Networks & Supply Chains: Tripping the Light Fantastic
The recent grounding of the huge container ship in the Suez Canal just provided another example of supply chain interruption that gives new meaning to the “butterfly” effect – the phenomenon whereby a minute localized change in a complex system can have large effects elsewhere. This was brought home to me when a story in an Economist podcast(beginning at 16:45) on the Suez pileup. Interestingly, the report related the Suez choke in the global supply chain to similar effects on the global economy resulting from the blackouts in Texas. I think I just felt a butterfly wing flapping at Palo Verde.
Blame Game - Part II
Like two children trying to pin the blame for Grandma’s broken vase, each side of the great political divide regarding the environment has been pointing blaming fingers for the blackouts in Texas. We will find out more details as time goes on and the necessary investigations go forward. However, as usual the true culprit is likely to be a combination of factors.
The Corrosive Effects of Political “Capture”
A recent effect of the rolling blackouts last summer was that the Federal Energy Regulatory Commission (FERC) considered last month (but ultimately rejected) an investigation into the CAISO’s Resource Adequacy (RA) program. A colleague in California suggested that CAISO’s Capacity Procurement Mechanism (CPM) provided the backstop California likely needed to avoid the rolling blackouts. We agreed the CAISO may have been reluctant to exercise this authority. The last time they did in 2017, they got slapped by the CPUC because natural gas units had been selected to meet a shortfall.
Here’s the Deal
I have a frustration. While my views might be seen as slightly “right of center”, I am not a climate denier. Indeed, I am in favor of a national cap-and-trade regime. I have told my climate-skeptic friends that that a cap-and-trade regime should make sense to them as well. In the event they are wrong in their beliefs, a cap-and-trade regime would allow for some prudent “risk management”.
Here’s the Deal
I have a frustration. While my views might be seen as slightly “right of center”, I am not a climate denier. Indeed, I am in favor of a national cap-and-trade regime. I have told my climate-skeptic friends that that a cap-and-trade regime should make sense to them as well. In the event they are wrong in their beliefs, a cap-and-trade regime would allow for some prudent “risk management”.
Moving On...

I am not here to make any political commentary or even to try to draw linkages between what we do in the Electric Markets and outcomes of this week’s election. I did my civic duty and voted. Now all that remains is to deal with whatever the outcomes are. So, let me move on to highlight a few things that may have escaped your notice while much of the country obsessed over headlines and election drama. As far as our interests in promoting market integration, these items are consequential. One was a hopeful sign; the other was troubling.

The “State-Led Study”

As the CAISO’s Energy Imbalance Market (EIM) has grown and evolved, some of the policy makers in states outside of California have wanted an impartial review of the benefits of the EIM. In particular, these policy makers are seeking an assessment of the value of the EIM over a large footprint as well as a comparison with other designs like a west-wide Regional Transmission Organization (RTO). To that end, the Utah Governor’s office, along with the Energy Offices of Idaho, Montana and Colorado secured a grant from the US Department of Energy (DoE) to fund a “state-led study” for the benefit of all the states in the Western Interconnection.

The study (found at this link), performed by the consulting firm Energy Strategies out of Salt Lake City, began over a year ago with significant stakeholder review on methodologies and assumptions. Last week, some results were published from the technical analysis of the relative benefits of three possible configurations; 1) the status quo of planned EIM integration, 2) an EIM that extends over the entire Western Interconnection and 3) a west-wide RTO or “One Market”. The benefits were calculated in terms of production cost savings and capacity savings which were balanced against start-up costs. Benefits such as improved market efficiency and transmission planning savings were excluded as they are difficult to quantify.

As you would expect, the larger the market footprint and the more robust the market, the greater the benefits. The “One Market” outcome yielded the greatest savings and increase in trade. Diversity of load was the key to capacity savings.  A larger market footprint was shown to lead to greater savings and a lower coincident peak. The total annual savings for the One Market in capacity savings alone was over $478 million – almost 10 times the amount of savings over an EIM over the entire west.

As exciting as that number is – particularly as the entire west wrestles with how to manage tighter capacity with unit retirements and  increasing renewable deployment – some really big numbers are evident when the study calculates the addition of production cost savings. The combined benefit totaled over $1.2 billion! The study goes so far as to estimate the benefits all the states in the region. If you get a chance, look through the slides. It really begs the question “Why not a Western RTO”?

