Monday Study – The West’s Market Opportunity

CAISO EDAM Benefits Study Estimating Savings for California and the West Under EDAM Market Scenarios

Keegan Moyer and Daniel Ramirez, November 4, 2022 (Energy Strategies)

Study Background>/span>

• The CAISO engaged Energy Strategies to estimate the benefits associated with the CAISO’s Enhanced Day-Ahead Market (EDAM)

o The purpose of the study was to estimate both operational and capacity savings that may accrue due to the formation of the CAISO’s new day-ahead market known as EDAM

o The benefit estimates were calculated for (1) California; and (2) the Western US states in the Western Interconnection

• The methodology and underlying databases used to perform the assessment were consistent with those adopted by Energy Strategies in performing the State-Led Market Study, which was an analysis conducted for the benefit of Western states with funding through a US Department of Energy grant

o The State-Led Market Study was published in July 2021 and with the goal of helping Western states independently and jointly evaluate benefits of generic organized electricity market expansion options, while enhancing regional dialog on related regulatory and policy issues impacting states

o The study featured detailed modeling that forecasted the operational benefits, as well as capacity savings, that could accrue to individual states under future market scenarios

o The modeling explored generic representations of real-time, day-ahead, and RTO market constructs, assuming their implementation across a series of hypothetical footprints selected by the Western states

o This EDAM assessment differs from this prior work in that it is designed to represent specific elements of a market proposal, whereas the State-Led Study was intentionally generic and not focused on representing a particular market proposal or design

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Study Goal

Estimate savings for California and the aggregation of Western States assuming a Westwide EDAM footprint, considering both operational efficiencies and load diversity benefits that may accrue in the year 2030

Operational Savings are Focus of Study

• This CAISO EDAM study focuses on operational benefits of future regional wholesale power markets, featuring modeling intended to reflect specific aspects of the CAISO EDAM proposal

o The study sources capacity savings directly from public State-Led Study results

• Operational benefits reflect a relatively small portion of the benefits caused by organized wholesale energy markets

Market Benefit Categories

Operational Savings

Savings due to more efficient dispatch (via SCED), more efficient management of transmission capacity, lower operating reserve requirements, removal of transmission wheeling costs within market footprint, decrease in trading friction

Capacity Savings

Savings due to lower and regionally shared planning reserve requirements caused by geographical diversity of loads (and generation)

Other Energy Related Savings

Savings due to more efficient planning of the transmission system, access to lower-cost public policy resources, environmental benefits of reduced emissions, new market products (e.g., hourly vs. block), increased automation of system operations

Non-Energy Savings

Savings due to lower electricity prices causing indirect economy-wide benefits such as new jobs, changes to household spending, and economic growth

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Adjusted Production Cost (APC) is Primary Metric to Measure Operational Savings

• Adjusted Production Cost (APC) is a metric commonly used to estimate operational benefits in market studies as it accounts for power trading between buyers and sellers

o APC represents the net costs for a given area to serve load, accounting for power generation costs, power purchase cost, and revenues from sales

• A decrease in APC for an area from one market scenario to the next represents operational savings

o This study calculates APC on a balancing area (BA) basis and allocates BA-level operational savings to states based on the amount of BA load in that state

• By comparing changes in APCs, the study estimates how states might experience operational benefits from CAISO EDAM market configurations

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Modeling EDAM: Key Assumptions to Represent Market

Wheeling costs: Transmission wheeling costs or “hurdle rate” between EDAM participants are removed. UC and DA dispatch are optimized together.

Transmission available to market: 100% of inter-area transfer capability is available for EDAM day-ahead market optimization

CAISO export limit: No MW cap on how much power CAISO can export under EDAM

Contingency reserves: No change in BA and reserve sharing group obligations due to EDAM market formation – status quo modeling retained

Regulating reserves: No change to assumption that BAs define and hold regulating reserves locally – Status Quo modeling retained

Load following / imbalance reserves: Assumes EDAM imbalance reserve product causes imbalance reserves to be calculated and held for entire EDAM footprint (versus individual BAs under Status Quo)

Carbon markets: No change to California carbon price or carbon cost applied to unspecified imports per AB32 – Status Quo modeling retained

Real-time market representation: 100% of inter-area transfer is available for real-time dispatch with no hurdle rate, among market participants in EDAM

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Study Results: West-wide EDAM Scenario

Scenario assumes that all Western balancing areas join EDAM market, which features a market-based imbalance reserve product, no transmission wheeling costs among market participants, and 100% transmission availability for market optimization

• An EDAM footprint across WECC causes California operational costs to decline by 6.2% from the Status Quo o Due to increased load diversity across the market footprint, California achieves capacity savings of $95 million per year

• In sum, California saves $309 million per year under a west-wide EDAM

• States outside of California also see efficiencies, especially those caused by load diversity, collectively saving $886 million per year

• Total savings for the region due to EDAM is nearly $1.2 billion per year

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Study Results: Change in Energy Transfers due to West-wide EDAM…Change in Renewable Output due to West-wide EDAM…Comparison of Energy Transfers and Renewable Curtailments for West-wide EDAM Scenario…

Study Results: Comparison to RTO Futures

• By comparing EDAM results to those estimated in the State-Led Market Study for equivalent RTO footprints, we see that the EDAM achieves 74% of RTO operational savings for California, and 81% of RTO operational savings for the remaining Western states

• EDAM, as envisioned in this study, has a market design that removes transmission wheeling costs, consolidates imbalance reserves, and opens up inter-area transfers available for market optimization

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Sensitivities…Imbalance Reserves and Geographic Diversity…Imbalance Reserve Sensitivity…

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Key Takeaways

The CAISO EDAM has the potential to reduce operational costs in California by $214 million per year if the market footprint covers the entire West

o These savings represent a decrease in operational costs of 6.2% in California (from the Status Quo)

o Other Western states, in aggregate, see $329 million in annual operational savings (↓ 4.5% from Status Quo)

o In addition, the EDAM market could help avoid nearly 3 million tons of CO2 per year The inclusion of an imbalance reserve production in the CAISO EDAM is critical to the efficiency of the market as it drives 60% of California’s operational savings forecasted for EDAM

o Removing the imbalance product from the EDAM market design causes California’s benefits to decrease by $128 million per year

o Other Western States operational benefits are also similarly compromised when the imbalance product is removed (benefits ↓$229 million/year)

EDAM is estimated to achieve 78% of operational savings forecasted for an RTO with the same WECC-wide footprint o The components of EDAM market design reflected in this study capture many of the efficiencies offered by an RTO If capacity savings are realized due to the formation of EDAM, total market benefits may reach $309 million per year for California, and $1.2 billion per year for all Western states (combined, including California)…

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