The Role of Wholesale Markets in Grid Decarbonization

Opportunities and Challenges

GridFWD 2019, hosted by Grid Forward (formerly Smart Grid Northwest), convened energy service professionals from across the Pacific Northwest in Seattle to focus on advanced solutions to modernize the regional energy system. In a series of articles, Cadmus presents some key themes that emerged regarding innovations in grid decarbonization and the different pathways, priorities, and solutions discussed as next steps in moving decarbonization and grid modernization forward.

By Ari Kornelis

Decarbonization goals at the state and local levels are increasingly prevalent and increasingly ambitious. To meet these targets, utilities and other private-, public-, and nonprofit-sector players face the challenge of identifying and pursuing decarbonization strategies while upholding the industry’s fundamental mission – providing safe, reliable, and affordable power. At GridFWD 2019, speakers and attendees discussed a wide range of decarbonization approaches, spanning the supply- and demand-side of retail and wholesale markets.

To achieve ambitious decarbonization goals while minimizing costs to stakeholders, the industry will need to take advantage of opportunities at all levels of the electricity system. At the conference, one particularly exciting and important discussion targeted opportunities and challenges at the top of the industry: the role of wholesale markets in grid decarbonization efforts.

A quick background on wholesale markets: in “deregulated” regions with competitive wholesale markets, independent system operators and regional transmission organizations (ISO/RTOs) have devised a variety of market structures to reduce costs of grid operation and send investment signals to ensure sufficiency of energy supply. These structures include short-term energy markets (real-time and day-ahead), ancillary service markets, and capacity markets.

The discussion at GridFWD highlighted major opportunities to modernize the wholesale electricity system and decarbonize the grid, including opportunities to integrate distributed energy resources into wholesale markets and the development of transmission networks to facilitate the increasing penetration of renewable energy. However, chief among the wholesale market discussion topics was the expansion and regional integration of the Western Energy Imbalance Market (EIM), captured in the session “Getting Started in the EIM: Updates from the Field.”

Wholesale Markets and the Expansion of the EIM

Wholesale electricity markets are in flux across North America. Capacity market rules are under review in several eastern interconnection markets, most notably in the PJM. Meanwhile, in the West, the EIM is expanding in multiple dimensions: it is growing in membership and coverage area and increasing the scope of its markets to include a day-ahead market.

The EIM is a voluntary real-time bulk power trading market operated by the California Independent System Operator (CAISO). It began in 2014 and has grown rapidly over its short history. Today, the market includes nine participating entities from eight states, plus British Columbia, and is on a path to double the number of participating entities by 2022. According to Mark Rothleder of CAISO, “77% of electricity demand in the Western Interconnect is served by entities that are either participating in the EIM or are committed to by 2022.”

The remarkable growth of this voluntary market indicates the strong value proposition it offers to utilities across the region. Participation in the EIM gives utilities access to a market that optimizes the dispatch of generation resources over a wide geographic area in real time. Participating utilities have found that the EIM supports the integration of renewables, reduces the cost of grid operation, and improves reliability.

Stefan Bird, president and CEO of Pacific Power (a subsidiary of PacifiCorp, whose territory covers six western states), distilled his view on the significance of the EIM for PacifiCorp customers: “Our goal is to connect our customers to the diversity of the West.” He went on to highlight that, to date, the EIM has generated “over $200 million savings for PacifiCorp customers while simultaneously reducing PacifiCorp’s CO2 emissions by 15 million tons, equivalent to taking 3 million cars off the road for a year.” CAISO has reported that the EIM has produced over $800 million in gross benefits as of October 2019.

“Regional cooperation on transmission expansion and market optimization is one of the most pressing issues facing the West. We need an expanded and modernized grid to access and optimize the abundance of diverse renewable generation, as well as diverse customer demand and demand response.”

