California's electric system operator is studying the possibility of turning the entire West into a single electricity market.

It's the beginning of a process that could eventually turn as many as 38 individual balancing authority areas (BAAs) into a market richer in resources than the Midcontinent Independent System Operator (MISO) or the PJM Interconnection. But first, crucial questions need to be answered about who will pay, who will benefit, and what kinds of energy the system will carry.

“A regional grid can access the untapped flexibility and diversity of resources throughout the West,” said Keith Casey, vice president of the California Independent System Operator (CAISO). “But we will do our due diligence to understand the full implications to the overall economy and the environment so we can make an informed decision.”

California’s landmark Senate Bill 350 (SB 350) ordered the study to determine whether a regional market is the surest path to achieving the state's 50% renewables by 2030 mandate.

CAISO has assembled a reputable set of consultants and academics to assess the potential of a regional market. The Brattle Group will lead and coordinate. Energy+Environmental Economics (E3) will assess resources. University of California economists will assess costs and benefits. Aspen Environmental will study environmental impacts.

Preliminary results and a timeline were presented to California stakeholders February 8. Results of the study must be delivered to the governor by December 2017, but the study is on track to be ready for official review by mid-June, according to Casey.

Origins of the Western market idea

The concept of regional markets emerged in the mid-to-late 1990s when, led by the Clinton Federal Energy Regulatory Commission, power pools like PJM and ISO-New England were formalized, Casey said.

A national discussion about organized markets' efficiencies followed. At that time, Western BAAs were not eager to give up their independence, he recalled. California’s 1999 to 2000 energy crisis disinclined them further.

But as California’s grid operator rebuilt from the energy crisis “ground zero” to a workable system, interest in a regional market renewed, Casey said. “The tipping point was the operational challenge of integrating renewables."

The West’s BAAs see variability increasing on their systems, he said. “They are beginning to understand the region’s resource and demand diversity can make dispatch more flexible and efficient.”

Interest accelerated with the emergence of the CAISO’s Energy Imbalance Market (EIM) in 2014 when Warren Buffett’s six state Pacificorp utilities joined with California.

The EIM uses the ISO’s state-of-the-art market software system to allow transfers in five minute and fifteen minute increments of lower cost supply from one BAA to meet demand in another.

CAISO numbers reported in August 2015’s Benefits for Participating in EIM showed benefits of $10.18 million for Q2 2015 and total gross benefits for the eight months of the EIM’s operation of $21.41 million.

Those findings provide confidence that benefits predicted when NV Energy, another Buffett-owned utility, joins the EIM this fall can be realized. They also boost expectations that returns will be yet higher when Arizona Public Service and Puget Sound Energy join the market later this year.

“Those benefits are the tip of the iceberg of what a regional energy market can offer,” Casey said. “Only so much is possible in real time. Coordinating and optimizing dispatch in the day ahead time frame adds an order of magnitude more flexibility in the use of generating units and access to transmission.”

The promise of a full Western market

A Western region energy market would use the same CAISO technology to “coordinate electricity systems across the West” and “take full advantage of the region’s renewable resources,” according to the CAISO’s summary of benefits. It would also create “disincentives to send coal-generated energy to California.”

A regional market will allow system operators to do more advanced planning and give them increased situational awareness that will lead to lower cost power purchasing, it adds.

There will also be savings to ratepayers both from operating cost savings and investment cost savings, according to a preliminary assessment from Brattle.

Operating cost savings, Brattle anticipates, will come from the elimination of multiple transmissions tariffs as resources are moved across BAAs. There will also be operating cost savings from using the wider region’s resources for balancing, instead of the EIM’s more limited resources.

Finally, optimizing day-ahead unit commitments regionally instead of locally and consolidating the region’s ancillary services markets will also bring down costs, Brattle anticipates.

Investment cost savings will come from a regionally-agreed definition of Resource Adequacy and from more flexibility in procurement of generation, Brattle says. Participating BAAs can also expect to defer investment in infrastructure with more efficient use of existing transmission, more access to lower-cost existing renewables, and reduced curtailment leading to less compensating overbuild.

Use of resources

E3 will provide input on the region’s resources under three scenarios. “They will represent the potential choices that California utilities and other buyers would have in renewables and the availability and cost of those resources," according to E3 Partner Arne Olson.

After an assessment of Business As Usual (BAU) scenario, E3 will isolate the effect of regional operations without any change in California's procurement, Olson said. The third scenario will evaluate the effects of the broader array of renewables that would be available with a regional transmission tariff.

“The substantial challenges of integrating 50% renewables into a big grid can be overcome, but the costs can be significant if good choices aren’t made along the way,” he said.

The second scenario shows the potential energy mix possible if a regional grid is available but there is no new transmission capacity and the state's procurement practices remain unchanged as it goes from a 33% renewables portfolio to a 50% renewables portfolio. In that scenario, the state continues to rely on its currently contracted out-of-state renewables and, for new supplies, focuses on developing California resources.

In that case, California's use of solar grows to 8,058 MW, up from 7,774 MW in the BAU case. The change, Olson said, comes because the regional grid allows the state to sell some solar production to other markets, rather than curtail it.

“We haven’t run the cost numbers but we would expect this portfolio to be lower cost than the BAU portfolio by a reasonable margin,” Olson said. “There is a lot of inefficiency in the existing system that could be squeezed out. The Brattle analysis will show how big that benefit could be.”

