Better together: How an organized market can help clean up the western US grid
Today 38 separate balancing authorities deliver power out West. A new paper says a single market would be more efficient
For more than a decade, the U.S. electricity system has been a house divided.
In the early 2000s, the California energy crisis stalled a wave of power sector deregulation that was sweeping the country. Pushed by the promise of greater competition and lower costs, dozens of states had moved to break down the vertically-integrated utility model, setting up organized markets to handle resource planning and dispatch.
But when the brownouts and price spikes hit the Golden State in 2000, the momentum for organized markets screeched to a halt, leaving the nation with a bewildering mix of market and regulatory structures.
To this day, utilities in the Southeast and West continue to operate in the vertically-integrated model, absent the organized market structure that now serves more than two-thirds of Americans. The exception in those regions is California itself, which operates in a market managed by the California Independent System Operator (CAISO).
Now, some backers of organized markets in the West are looking to change that. A formal proceeding at CAISO is now underway that would integrate the 38 separate Western balancing authority areas (BAAs) into a market potentially richer in resources than the Midcontinent Independent System Operator (MISO) or the PJM Interconnection.
Organized markets in other regions have proved that grids with larger geographic footprints and bigger resource bases are “cleaner, cheaper, faster, and safer to operate,” than those run by vertically-integrated utilities, according to a new paper from the Natural Resources Defense Council that seeks to provide guidance to the stakeholders.
“A regional grid can access the untapped flexibility and diversity of resources throughout the West,” Keith Casey, a CAISO vice president recently told Utility Dive.
If the West were to form a single organized market, it would be one that could integrate significantly higher amounts of renewable energy generation, according to paper author Carl Zichella, director of western transmission at NRDC.
“The system is flipping from using a fossil foundation with a renewable energy add-on to one with a renewable energy foundation in which fossil fuel resources are used to deal with fluctuations,” Zichella said. “Where the operator can’t match renewables with renewables, natural gas generation will be available to fill in the blanks.”
How a regional market works
The goal of the NRDC paper, Zichella said, to use lessons from other organized markets to offer recommendations on how best to design one for the West.
The region’s 38 BAAs now operate primarily through bilateral power contracts, which is highly inefficient, he said.
By contrast, generation in organized markets is typically dispatched based on economics. Utilities and other plant owners offer bids into the markets to satisfy demand on an hourly basis. The system operator chooses the lowest-cost resources to meet the demand, working up to more expensive ones until demand is satisfied.
The price paid for the last megawatt purchased — the market clearing price — is paid to all power suppliers that clear the auction.
Demand response programs, which focus on reducing customer usage to balance the grid, are typically among the first resources cleared in auctions where they participate.
Renewables, because they have no fuel cost, are often the lowest cost and first dispatched generation resources, Zichella said, though the historically low price of natural gas means it undercuts wind and solar in some regions. The more renewables there are, the less fossil generation is used to meet load and the less competitive conventional plants become.
“Markets force out of the generation stack the least efficient, most expensive resources,” Zichella said.
Regional market mechanisms can incorporate state-level decisions to protect local autonomy, however. The system operator uses the resource mix established through state procurement practices and renewables mandates and dispatches according to state loading orders.
State mandates increase the supply of renewables, driving out more fossil generation. Local policies to limit emissions are also factored into the market.
In California and the Northeastern member-states of the Regional Greenhouse Gas Initiative, the price on carbon goes into the price of fossil generation as an “adder” that makes it less competitive, Zichella said.