TODAY’S STUDY: Why A Western Region Grid Means More New Energy

Regional Transmission Organizations: Recommendations for the West

Introduction

An historic reorganization of the western electricity delivery system is underway. The sources of our electricity are changing rapidly, driven by shifting economics that include plunging natural gas prices, new state and federal policy goals, and the rise of renewable energy resources. Renewable generation sources have been shown capable of reliably powering increasing shares of our economy. And as large amounts of renewable power are added to the western grid, major changes in how it operates will be needed.

There are many benefits to the potential expansion of the California Independent System Operator (CAISO) across much of the western grid (the Western Interconnection, which serves parts of Montana, Nebraska, New Mexico, South Dakota, Texas, Wyoming, and Mexico; all of Arizona, California, Colorado, Idaho, Nevada, Oregon, Utah, Washington; and the Canadian provinces of British Columbia and Alberta). These benefits include cost savings for customers across the region, the avoidance of building redundant transmission lines and expensive power plants, and the reliable and cost-effective integration of renewable energy resources. Based on experience gained in the rest of the country’s organized grid regions, this Issue Brief examines issues related to renewable power integration and conventional power plant retirements as they apply to expanding CAISO’s footprint.

Regional transmission organizations (RTOs) or Independent System Operators (ISOs)—the terms are interchangeable— run large regional portions of the national electrical system across most of the country. They include the Midcontinent Independent System Operator (MISO) and PJM, the grid operator for the nation’s largest electricity market stretching from the mid-Atlantic states to the Midwest. Studies by these groups have shown that large levels of renewable energy can already be safely and reliably integrated into generation supplies without having to resort to large amounts of gas-fired generation to balance out variability due to fluctuations in the wind and sun.1 A large system footprint, combined with closely coordinated and consolidated grid operations, can avoid the need for significant fossil-fueled generation.2

This kind of operational control and coordination is a common trait in the RTOs/ISOs (including CAISO) that run most of the nation’s electrical grid. Drawing renewable power from across large areas allows grid operators to blend the variability of geographically separated wind farms because the wind in one part of the region is often blowing when it is calm in another, allowing generation in the windy area to replace the energy lost where it calm. Similarly for solar energy, when it is cloudy in one area, it is likely to be sunny in another.

As the 2014 PJM Renewable Integration Study concluded:

PJM has long held that ISOs and RTOs are better able to integrate variable energy resources because of their organized markets and regional infrastructure planning processes, but the study found that PJM’s large geographic footprint also provides significant benefit for integrating wind and solar generation because it greatly reduces the magnitude of variability-related challenges.3

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Economies of scale, technology improvements, and national policy goals have driven renewable energy penetration to new highs worldwide. More than a billion dollars per day was invested globally in renewable energy sources in 2015 ($367 billion total).4 In the United States, renewable energy growth continues its relentless upward trajectory, with solar additions to the electricity system forecast to more than double in 2016 over the previous year.5 As renewable energy’s star is rising, the coal industry’s market position is deteriorating at an accelerating rate, due in large part to unfavorable market conditions.

Some would resist making the changes needed to facilitate the large additions of renewable power necessary to meet our national climate goals because of the fear that some coal plants will be perpetuated in an energy market. They might point to features such as capacity markets (discussed later) in the Eastern Interconnection as proof that markets allow coal plants to stay alive, even if they are infrequently run—some as little as a few hours a year. However, since 2009, PJM (which covers 13 mid-Atlantic states and the District of Columbia) has retired 21,336 megawatts (MW) of coal unit capacity. In the same period, MISO (which covers 15 states in the Midwest and Great Plains and two Canadian provinces) retired 5,713 MW of coal generation. All of these retirements took place without material, unresolvable reliability issues and relatively few out-of-market payment arrangements to keep units running for reliability purposes. In any case, these features of existing markets needn’t be replicated for an expanded western electricity market.

As western coal plants continue to be retired, the use of the extraordinary renewable resources in the West, along with distributed generation like rooftop solar, energy efficiency, and demand response programs, will ensure the system has adequate supplies to meet virtually every load condition and even enhance system reliability. It is time to look at ways to expedite the renewable energy transition to meet the deep penetrations of clean power we will need to meet an 80 percent reduction in greenhouse gas emissions by 2050, as specified by California’s groundbreaking Global Warming Solutions Act, AB 32. This transition will require a major transformation in how the electricity grid is organized, operated, and planned. In the western United States, this means eliminating as much of the operational fragmentation as possible from the system (see map) and placing coordinated operations and planning into fewer hands.