– Stefan Bird, Pacific Power

The benefits for PacifiCorp and the other EIM members are only expected to increase as the EIM expands to include more partner entities with diverse assets. Idaho Power, Portland General Electric, Powerex, and the Balancing Authority of Northern California (which includes SMUD and number of other utilities) all joined the EIM within the past two years. When Steve Kerns of Bonneville Power Administration spoke at Grid Forward 2019, the ink was still wet on the implementation agreement stating BPA’s intention to join the EIM in 2022. BPA has expressed that participation in the EIM “may result in increased value for the flexibility obtained from the federal hydropower system.” Under the EIM least-cost dispatch system, non-emitting resources receive prioritization when serving loads within greenhouse gas compliance regions (i.e., CAISO and SMUD). The benefits for BPA will also translate into benefits for the western grid. In particular, the additional access to the Northwest’s carbon-free hydropower storage resources is expected to reduce congestion on the transmission grid.

The BPA announcement came just a couple weeks after another piece of major news for the EIM: the EIM partners collectively agreed to begin a process to extend CAISO’s existing day-ahead market to allow for participation from all EIM entities. Rothleder said that this extended day-ahead market (EDAM) would build upon the structure established by the EIM and provide additional renewable resource integration benefits and general efficiency through optimized day-ahead unit commitment and scheduling. The results of a CAISO feasibility study of the EDAM indicate that it could provide $119 million to $227 million in annual energy production cost benefits and 1 to 2 gigawatt-hours of reduced renewable curtailment (tens of millions of dollars in additional value).

Challenges for the EIM

The growth of the EIM is promising, but the expanding market will need to address a number of challenges. Mark Holman of Powerex highlighted the increasing variety of attributes that must be correctly priced in an efficient wholesale market. Holman argued that markets in 2019 and beyond will need to compensate resource providers for the increasing value of resource flexibility, capacity (i.e., firm energy), environmental attributes, and reliability services (e.g., frequency support). This is a sharp contrast to the markets of a decade ago when there was just one resource attribute that was relevant to wholesale markets: energy. Holman described what is needed to achieve the ideal wholesale market structure: “organized markets and forward procurement programs must evolve to efficiently price additional products and services and avoid market segmentation.”

Numerous speakers echoed these views on the importance of valuing resource attributes beyond energy. Kerns presented BPA’s view that “a well-designed electricity market is built on a foundation of resource adequacy and has features that…compensate explicitly for capacity resources that provide system reliability and flexibility.” Laura Trolese of the Public Generating Pool also highlighted the need for price formation that accounts for a full set of resource attributes and related challenges for greenhouse gas accounting. ISO/RTOs in the eastern interconnect incent resource adequacy through capacity markets. Some offer additional market features for specific resource attributes (e.g., the Midcontinent Independent System Operator’s ramp capability product). In a more market-driven approach, the Electricity Reliability Council of Texas (ERCOT) has relied on scarcity prices in a singular spot market to deliver sufficient service during peak events. During a particularly hot 2018 season, the ERCOT approach demonstrated success under fire.

In addition to the issues around price formation, Trolese spoke of challenges relating to transmission compensation and market governance. Under the current structure, the EIM Governing Body exists under the authority of the CAISO Board of Governors, a politically appointed body with statutory obligations to California consumers. Despite support from the governor, state assembly, and CAISO itself, legislative efforts to open the CAISO governance body to participation from other western states have stalled in the California Senate. Trolese, representing stakeholders from outside the CAISO balancing area, raised the need for an independent board to exercise primary rule-making authority for the day-ahead and real-time markets. In public comments, the Public Generating Pool indicated that an independent board with greater decision-making authority, among other related governance changes, would “provide parties outside the state of California greater assurance of the CAISO real-time market’s ability to act in the interest of all market participants and affected stakeholders, not just the interest of one state.”

It’s all in the details

Stefan Bird of Pacific Power summed up the opportunities and challenges of a modernized wholesale market in the West: “Regional cooperation on transmission expansion and market optimization is one of the most pressing issues facing the West. We need an expanded and modernized grid to access and optimize the abundance of diverse renewable generation, as well as diverse customer demand and demand response.”

There are many ways to integrate renewables into the grid, but bulk solutions continue to be the lowest-cost option. Expanding regional markets is a key step to facilitate high levels of renewable penetration. Connectivity can help us achieve a decarbonized grid while minimizing the cost of making this transition. Yet, there are significant challenges in transitioning to a broadly integrated western market that efficiently compensates generation resources for the diverse set of resource attributes that matter to stakeholders in 2019 and beyond. The success of the market will depend on getting the details right.

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