Western Regionalization Plan B: Utilities take an interim step to expand the grid

Western utility leaders’ political push to expand California’s grid system into a regional power market was dismissed in the state’s most recent legislative session — but now those leaders are looking toward a different market.

California lawmakers in August rejected Assembly Bill 813, which would have expanded the California Independent System Operator (CAISO) by including other Western state representatives into its governance. California lawmakers, concerned this might compromise the state’s clean energy goals, froze the bill in committee.

Policymakers and utility leaders in California, Washington, Oregon, Nevada and Arizona remain committed to developing some kind of regional cooperation and are discussing an expansion of CAISO’s real time energy imbalance market (EIM) to its day-ahead operations.

“Cautiousness in the West about these things makes evolution better than revolution,” former California Public Utilities Commissioner Mike Florio, a leader in the new regionalization effort, told Utility Dive.

While policymakers have struggled with regionalization, the EIM “has been quietly churning out savings and expanding collaboration and trust between participants,” Florio said. “Now may be the time to expand the EIM to the day-ahead market, which has probably always been a more natural Plan B.”

The existing EIM is a real-time energy market in which Western utilities and CAISO exchange resources to meet demand that was not scheduled in the day-ahead market. Having real time visibility into supplies across an eight-state region allows participating utilities to balance fluctuations in supply and demand at a lower cost, according to CAISO. It also allows avoiding the costs of curtailment.

Participants have saved a cumulative $401 million dollars for ratepayerssince the EIM launched in 2014. Florio and others in California and across the West believe obstacles that blocked efforts to create a Western regional power market will not stop participants from realizing far more savings in a day-ahead EIM.

Savings from increased efficiency in resource dispatch and sharing renewables could potentially multiply significantly since an estimated 95% of the present market volume is day-ahead activity. But reconsideration of existing transmission charges and bilateral contracts will be necessary to make the day-ahead EIM a reality.

EIM by the numbers

The seven current real time EIM participants working with CAISO are the six state PacifiCorp utilities, NV Energy, Puget Sound Energy, Arizona Public Service, Portland General Electric, Idaho Power, and Powerex.

The authority of the EIM’s Governing Body to supervise market operations is delegated by the CAISO Board of Governors. Use of the market is voluntary. This is key to the system’s success because it preserves participating utilities’ autonomy, the Governing Body’s Vice Chair, Carl Linvill, told Utility Dive. Linvill is also a principal of the Regulatory Assistance Project and a former Nevada Public Utilities Commissioner.

If the ongoing stakeholder process results is moving ahead with a regional day-ahead EIM, the CAISO Board of Governors could extend oversight of it to the Governing Body, but utility participation would remain voluntary, Linvill said. “All the current EIM participants have expressed interest in a regional day-ahead market, but they are unlikely to make a firm commitment until studies show benefits are greater than costs.”

EIM benefits “include cost savings and the use of surplus renewable energy,” according to the CAISO Q2 2018 report. Q2’s $71.21 million in benefits and the market’s cumulative $401.73 million in benefits show the EIM is increasing its use of low-cost renewables and reducing curtailment through an automated selection of “the most economic resources across the EIM footprint.”

A significant factor in creating benefits is “transfers across balancing areas”, according to the report. Avoiding renewables curtailment is another benefit that reduces GHGs. In Q2 2018, utilities displacing 55,267 metric tons of CO2 by avoiding 129,128 MWh of renewables curtailment.

These calculated benefits “are in line with analysis conducted by each EIM entity before they joined,” the report concludes, suggesting studies proposed by Linvill could be equally accurate.

Market volumes vary but a “fair” estimate is that the real time EIM handles about 5% of the volume and the day-ahead market makes up the other 95%, according to CAISO Senior Public Information Officer Anne Gonzales. “We are seeing more than $400 million in cost benefits for 5% of the market.”

Each EIM participant is seeing significant benefits.

Examining benefits

California policymakers’ objections to expanding CAISO “do not appear to be implicated in an EIM expansion,” Matthew Freedman, staff attorney for consumer advocacy group The Utility Reform Network (TURN), told Utility Dive. Freedman was one of the most vocal opponents of AB 813 because of the potential threat to the state’s climate policies.

“We need more details before formally committing, but TURN will likely be supportive of a day-ahead EIM because it can address curtailment and over-generation,” he said. The plan would offer benefits of regionalization without requiring the governance change that could allow interference by the Federal Energy Regulatory Commission (FERC) or out-of-state fossil fuel generators.

“A key factor is that participation in the EIM is purely voluntary,” Freedman added. “If FERC were to impose requirements that were very problematic for California, we could withdraw and still have the California ISO system the way it is now.”

