TODAY’S STUDY: The Pros And Cons of A New Western Power Market

A Regional Power Market for the West: Risks and Benefits

Bentham Paulos, July 2018 (Paulos Analysis via Next 10)

The Case For Regionalization

Regionalization has a large number of supporters, including Governor Brown, CAISO, and members of two coalitions, the Fix The Grid Coalition and Secure California’s Energy Future, made up primarily of clean energy industry and environmental groups. They cite the following arguments in favor of a regional RTO.

1. Easier Integration of Renewables A bigger, more liquid, and transparent market would enable easier integration of wind and solar power, and help meet the state’s renewable energy and climate goals at the least cost. It would allow California solar to be exported rather than curtailed, and enable access to a greater variety of excellent resources, such as wind energy in Wyoming, Montana and New Mexico.

2. Manage and Use Existing Transmission Better A Western RTO would enable more efficient use of existing transmission lines, through increased transparency and competition. Eliminating duplicative transmission fees would lower costs. It would also create a more unified and efficient process for planning and allocating costs from transmission lines that cross state borders, which are currently regulated by individual states. By weighing all options across the region, only the most necessary new lines would be built.

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3. Reduce Operational Costs As shown by the $330 million saved to date by the CAISO’s Energy Imbalance Market (EIM), shared operations in a Western RTO can cut operational expenses. Utilities can share reserves, reducing the number of power plants they need to keep on standby. A bigger pool also reduces the variability caused by demand and by wind and solar power, smoothing it out over a larger number of customers and geographic area.

4. Improve Competition, Choice, and Consumer Savings, Growing Jobs A transparent regional market would facilitate greater competition between generators, which would help cut utility bills. One study found that savings could rise to $1.5 billion per year for California consumers by 2030. Lower power costs would spur job creation across the economy.

5. Put Competitive Pressure on Coal-fired Plants A regional market will also increase pressure on the least competitive power plants, which are often the oldest and least efficient. In competitive markets in other parts of the country, older coal plants are retiring in large numbers in the face of lower cost natural gas, wind, and solar power. The West’s excellent wind and solar resources will be strong competitors with existing coal and natural gas power plants, including some in California, helping reduce local pollution instate.

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The Case Against Regionalization

Opponents to regionalization include labor unions, the Sierra Club, The Utility Reform Network (TURN), and some municipal utilities.

1. Governance The current CAISO board is appointed by the governor and approved by the state Senate, though it is a non-profit corporation, not a state agency. CAISO has a strong connection to state policies and coordinates with state energy and environmental agencies. A regional RTO would have a board strictly independent of all stakeholders, including policymakers, with state regulators represented on an advisory committee. Opponents of regionalization fear this would decrease control by state policymakers. 2. It Could Undermine California Policies An independent regional RTO would have to consider the policy needs of any Western states whose utilities join, rather than working solely with California. Opponents fear this would compromise state policies, and expose California to attacks from other states and to greater scrutiny by FERC.

3. It Could Increase Sales by Regional Coal Plants California imports about nine percent of total demand from coal plants in other states. While coal has been in decline nationally, opponents say a regional power market could help these old coal plants, and drive up carbon emissions. They fear that Trump Administration proposals to prop up uncompetitive coal plants would be more likely to succeed in a regional RTO.

4. It Could Shift Construction Jobs to Other States California’s renewable portfolio standard (RPS) requires at least 75 percent of renewable electricity to be delivered directly into the CAISO grid, meaning it must be located in or near CAISO. Expanding the RTO to a broader region would make more out-of-state projects eligible, thus shifting construction jobs to other states.

5. There are Other Ways to Integrate Renewables While opponents of a Western RTO concede that a regional grid could help integrate renewables, they argue that California has many other ways to do that, using distributed energy resources like rooftop solar, energy storage systems, controllable demand (known as demand response), and electric vehicles that can be tapped to provide grid services when they are plugged in. They argue that relying more on distributed energy than on regionalization could improve reliability, create more jobs in California, and capitalize on the state’s competitive advantage in advanced technology.

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Tradeoffs and Takeaways

Not all of these arguments are equal or deserving of the same consideration. Some, such as fears of what FERC or the Trump Administration may do in the future, are speculative, so cannot be proven one way or another. But all of the issues raised involve tradeoffs and options that will require further decisions down the road. Key takeaways include:

1. JOBS: A regional RTO would facilitate regional development of renewables, which could mean construction jobs happening in other states to meet California’s needs. However, those projects, especially wind farms, would lower the cost of electricity for all Californians and create a more diverse energy supply, which would ease integration. Research shows that cheaper electricity would lower costs for business, creating a much larger number of jobs across the California economy. Lower costs come from developing the best resources in the region, rather than restricting development to California. On the whole, studies say that regionalization would lead to greater job growth in California.