The key to deep penetration of renewable power into the grid, myriad studies tell us, is operating the system over a large geographic footprint, using both policy and market tools to define the types of power plants used and balancing power and demand over seasons, days, hours, and even minutes.6,7

Expanding the operational and market functions of the current CAISO footprint across more of the West, and establishing a governance framework that allows CAISO to act as a regional system operator, can provide many of the tools we need to transition to renewable energy and reliably and affordably meet the climate challenge. We can take the best of the RTO experience from around the country and avoid features that are not well-suited to our uniquely western needs…

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How Regional Energy Markets Work

Existing RTOs operate different types of centralized energy markets within their regions. All of the RTOs and ISOs have day-ahead and real-time wholesale energy markets. As with other commodities, utilities buy this electricity in bulk amounts and then sell it to consumers as a retail product. Some of the RTOs and ISOs also have an additional market tool, called a forward capacity market (discussed later), along with various ancillary service markets from which they obtain energy and operational capabilities from some strategically located power plants. Ancillary services are tools that keep the grid stable and operating smoothly by ensuring that the system is energized properly or operating within the correct specifications. Ancillary services include things like frequency response and operating reserves.

Organized energy markets function similarly across RTO regions. In the day-ahead market, the RTO or ISO first works with the utilities in its region to predict customer demand for each hour of the following day. Utilities and other power plant owners offer bids for power in the dayahead market to satisfy demand on an hourly basis. The RTO then selects the resources to meet that demand the following day. It selects the lowest-cost resource first, then the next lowest, and so on until it has chosen enough generation to meet predicted demand. Because the RTO selects the lowest-cost resources available to meet demand (load), renewable generation—which has no fuel cost—is usually dispatched first. The price paid to all generators providing power within a given hour of the day is the price offered to meet the last megawatt of demand from the highest-cost power plant that clears the market. This price is called the clearing price. The units that clear are obligated to provide energy during the hours for which they cleared the following day.

In reality, customer demand at any given hour will not be exactly what was predicted. As a result, RTOs operate real-time markets during each operating day to account for the differences between predicted and actual demand, in 5- to 15-minute intervals. Resources bid into the realtime markets (or spot markets) are cleared in a lowest-tohighest-cost fashion, just like the day-ahead market, and are dispatched in real time. Because of renewable energy’s free fuel, the more renewable energy that is available, the fewer hours of higher-cost fossil generation will be dispatched to meet a system’s load.

As the electrical system transforms by converting from conventional generation to renewable energy, conventional power plants become increasingly uneconomical and less competitive with cleaner resources. As carbon costs are added (as with AB 32 provisions in California, or as expected with the U.S. Environmental Protection Agency’s Clean Power Plan to limit power plant emissions), this shift occurs even faster. One strategy for reducing carbon dioxide pollution is to add an additional cost to electricity from conventional plants based on how much pollution they release to the atmosphere. This cost, often called a carbon adder, makes power from these generators more expensive and less likely to be chosen in the day-ahead or real-time market…

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Conclusions

-A western RTO or Regional System Operator (RSO) would greatly facilitate efforts to transform the electricity sector in the region to a low-carbon energy delivery system.

-An RSO can help all western states more efficiently meet load and more cost effectively help them comply with federal and state pollution and energy procurement mandates and goals by providing access to lower-cost renewable power from throughout the region.

-All RSOs (including CAISO) have been able to reliably integrate increasing amounts of renewable energy into their systems.

-A balkanized, multi-balancing-area authority system results in an inefficient use of the grid and unnecessary investment in transmission and generation infrastructure, and it makes renewable integration more difficult.

-Geographically large electric system footprints aid renewable integration, aggregate renewable energy’s variability, and reduce the need for flexibility reserves, saving money and enhancing reliability.

-RTOs, because they control the dispatch of all generation in their footprint, can better take advantage of existing gas generation—avoiding the need for new fossilfueled power plants—to integrate high penetrations of renewable energy.

-Energy markets have led to a large number of conventional plant retirements in the Eastern Interconnection.

-Capacity markets have been used to guarantee reliability in eastern RTOs with mixed results. Greater participation has been provided for demand response products in capacity markets, but some uneconomical plants have been preserved by capacity payments when they are no longer competitive in the wholesale market. These include uneconomical coal plants, though they may be infrequently used.

-Regional markets intrinsically favor renewable electricity generators that have zero fuel costs and very low marginal costs.

-A capacity market is not necessary in the Western Interconnection, which is already long on natural gas resources and rich in diverse renewables that often operate during different hours.

-The consolidated operation of RTOs has been shown to reduce and better manage renewable energy curtailment.

-RTO consolidated planning can lead to better identification of infrastructure needs, avoided overinvestment in infrastructure, better use of the existing system, and better justification of new infrastructure when it is needed.

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Recommendations

-Western state legislators and regulators should approve the consolidation of the various transmission and electricity balancing areas in the western grid into an RTO/RSO to better manage and more efficiently integrate increasing amounts of renewable power.

-Authorities should approve expanding the existing successful ISO platform from CAISO to across the West. This will save resources and time and facilitate a more rapid system transformation. It builds on the already expanded ISO regional real-time market.

-A new RSO should avoid the establishment of a capacity market, which can perpetuate uneconomical generation. It is not needed in the Western Interconnection to meet reliability. Resource adequacy will continue to be assured through competitive utility procurement under the supervision of state regulators and local utility boards even as many older power plants are retired.

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