Huge Benefits from Regional Market Expansion, Studies Show

The first in a two-part series

Expanding the organization that coordinates the operation of California’s electricity generation and transmission into a regional grid system operator across the West will produce enormous financial and other benefits for the state, according to results of legislatively required studies unveiled last week by the California Independent System Operator (CAISO).

Several of the nation’s top energy, environmental and economic consultants (Brattle, E3, Aspen Environmental Consultants, and the Berkeley Economic Advising and Research or BEAR) took part in the (“aka SB 350 studies”) process and presented their work across a number of issue areas the California Legislature requested: utility customers, environmental, environmental justice, and greenhouse gas reduction benefits.

Despite using conservative modeling assumptions, the study results show that expanding the independent system operator’s footprint produces enormous benefits for California in all the above categories.

The financial benefits for utility customers (and by extension throughout the economy) are staggering (ranging from a low of $55 million a year in 2020 to approximately $1.5 billion a year in 2030). If other entities beyond PacifiCorp—the first utility to propose expanding the footprint over a year ago join—the benefits go up dramatically: $258 million a year in 2020 for an expanded regional footprint (western interconnection’s 14-state region, excluding the federal power marketing administration's Bonneville Power Administration and the Western Area Power Administration). All classes of benefits grow over time in an expanded electricity market operated by a single independent entity.

The environmental results show benefits from reduced land use impacts, air pollution, and water consumption in California, and while some land use impacts would be expected elsewhere in the West, similar benefits in reduced pollution and water use are expected across the region.

The BEAR analysis results for disadvantaged communities were also substantial. Much of this comes from lower energy costs freeing up capital for other job creation and economic activity in California. The BEAR presentation explained the effect as:

Demand funded by energy savings is a potent and pervasive source of long term, diverse job creation. These jobs are more likely to be for instate services that cannot be outsourced.

The studies presented have been the subject of a very transparent stakeholder-driven process that has seen great participation from all the affected stakeholder groups. The results presented during a marathon two-day workshop last week should have great influence with California lawmakers. 

More details of the studies

Expanding the CAISO will create a six-state “day-ahead” electricity market in which utilities plan which power sources to use on a given day based on their forecasts of demand and weather. Utilities offer bids for power and compete with each other to see who can meet that day’s demand at the lowest cost. Lowest-cost resources are those that have the lowest fuel and operating and maintenance expenses. This overwhelmingly favors renewable power, the fuel for which is free. Regional markets help integrate renewable energy resources into the electricity mix at least cost, as we have written about previously, and they have the added benefit of encouraging the retirement of conventional fossil fuel power plants that cannot compete with renewables due to higher fuel and operating costs.

The consultants last week noted a range of benefits they did not quantify in the studies but which have considerable value to California. Most of these are in the area of system operational efficiencies. (I will address these in more detail in my next blog.)

Some examples: The centralized control of the grid expansion would provide (as opposed to the current and wastefully complex web of 38 entities running the electricity delivery system now) operating efficiencies that lower costs for new infrastructure, allow for the sharing of planning and flexibility reserves across the region, and lower the cost of renewable energy integration.

Because the least-cost energy available in that hour will be selected, renewable energy from all over the West will be likely to operate in hours they currently are not needed to meet of the energy demand in a local area. Gas plants will increasingly be used to support renewables, the studies show, instead of providing continuous power to the grid.

The studies show that many of the ISO expansion savings come from being able to use renewable energy California has already built (and is expected to build in the future) more efficiently, sending it to neighboring states when California has too much of it. California solar generation works so well that in many hours of the year it generates more power than the economy can absorb. This surplus power California would otherwise have to shut off to protect the grid.

The regional market gives value to this energy by making it available to utilities in neighboring states that could use it instead of operating their costlier and more polluting conventional coal or natural gas plants. This obviously has a significant carbon pollution reduction benefit. Every megawatt-hour of electricity of solar we would otherwise have had to shut off (or “curtail” in industry parlance) that we export displaces conventional fossil generation in a neighboring state’s balancing authority.

Still other savings result from California getting better access to renewable generation elsewhere in the West. Just as our abundant California solar is a good deal for neighboring states when we have too much of it, excellent renewable energy resources in other parts of the West will be a good deal for California because they are operating during hours when they are not needed to serve local electricity needs elsewhere in the West and prices are low. This is typically wind energy from places like Wyoming and New Mexico, which are blessed with high wind energy “power plant capacity factors” (the percentage of time a generating facility operates at its rated capacity), but it can also be solar power from states in different time zones which enables California to match demand with renewable power at many hours of the day. The studies estimate that access to this lower-cost renewable power produces a gigantic financial windfall for California consumers.

Of course California would not be the only beneficiary. A majority of western states representing a most of the western electricity demand have renewable energy procurement standards requiring an explicit percentage of their electricity mix to be comprised of renewable energy, or goals (all but Wyoming and Idaho; Utah has a goal not a standard), and/or coal reduction and greenhouse gas reduction statutes (California, Oregon and Washington while Nevada has a policy to eliminate its coal generation). They would clearly be winners in a regional market. Many utilities in these West (California Oregon/Washington/Utah/Wyoming/Nevada and Arizona) already participate in the regional Energy Imbalance Market (EIM) and are likely suspects to join the full, day-ahead regional energy market that is proposed. 

But even states with a large reliance on coal and gas generation would likely benefit as they make what promises to be an economically painful transition from their high-carbon energy resources to a more renewable future. This is because states like Wyoming, Montana, and Utah all have superb renewable energy resources and very small amounts of electricity demand within their borders. They have always been net electricity exporters, but as their coal-fired electricity markets dry up, coal companies declare bankruptcy and walk away from new mines and even existing generation a regional electricity market opens a door for them to an alternative future in which they can help supply the region’s growing electricity demand with wind and solar. The regional market does not solve all their problems, but the SB 350 benefit studies show a large and growing market for their power becoming available to them.

Up next: A look at the ISO expansion studies conservative assumptions.