2. GOVERNANCE: There is a perception that moving from a state RTO to a regional RTO would mean state policymakers would be giving up control. It is true that a regional RTO would need to have a staff and board that were fully independent, from both market participants and from policymakers. The point of independence is to insulate the regional market from political interference and control by market participants. But CAISO, despite having a board appointed by the governor, is already independent from stakeholders. Because it has been responsive to state policy goals, some people think of it as a state agency, regulated by state policymakers. But it is not, and hasn’t been for almost two decades. A regional RTO, just like CAISO, would have to operate under a framework of FERC orders and federal law that require cooperation, free trade, and fair competition.

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3. THREATS TO POLICY: Threats to California state policies are the same whether or not the state is part of a regional RTO. FERC already has jurisdiction over CAISO and interstate electricity sales. Most legal challenges to clean energy policy happen under interstate commerce rules, not under RTO or FERC rules. FERC must follow federal law and all decisions are subject to appeal to the courts. The primary goal of federal law and FERC policies is to facilitate competition, as a way to ensure “just and reasonable” rates. State policies that don’t interfere with competition are unlikely to run afoul of FERC challenges. Clean energy policies, like RPS, can be crafted to be compatible with federal rules.

4. INTEGRATING RENEWABLES: There are no technical absolutes about how renewable energy can be integrated. Bulk solutions, such as transmission lines and regional markets, are the traditional way to manage the variability of wind and solar. Distributed energy resources, like batteries and demand response, can also be used to integrate renewables, and they are increasingly affordable and capable. A bulk approach is still a lower cost option than one that relies heavily on distributed energy, but the two need not be mutually exclusive. Most distributed energy resources are in their infancy, and wide-scale adoption will take time, based on current costs and trends. Unfortunately, a distributed-intensive scenario was not included under the SB350 studies mandated by the state to investigate a western RTO, nor has it been adequately studied by other agencies, labs, universities, or think tanks. A detailed study should be undertaken to better understand the potential of distributed energy to help decarbonize the grid reliably and affordably. Given the benefits of both bulk and distributed approaches, it is likely that a high-renewables future will include more of both.

5. MORE, OR LESS, COAL?: Coal power is in decline across the country, and especially in competitive markets. The argument that coal would thrive in a regional RTO relies largely on market failures and poor decisions by regulators, and on the threat of future action to undermine competitive markets – not on the presence of greater regional competition. Given the enormous amount of high quality renewable energy resources across the West, and the relatively small amount of coal power plants, it is hard to envision coal succeeding in a truly competitive market, so long as rules do not unfairly favor incumbent or obsolete technologies.

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Conclusion

There is strong agreement in California about clean energy and climate policies, but not on the vexing question of whether a regional power grid would be a good, or necessary, way to reach those goals. Support for regionalization is strong, but concerns remain. With clean energy technologies becoming the most competitive options, their growth may well be best served by a larger and more independent power market. Proponents argue that these trends are unstoppable, and a formal regional market will simply accelerate the domination of wind and solar in the Western power system. Opponents counter that a regional market will disconnect state policy from market operations, enhance federal moves to prop up coal plants, and drive construction jobs to other states.

In either case, RTOs have a limited ability to set electricity sector policies. States play a much more prominent role, making procurement decisions, setting emissions policies, and determining retail rates. While it is not always an easy process, RTOs around the country have generally accommodated state policies on clean energy. And in the end, participation in an RTO is voluntary; utilities and states can withdraw if they are unhappy.

The research in this paper is intended to inform the debate around a regional grid by presenting arguments and evidence in a straightforward summary. This analysis explores complex legal, policy, and engineering issues, to shed light on the debate and help further inform discussions.

Adding to the difficulty for policymakers is the asymmetrical nature of the debate: technical arguments on integrating renewables and cutting carbon, on the one hand, versus governance issues on the other. Weighing this apples-to-oranges comparison will be necessary in deciding whether to move toward a regional grid.

In the meantime, the success of CAISO’s Energy Imbalance Market has helped the region evolve toward more cooperative and competitive markets, and increased the comfort level of participating utilities and regulators. The rapidly declining cost of wind and solar is lowering resistance to their adoption, putting more Western states on the same page about what the future will look like.

The trends point toward regional cooperation, but the specifics will need to be worked out in partnership with other stakeholders, and not in a single California bill. The bill is the first step in allowing greater regional cooperation to proceed.

CPUC Chair Michael Picker has characterized the creation of a coordinated Western market as an evolutionary process. “The success of the EIM was that people can ease into it,” he pointed out during a 2017 CAISO symposium. “The EIM is like living together before you get married, then you get married and buy a house.”

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