Although the November election of a new California governor could change things, a day-ahead EIM is currently CAISO’s primary focus, Linvill said. A day-ahead Market Enhancement initiative is preparing the system to move from a one-hour scheduled resource dispatch to a 15-minute dispatch.

That initiative sets the stage for the Expanded Day Ahead Market, which will extend the day-ahead market to the region’s EIM participants. They would be able to take advantage of the more frequent dispatch of resources when they have unplanned needs to balance their systems.

A primary driver in the 2018 CAISO three-year roadmap is “extending day-ahead market enhancements to other EIM balancing areas,” according to a January 2018 presentation for the Governing Body.

The roadmap promises benefits for day-ahead EIM participants similar to those delivered by the real-time EIM. It forecasts market efficiencies and renewables integration, while protecting local and state regulatory control over resource planning and procurement decisions, and transmission planning and investment decisions.

Only a detailed cost-benefit analysis can show how much bigger the benefits of a day-ahead EIM might be, Linvill said. “But the incremental progress toward regional collaboration and trust has been awesome.”

EIM participants have seen a wide range of benefits.

Challenges in charges

Day-ahead market expansion does not have a regional market’s planning efficiencies, but it offers operational efficiencies and advance unit commitment that create savings, Florio said.

Both the CAISO Board and its EIM Governing Body supporting the ongoing stakeholder initiatives for extension of the day-ahead market to the EIM entities and want to see studies go forward, Linvill said.

However, stakeholders must resolve important and difficult issues, according to CAISO’s roadmap. First, others will need to agree to CAISO’s transmission access charge (TAC).

“It is imposed on flows in or out of the California system, but it is punitively high,” former Washington Utilities and Transportation Commissioner Phil Jones told Utility Dive. “The need to recover cost is understandable, but it is a disincentive for Pacific Northwest participants.”

Second, existing bilateral contracts for transmission and the revenue rightsfor opening capacity on contracted lines to relieve congestion must be settled.

“Long term rights holders expect more revenues,” Florio said. “This friction can be reduced if the rules are clear, but it will take considerable negotiation, and maybe a little creativity, to figure out what works.”

Third, it will be necessary to resolve the “resource sufficiency” issue to ensure no participant is “leaning on others for capacity, flexibility or transmission,” according to the roadmap.

“A participant without its own resources cannot rely on the spot market to serve its load because that could trigger an energy crisis,” Florio said. “But the real time EIM has a resource sufficiency test ready. That leaves transmission as the big question.”

Finally, there needs to be transparently attributed accounting for all day-ahead and real time transactions, including resource sufficiency transactions that impact GHG accounting, the roadmap reported.

To be fair to those with existing investments and to ensure that future investments make sense, it will first be necessary to know what the costs for transmission will be and how they compare to benefits, which “will require a detailed study,” former Public Utilities Commission of Nevada Commissioner Rebecca​ Wagner told Utility Dive.

California needs greater access to other markets, “either through the EIM expansion or an alternative,” Freedman said.

One way would be expanding the CAISO limit on exports, Freedman said. “A recent study showed relaxing the net export limit from 2,000 MW to 8,000 MW would resolve 75% of the curtailment that full regional expansion resolved.”

Other options include a “voluntary reserve sharing agreement” to reduce costs and fossil fuel use for reserves or a resource adequacy agreement connecting California with Pacific Northwest hydro, he added.

“Regionalization made the CAISO less willing to explore alternative approaches,” Freedman said. “Taking it off the table could provide an opportunity to find better solutions. A day-ahead EIM is the logical next step, but first there needs to be a cost-benefit analysis.”

Looking ahead

The day-ahead market will begin operating with 15-minute interval scheduling sometime in 2019, according to Linvill. The enhancements now being designed will make it possible to extend the day-ahead market to EIM participants.

The proposal is “the right path” and should offer benefits “above and beyond what we’re seeing in the real time EIM,” Wagner said. “It is not a substitute for full regionalization, but if I was still a regulator, I would want my regulated utility to explore it and I would want to hear from them on it.”

It is not clear whether a day-ahead EIM’s benefits would be a small incremental increase or a significant increase, she added. “But, from a regulator’s point of view, if there is a chance to save ratepayers money by delivering electricity more efficiently, we should be exploring it.”

Though other markets have developed from real time EIMs, a day-ahead EIM has never been an interim step to regionalization, Florio said. “But any time people work together on a common problem, it lays the groundwork for taking another step. Building confidence takes time.”

If AB 813 had passed, a regional system could not have been achieved before about 2022, which is when the CAISO’s day-ahead EIM is likely to be in service, he added. If, during that time, national politics change, full regionalization might be reconsidered.

“If there was an administration in Washington pushing to do something about climate, it would add some momentum that is not there now,” Florio said. “For now, there is a lot to be said for moving systematically, in small steps.”