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Blog posts of '2020' 'November'

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.