If we ever got to a full Western RTO, I suggest we call it “El Dorado”. One formidable impediment is the governance of the California ISO (CAISO) the Board of which is appointed by the Governor of California. However, the rest of the west could integrate into a market with its own governance and then seek to trade with CAISO to achieve most of the benefits. This is what happens in the East between markets like MISO, SPP, PJM, etc. We could call such a market the “Real Western RTO”.

Market Power or Price Formation?

As a past practitioner in the national security field, I recall a conversation with a diplomat from Cuba in which we discussed different views on terrorism. He noted that “one person’s terrorist is another person’s freedom fighter”. This exchange came to mind when I heard from a colleague about a question that came up at a Haas School public discussion on research topics for Electricity. This gathering is normally a great venue to listen to academics discuss their ideas. On this year’s agenda were decarbonization, the introduction of EVs, and a Roundtable on how to achieve a reliable decarbonized grid in the west.

What was disturbing was a pointed question/accusation by a senior staff person from the Energy Division of the California Public Utilities Commission (CPUC) made toward Mark Rothleder of the CAISO. It seems that this staffer felt that the tightness of the market for Resource Adequacy (RA) in the west – amply demonstrated in August – was going to result in CAISO’s policy efforts focusing too much on scarcity pricing and not enough on the need for market power mitigation. Aside from the point that the issue raised was apropos of nothing in the discussion, it underlined the fact that many at the CPUC seem unpersuaded that price suppression during a period of shortage is a bad idea. Or does this staffer think that shortage is really “market power”?

It does raise a general issue that we seem to struggle with in allowing prices to be dictated by supply and demand. It is fundamental to running an efficient market that “price formation” be allowed to send signals about the needs of the system, both in the real-time and the longer period of investment. Indeed, Carrie Bentley of Gridwell Consulting who chairs the WPTF CAISO Committee suggested that poor signals from the CAISO in the mid-August crisis undermined price formation and therefore reliability during critical hours. In a market, the two are inextricably linked – particularly when the market is “tight”.

It was therefore depressing to realize that some on the CPUC staff appear to be myopically focused on price suppression rather than reliability. Certainly, one can achieve reliability without a market and the price formation that underpins it but at what cost? Without a market, regulators are shooting blind and must err on the side of “over-procuring” if they wish to be sure of meeting reliability needs. The reason for the market is to achieve reliability and other outcomes as efficiently and transparently as possible. This last aspect seems to be missing from the consciousness of at least one senior member of the CPUC staff. Given the events of mid-August in California and the rest of the west, now seems an odd time to act in ways that undermine price formation.

Minding our Business

As I wrote this, one of the happy thoughts that came to me was that what Western Electric stakeholders are pursuing is largely unaffected by the outcome of national elections. We have it within our grasp, if we choose to do so, to move toward market integration that will improve reliability in an efficient way that achieves the goals of states in the west. That, my friends, seems liberating in the current environment.

The Megawatt NOT Consumed
Back in the 1990s, when I was new to the industry, I was working for a competitive generator. I recall one morning, I was in the office early; the sun was bright that day and I had my lights off in my office. The CEO Joe Kearney, a gregarious but thoughtful guy, came by, turned my lights on and said, “We sell electricity”.
The Blame Game & Solutions
My stomach turned… I was on vacation after dropping our daughter off at a new college when I got a text about the impending rolling blackouts in California on August 14. I knew the weather was hotter than Hades and there were fewer resources around than in previous years due to retirements. But rolling blackouts? That took us all back to the summer of 2000 and the blame game that followed…
Well, that was awkward!
Ever find yourself on a flight next to someone who just wants to talk? You know, you exchange pleasantries and you think you can go back to watching a movie, doing work, or reading and this person does not stop talking. That was my first leg of the trip. According to the flight map, this guy talked from Chicago to Utah. What made it worse was that he was telling me of his “second business” – trying to sell solar projects to manufacturing clients with battery storage as if this were a new idea. He had never been in the industry, and did not even know the difference between energy and ancillary services. He honestly thought all he needed to do was offer a solar project with some battery storage and SNAP! Everybody could have cheap, clean power without any connection to anything else.
I want to talk about the California ISO (CAISO) and the awful position it has been put in by FERC, the CPUC, the legislature of California and other factors that restrict its independence.