TODAY’S STUDY: PULLING THE NEW ENERGY IN THE WEST TOGETHER

Regional Coordination in the West: Benefits of PacifiCorp and California ISO Integration

October 2015 (Energy and Environmental Economics)

Executive Summary

Changes in the electricity industry across the Western U.S. are creating new opportunities for cooperation and coordination among electric utilities. As populations and economies throughout the region continue to grow, utilities are increasingly looking to regional solutions to meet their customers’ needs at a reasonable cost. State and federal environmental policies and changing customer preferences are driving a transformation of the region’s generation mix, significantly increasing its reliance on renewable energy. Regional coordination will help Western utilities respond to these changes at a lower cost to customers while maintaining high levels of reliability.

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The benefits of regional coordination have already begun to spur collaborative initiatives among the West’s balancing authority areas. In November 2014, the California Independent System Operator (ISO) and PacifiCorp established a joint energy imbalance market (EIM). The new market generated $21 million in customer benefits in the first eight months of operation, in line with initial estimates. NV Energy is on schedule to begin participating in the EIM in November 2015 and two additional utilities — Puget Sound Energy and Arizona Public Service — have announced their intention to participate in the EIM in fall 2016. Portland General Electric and Idaho Power Company have both recently announced plans to explore steps to possible participation in the EIM.

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In April 2015, PacifiCorp and the ISO announced a memorandum of understanding to explore PacifiCorp becoming a full participating transmission owner (PTO). As part of this process, PacifiCorp engaged Energy and Environmental Economics (E3) to preliminarily assess the potential incremental benefits1 beyond those already captured through participation in the EIM, of further integrating PacifiCorp and the ISO, where PacifiCorp becomes a PTO and the ISO becomes a more regional organization through changes in its governance. This report presents an overview of our findings.

Full integration of the PacifiCorp and ISO systems would provide a number of operating, investment, and regulatory cost savings, incremental to those achieved by the EIM, which are summarized in the table below.

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In this report, we develop quantitative estimates for four of these benefits: (1) more efficient unit commitment and dispatch, (2) more efficient overgeneration management, (3) lower peak capacity needs, and (4) renewable procurement savings. The other benefits listed in Table 1 represent important potential sources of additional value for PacifiCorp and existing ISO customers but are more difficult to accurately quantify. Figure 1 shows a range of quantified incremental benefits for PacifiCorp and ISO customers in 2024 and 2030.

We estimate that integration of PacifiCorp and the ISO’s balancing authority areas would yield significant incremental annual savings that increase over time. In 2024, we estimate incremental savings of $62 to $122 million (2015$) for PacifiCorp, rising to $200 to $272 million in 2030 (Table 2). For ISO customers, we estimate incremental cost savings of $92 to $213 million in 2024, rising to $203 to $894 million in 2030 (Table 3). Over its first full 20 years, assumed here to be 2020 to 2039, we estimate that PacifiCorp and ISO integration would yield $1.6 to $2.3 billion (2015$) in total present value incremental savings for PacifiCorp, and $1.8 to $6.8 billion for ISO customers.

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The large range in benefits for 2030, particularly for ISO customers, reflects the significant upside potential for jointly planning transmission to access low-cost renewable resources across the combined footprint, thereby creating an opportunity for California to achieve a portion of its 50% renewable portfolio standard (RPS) target at a reduced cost. This study assumes high-quality wind resource potential in Wyoming is used to meet a portion of the California RPS targets as a means to measure the benefits of joint transmission planning for renewable development strategy, recognizing that alternative transmission and supply options for renewable development exist.

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As the results suggest, PacifiCorp and ISO customers will benefit differently from integration. PacifiCorp’s largest source of incremental benefits will be operating cost savings — savings in fuel and energy procurement costs that result from participating in the ISO’s day-ahead market and importing renewable energy when California has excess supply. ISO customers will realize incremental benefits primarily from investment cost savings — savings from procuring lower cost renewable energy and from reducing the need to replace overgeneration with additional renewable energy to meet policy goals.

Benefits increase significantly over time, particularly for ISO customers facing a 50% RPS target by 2030. Consequently, it is important for stakeholders to take a long-term perspective when evaluating the benefits of PacifiCorp and ISO integration. The high-value, longer-term savings described in this report are linked to planning and investment decisions that require long lead times and clear guidance. Importantly, PacifiCorp and ISO integration in the nearer term would provide the joint processes and certainty that enable more strategic and efficient longer-term investment decisions.

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The quantified benefits for both PacifiCorp and ISO customers are sufficient to support continued progress toward PacifiCorp and ISO integration. Over a longer-term horizon, the integration of the PacifiCorp and ISO balancing authority areas would provide PacifiCorp and ISO customers greater flexibility to respond to ongoing changes in state and federal environmental policies, to develop renewable energy, and to reduce greenhouse gas (GHG) emissions at a lower cost. Additionally, the regional transmission organization created through PacifiCorp and ISO integration would lay a foundation for broader participation by other balancing area authorities in the West. While the initial benefits analysis presented in this report indicates there is an opportunity for significant benefits, ultimately, a successful integration will require PacifiCorp and the ISO customers to each have net benefits. The upcoming stakeholder process will provide the guidance for any necessary changes to the ISO tariff and inform the determination of overall costs and benefits. A description of the key cost categories, while not quantified, are included in Section 3 of this report.

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The remainder of this report is organized into four sections. Section 1 provides context for the assessment, describing expected changes in the Western Interconnection over the next 15 years. Section 2 presents the benefits assessment, including qualitative descriptions of how different parties stand to benefit and quantitative estimates of a subset of those benefits. Section 3 describes cost categories. Section 4 summarizes key conclusions. A separate technical appendix describes the methods and assumptions used to develop the quantitative benefit estimates.

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