A version of this article was originally published on July 23, 2015 on Greentech Media.
By Michael O’Boyle and the experts of America’s Power Plan
The electricity system in the Western Interconnection is in the midst of unprecedented change. State and federal regulations that directly and indirectly require decreases in coal-fired generation and increases in the utilization of renewable energy resources, storage, demand response, and energy efficiency are projected to generate significant near- and long-term environmental benefits.
As a result of renewable energy policies, not only have the costs of wind and solar plummeted — in some cases below the average cost of existing resources — the technical ability of renewables to deliver clean, reliable, and economic power has improved dramatically. However, the transition to a cleaner, more reliable, and more affordable electricity system will require the resolution of significant institutional barriers.
Renewable integration in the West has forced reconsideration of system operations, planning, and markets. The key barrier to the optimal integration of renewable resources in the West is insufficient regional coordination. In order to develop a bulk electric grid that will be resilient in a dynamic future, the manner in which the system is planned and operated and the means by which entities are compensated for the energy, power, ancillary services, and emissions reductions they provide will need to evolve.
The Wild West
Advances in regional coordination and markets are critically important for the Western Interconnection, and entities in the region are aggressively developing and implementing groundbreaking initiatives to improve regional collaboration. In order to understand why, we provide descriptions of some of the more pressing issues facing the Interconnection and an overview of strategies being developed to resolve them.
While renewable energy deployments — driven largely by improving economics and progressive state Renewable Portfolio Standards — are accelerating rapidly, they are being deployed into a system that has pre-existing challenges. These grid challenges were highlighted by a September 2011 Southwest blackout that left approximately five million people in Arizona, Southern California, and Baja Mexico without power for up to twelve hours. The outage, which was caused by factors completely independent of renewable generation, was the subject of a joint analysis by the Federal Energy Regulatory Commission (FERC) and North American Electric Reliability Corporation (NERC). The analysis, which estimated $40 million in penalties and significant requirements for corrective action, determined that deficiencies in Western Interconnection operations planning and situational awareness create reliability threats for the region.
A key contributor to challenges with system reliability and renewable integration in the West is the fractionalization of grid planning, operations, and markets. Regional reliability is currently managed by 38 separate Balancing Authorities (BAs) that perform a portfolio of reliability functions within their respective control areas. This is compared to the Eastern Interconnection where the majority of the system is managed by six regional transmission organizations (RTOs). The high number of BAs in the West is a problem because smaller control areas have constrained access to the resources necessary to optimize reliability and system economics.
Additionally, a majority of entities in the non-ISO areas of the Western Interconnection currently transact the bulk of their business through bilateral contracts and operate the system on an hourly basis — as opposed to through centralized markets on a sub-hourly basis. As the characteristics of the electricity system – including demand patterns, generation resources, and the configuration of the transmission system – have evolved over time, the hourly bilateral approach has degraded in efficiency and is becoming an increasing barrier to reliability and the economic operation of the system. Inefficiency, poor liquidity, and lack of transparency are hallmarks of this legacy structure.
By contrast, the California Independent System Operator (CAISO), the Alberta Electric System Operator, and most of the Eastern Interconnection use centralized markets and operations that are co-optimized to transact, schedule, and dispatch energy, capacity, and a host of ancillary services that support the efficient and reliable use of the system. These regions transitioned to centralized sub-hourly operations and markets years ago to protect grid reliability, reduce long-term overall costs, and optimize efficiency.
Greater coordination on regional transmission planning, some degree of virtual and/or physical consolidation of system operations, and gradients of centralized markets will be necessary in the West to protect reliability, enhance affordability, and enable the integration of clean energy resources. This is because:
- Regional transmission planning and cost allocation, as required by FERC Order 1000, are critical in order to develop foundational infrastructure for a system with rapidly changing generation and demand characteristics – particularly because of the long lead times for transmission development;
- Larger geographic control areas allow system operators to net the variability of renewable generation, traditional generation, and consumer demand. This reduces the need for system operators to hold high levels of operating reserves, adjust thermal generating units in real time, and curtail renewable energy to balance the system;
- System operators with access to large pools of generation and transmission resources are able to more effectively dispatch the system in sequence of lowest cost first and to leverage flexibility within the system — both of which have the potential to reduce transmission congestion and system-wide marginal operating costs
- The grid is intrinsically regional and can be utilized more reliably and more efficiently when it is managed cohesively.
