With the need for clean, flexible generation set to grow as the U.S. works toward net-zero greenhouse gas emissions, a new report is urging changes to wholesale power market rules "to fully unlock the value of hydro in the clean energy transition."

The Brattle Group released a whitepaper on April 15 titled "Leveraging Flexible Hydro in Wholesale Markets." Prepared for the National Hydropower Association, or NHA, the report explored how regional grid operators and asset owners manage hydroelectric facilities and laid out four principles for "maximizing the value hydro and other assets provide within wholesale markets."

U.S. President Joe Biden is working to advance policies to decarbonize the country's power sector by 2035 and produce net-zero greenhouse gas emissions economywide by 2050. Hydropower provides 7% of total U.S. generation and nearly 20% of its carbon-free output, which advocates say makes it a crucial resource in eliminating emissions. Advocates also point out that hydropower provides more than climate-free power, including voltage control and black start capabilities to establish frequency after blackouts.

"Achieving the ambitious decarbonization goals proposed by the Biden Administration and Congress, starts with recognizing that hydropower is more than just clean energy," said Cameron Schilling, NHA's vice president of market strategies and regulatory affairs. "The ancillary services it provides to the grid are being leveraged by balancing authorities to integrate growing amounts of wind and solar generation."

But NHA members "indicated that there is still work to be done to ensure hydro resources are able to overcome market frictions and contribute their full clean energy and flexibility value," the Brattle Group said in its whitepaper.

The report said new energy and ancillary service markets may be needed as the grid faces new flexibility challenges, including from increased reliance on intermittent solar and wind power. Those new markets must "properly utilize and compensate flexible resources such as hydro," according to the report.

Secondly, the paper said regional grid operators should allow a range of energy market participation options for hydro resources, with "incomplete accounting" of flexible hydro assets' operation and opportunity costs often leading to the inefficient dispatch of those units.

The Brattle Group also urged proper compensation for out-of-market dispatches, with plant operators frequently using their hydro assets outside of standard day-ahead and real-time market products.

"More complete day-ahead and real-time markets can reduce the need for these out-of-market instructions," the whitepaper said. "When these are unavoidable, uplift payments should be structured to fully compensate suppliers for their costs, including lost opportunity costs."

Lastly, Brattle Group said all generation assets, including hydroelectric ones, should be "accredited fairly" for their resource adequacy services. Although system operators can quantify hydro's resource adequacy value, "a larger challenge is accurate accreditation of renewable and short-duration storage resources as the market share of these resources increases," the study said.

"Through ensuring the accurate identification and fair compensation of emerging flexibility and clean energy needs, the power markets of the future offer the opportunity to fully unlock the value of hydro in the clean energy transition, supporting the transition to reliable, cost-effective, decarbonized energy systems," the paper concluded.

Along with providing carbon-free power, hydroelectric facilities serve several other crucial functions in an evolving power grid. The NHA noted that in the California ISO market, which is working rapidly to decarbonize, hydropower makes up 15% of installed capacity but 25% of regulation services used to balance supply and demand and maintain a consistent grid. In addition, hydropower provides 60% of CAISO's spinning reserves, capacity that is available on short notice to balance the system in the event of power or transmission outages or other contingencies.

With California and other states seeking to sharply reduce greenhouse gas emissions and integrate more intermittent resources, grid watchdog the North American Electric Reliability Corp. has urged the addition of more flexible resources including hydropower to maintain system reliability.