over the past 20-30 years, one of the critical areas of debate is the RTO role in renewable energy integration. In particular, how do these organizations evolve their interconnection queue study process to allow renewable energy projects to advance through the study process without substantial delays?
Any developer involved in a deregulated interconnection study process (i.e. CAISO, SPP, etc.) has felt the pain of interconnection queue delays. Except for ERCOT, it generally takes 3+ years from submission of an interconnection application to receipt of an interconnection agreement for 20 MW+ projects. This indicates a broken model that needs to be fixed.
RTO and ISO Impact on Electricity Prices
Supply and demand sets electricity prices in wholesale markets with RTOs and ISOs facilitating the buying and selling of power. One of the primary goals of these organizations is to open the wholesale market to competition translating to a lower cost of electricity for consumers.
Electricity in deregulated markets is dispatched starting with the lowest cost of electricity first. Power plant owners and market participants submit bids to the market. The RTO and ISO then match supply with demand. Electricity prices are a function of both supply and demand as well as transmission, congestion, and ancillary services and fuel costs.
Key Takeaways
When comparing an RTO vs ISO remember the RTO and ISO functions are generally the same. Both are non-profits and the RTO and ISO market structure is set up to create competition. The RTO and ISO impact on electricity prices will continue to evolve as the energy transition continues. In addition, the RTO and ISO role in renewable energy integration is something I’ll be following along with the RTO and ISO future outlook.