Customers throughout the region will benefit from strategies that include consolidated transmission tariffs, centralized dispatch of generation assets, sharing of operating reserves, energy imbalance markets, or Regional Transmission Organizations RTO(s) with integrated forward markets. Fortunately, several of these strategies are already being considered in the West.
Western Interconnection Grid Modernization Gains Momentum around the Region
Grid Integration in the West, a new report from the Hewlett Foundation that is intended to be a resource for policymakers in the West and elsewhere, provides detailed descriptions of initiatives underway in the West to improve regional coordination and develop new markets. Now available on America’s Power Plan’s website, the report is highly consonant with the newly refreshed recommendations of America’s Power Plan to make the Western grid more affordable, reliable, and clean. Of the many activities underway in the Western Interconnection, four major initiatives are making significant strides to upgrade electricity system planning, operations, and markets:
Northwest Power Pool Market Assessment and Coordination Committee (NWPP MC)
In March 2012, the 22 member NWPP MC was formed to evaluate and develop sub-regional solutions for “operating the regional power system in a reliable and cost-effective manner as additional variable energy resources are brought onto the electric grid.” The current focus of the MC is on operational tools to support reliability and efficiency in the region. Market functionality is also being collaboratively explored by the 14 balancing authorities and 100+ electricity providers in the NWPP MC footprint.
PacifiCorp Full Participation in the CAISO Markets
On April 14, 2015 the CAISO and PacifiCorp announced that the entities had entered into a Memorandum of Understanding to explore full PacifiCorp participation in the CAISO markets by 2017. With this transition, the CAISO would dispatch the generation and transmission resources in the CAISO-PacifiCorp combined footprint and would be the centralized market operator.
Mountain West Network Tariff
Seven entities along the Rocky Mountain West are in negotiations to develop a common network tariff. The Mountain West Network Tariff would significantly modify the terms by which the entities sell access to their respective transmission systems and would centralize certain aspects of the operations, resulting in improved system reliability and efficiency. The network would be managed and the tariff administered by a single entity.
California Independent System Operator Energy Imbalance Market (CAISO EIM)
The highly publicized CAISO EIM is an extension of the CAISO real-time energy market to adjacent operating footprints. The CAISO and PacifiCorp began binding EIM operations on November 1, 2014. NV Energy is expected to join the market in October 2015, while Puget Sound Energy and Arizona Public Service intend to join the market in October of 2016.
Recommendations for Policymakers
To address electricity system challenges and opportunities holistically, electricity providers, regulators, and a myriad of stakeholders will need to collaborate across the Interconnection. Sub-regions of the West are highly likely to eventually transition to variants of consolidated system operations and markets for both reliability and economic reasons. This will create new challenges and opportunities for state regulators because initiatives to upgrade electric system planning, operations, and markets are becoming increasingly regional in nature, but investment decisions for electricity infrastructure are made primarily at the state level. Collaboration across states and broad stakeholder participation will be essential to overcome institutional barriers.
To achieve the benefits of greater regional coordination and drive a more affordable, reliable, clean grid that directly benefits consumers and state economies:
- State policymakers should participate fully in current regional stakeholder processes regarding the consolidation of operations and the development of markets, and should start dialogues where they do not currently exist.
- Public Utility Commissions should require utilities to fully evaluate the benefits to ratepayers of participation in regional markets as part of the normal course of resource planning and rate cases.
- States and utilities should work together to increase coordination of transmission planning and operations to maximize the use of existing assets and to optimize new development.
- Utilities should continue to virtually and physically consolidate operations and markets to reduce costs.
- Regulators should ensure that the economic benefits of regional collaboration are appropriately passed through to ratepayers.
- Electricity stakeholders should examine the successes and failures of markets in the East and California to leverage knowledge about what works and what doesn’t, relative to market design, governance, and deployment.
Thanks to Julia Prochnik, Ron Lehr, Rebecca Johnson and Sonia Aggarwal for their input on this piece. The author is responsible for its final content.