Networks & Supply Chains: Tripping the Light Fantastic

I am sitting here in the dining room of my parents’ house in Louisville, Kentucky as my father has been unwell the last several weeks. I find myself in that place that many often find themselves – when a parent appears to be coming to an end, but the timing is uncertain, and you try to “be there” for whatever comes. Having had my Mom pass about 18 months ago, this is the last chance to connect with my parents’ time. “Bittersweet” is a useful descriptor for this phase.

My Dad has been a state senator, taught law, served on the Board of the University of Louisville and raised 4 kids. But he made his bread and butter practicing maritime law as barges moving goods and material often run into bridges, dams, and other things on the big, broad Ohio River. So, with that professional background, the ship grounding in the Suez Canal was a topic of great interest in the house this past week. Bear with me for a minute; I’ll connect the dots to a dire situation in California AND the entire West region.

The Egyptian-Texas Connection

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.

And, how does this relate to the West?

The global economy truly is a vast network, one that relies on goods, services and money moving over huge areas. In the Western part of the US, we have a transmission system that is physically connected and should perform like such a “network” with all its inherent efficiencies. Instead, we have an electric system that functions like fiefs in Medieval Europe. The equipment is certainly modern, but the dispatch is not.

Most of the West is governed by dispatch decisions that are made in each utility’s balancing area. But power can and should be sold, then moved to areas where it is needed most. Otherwise, why have an interconnected system? Even though electrons do not move in a uniform direction like natural gas molecules, most of the West enables bilateral sales by pretending that electrons are moving in a “contract path” rather than moving along the path of least resistance.

For over 20 years, California has dispatched its electric system using the “security constrained economic dispatch” or SCED. This allows the CAISO system to function as a true network which allocates transmission on a real-time basis that reflects the actual state of the system. Power moves where it can, and it loads the transmission system as efficiently as physics allows. When the system is maxed out, load in constrained areas reflects higher prices so that generation that can serve load is incented to be available.

Historically, this difference in transmission allocation was seldom a problem as the West normally had excess capacity available through abundant hydro resources and large thermal (coal, natural gas) units beyond the needs of the region. Power often needed to move from the Pacific NW to the Desert SW and the CAISO system benefited by buying some of this power and allowing it to “wheel” into the Southwest. However, the days of easy transit across these differing transmission systems are now over. Load growth, legacy resource retirement and the transition of resources to lower emitting objectives are making this plain.

California has been furiously working to make sure that the blackouts that occurred in August of last year don’t happen this year – if possible. The California Public Utilities Commission (CPUC) has been directing a multi-phased process to get the utilities and other load servers to contract for already scarce resources. The rest of the West, fearing that California may suck up resources or not allow some to flow outside its borders is procuring any capacity it can. The result is widening price spreads for this Summer:

The Clogged Supply Chain

The CAISO is presently caught in a difficult situation. It runs the transmission network that efficiently moves power around California. Power coming into California, however, utilizes transmission that allows for long-term availability. But this supposed “availability” is predicated on a static estimate of the transmission system’s capacity. The CAISO must allocate some of this capacity so that it meets the CPUC requirements for being dedicated to California while allowing power to be sold across its system to meet needs in other states. In the case above, this means allowing power to move across the CAISO system from the Pacific NW to the Desert SW while at the same time making sure that CAISO load gets its share.

If the CAISO doesn’t accommodate “wheel throughs” it destroys liquidity in the power market, exacerbates shortages, and this results in power prices spiking. To put it in physical terms, this is like allowing goods coming from Oregon to California at COB on a narrow railroad gauge which then must be unloaded and put on a wide gauge track to Palo Verde, then put on another narrow-gauge track to serve load in Arizona and Nevada. This movement must allow for the flow of goods within California on the wide gauge track.

This is a situation that could easily be corrected. It does not require massive investments in systems as investments to run a network already exist. It requires either the utilities outside California to join in the network system of the CAISO or to form their own network that would dispatch in a SCED system in harmony with the way CAISO is dispatched.

The utilities in the Energy Imbalance Market (EIM) could easily form their own network or Regional Transmission Organization (RTO). They have the size and the systems to do so. They would just need their own market administrator which could be had through a simple solicitation process of any of the functioning RTOs (SPP, MISO, PJM, CAISO). They would get 95% of the efficiency of being a member of CAISO which would be a vast improvement in efficiency over the status quo.

However, it would be easier still to just join CAISO and get all the efficiency of a vast transmission system operated as a network. But to get this, the decision makers in California must reorganize the Governance of the CAISO to make it acceptable for the neighboring utilities to join. That means ceding some power in the selection of the CAISO Board to either an independent process or one that is shared with other states.

Can California officials get over the “need to control” in order to get the benefits of efficiently sharing increasingly scarce power resources? Or do the states surrounding California need to make their own organization to then coordinate with the CAISO? The management at the CAISO would certainly like to convince the decision makers in Sacramento to make it easier to join CAISO. But if they cannot make progress on this soon, the needs of customers may make it necessary to choose the next best alternative. Will the West allow for the network or will the supply chain continue to be choked? Time to decide.