In the third scenario, the regional market would be broader and offer a more diverse resource mix due to new transmission. A portfolio of the least-cost renewables would be procured from across the proposed Western marketplace.

In that scenario, the market would cut solar use to 4,362 MW because it could find 1,500 MW of less expensive wind in Wyoming and another 1,500 MW of less expensive wind in New Mexico.

California’s wind is of lower quality and would drop proportionally, Olson pointed out. But its output patterns continue to make it useful.

Overall, “there is limited opportunity to achieve as diverse a renewable portfolio procured entirely from inside California,” Olson said.

Under BAU conditions, California’s system is expected to have difficulty absorbing more of the state’s abundant low-cost solar when solar grid penetration gets above “about 15%,” Olson noted. A regional grid and out-of-state renewables reduces curtailment by about 4,000 GWh relative to the BAU scenario, he added.

“The regional grid helps to absorb some of the over-generation, reduces curtailment, and makes solar more economically attractive,” Olson said.

These changes come from establishing a single regional transmission tariff instead of 38 separate ones and a single transmission planning entity for the entire regional interconnection that can procure the least cost energy solution, Olson said.

“We are just looking at California, which is already a large and diversified market,” he added. “Any other grid going to higher levels of renewable penetrations will have proportionally much larger benefits from a regional market.”

Who benefits?

SB 350 requires an evaluation of the economic consequences of alternatives, said University of California, Berkeley, Professor of Economics David Roland-Holst. “My job is to estimate the impacts on the state economy from any costs or savings.”

Scenario two means more investment in developing California’s renewable capacity, particularly solar, whereas scenario three’s energy trading would likely find the least-cost renewables in a combination of in-state and out-of-state resources, he said.

Wyoming wind, for instance, is likely of offer “substantial cost reductions,” Roland-Holst said. Though the development opportunities would then go to Wyoming, it might mean “substantial savings” for California ratepayers.

Roland-Holst will assess impacts in California using Brattle Group and E3 cost estimates, he said. The analysis will be done with the Berkeley Energy and Resources (BEAR) tool created for modeling AB 32 and designed to capture the full range of California economic activities.

Infrastructure investment can create short-term employment and capacity investment can create short and long term jobs, according to Roland-Holst.

But expenditure shifting, which comes with demand funded by lower-cost electricity, “is long term, creates more jobs, more kinds of jobs, and is more likely to be for California goods and services.”  

Lower-cost electricity also benefits lower income households because they spend a larger part of their income on energy services.

“That is the fundamental tradeoff. The outcome of the assessment will hinge on the nature of the efficiency gains from energy trading,” Roland-Holst said. “We know it improves efficiency but it is not clear how much a regional trading scheme can save and for who.”

The transition to a regional grid in the West could change the geopolitics of U.S. energy, he added. “Wyoming is a coal state but it could become the Saudi Arabia of wind. There are tectonic forces at work in these markets and California demand could be a decisive factor.”

Skepticism about a West-wide market

While officials inside CAISO and its contracted consultants remain optimistic about the possibilities of a region-wide electricity market, some California leaders remain skeptical. A letter to Governor Jerry Brown from Senate President pro Tempore Kevin de León, Assembly Speaker-elect Anthony Rendon, Senate Energy Committee Chair Ben Hueso, and Assembly Natural Resources Committee Chair Das Williams asked for assurances any region-wide plan would protect the state’s economy.

California's advanced energy employment in 2015 was 431,800, up 5%. In 2016, 70,000 new jobs are expected from the sector, a 17% increase, the legislative leaders reported. ”Regionalizing the grid should not put this new California investment at risk.”

The letter stipulated the regional grid plan must include:

• No preemption or weakening of California’s clean energy and climate laws
• Reduction of air and GHG pollution
• Protection for the 50% renewables by 2030 mandate
• Lower costs for California ratepayers
• Lower costs to ratepayers
• Transparency and access
• Support for low cost electric vehicle charging
• Economic growth and job creation

The legislators seem concerned about loss of local control and that the new transmission could be used to increase fossil fuel delivery, Olson said. “We will have to wait to see what the studies show but the 50% RPS is an effective limit on the amount of fossil fuels that will get used.”

The letter from the leadership was helpful in that it highlighted specific concerns they want addressed, Casey said. “But it did not raise any new issues.”

California environmentalists have long worried about role of Pacificorp, as the Buffett company has a history of coal dependence. It plans over $1 billion in additional spending on coal plants through 2023, according to the Los Angeles Times.

A Sierra Club statement about the leadership letter called PacifiCorp "the largest owner of dirty, outdated coal-fired power plants in the west."

But Pacificorp coal generation would be “disadvantaged” by the regional plan, Pacificorp Spokesperson Bob Gravely told the Times. “This is a way to reduce the use of coal overall and increase use of renewables.”

“The analyses will carefully study how coal dispatch would change with a regional market because we understand it is an important issue,” Casey said. “But state policy will dictate whether there is a regional market and how it will work. If the state decides it wants infrastructure development and construction jobs in California, we will plan the system accordingly.”

But the transition to a regional market can be, he added, “the next evolution in California’s world-leading climate policies and can provide a platform for other states to join and pursue their own climate policies."

It is unlikely all 38 balancing areas are now on board “but it is not about where they are today,” he said. “As they start to see the advantages in dealing with the challenges they have, there will be an evolution toward joining.”