The Headlong Rush Into Energy Imbalance Markets
Originally published January 16, 2014
To help deal with the unrelenting pace of renewables development in the West, there is a strong movement to establish energy imbalance markets. Getty Images/iStockphoto.
Sunny and sprawling, the landscape of the American West is ideal for renewable energy development. But intermittent renewable resources must be integrated into the grid, which remains a limiting factor for the 38 balancing authorities. The Western Electricity Coordinating Council anticipates at least 60 gigawatts of wind, solar, and geothermal energy in the West by 2022. To help deal with the unrelenting pace of renewables development, there is a strong movement—what some would call a headlong rush—to establish energy imbalance markets. The most developed EIM, a joint effort of the California ISO and PacifiCorp, is scheduled to begin operations in October 2014. The second, an undertaking by the Northwest Power Pool, is still in a more exploratory mode, but has gone so far as to propose a set of governance principles.
Every balancing authority, utility and major transmission entity in the west is now engaged one way or another in the EIM issue. Some are formally evaluating options and analyzing the costs and benefits, while others are holding stakeholder meetings and workshops. Others are paying attention to what their neighbors are doing because of the potential impact on transmission availability, markets, and prices. A few utilities, including NV Energy and Xcel Energy Inc., are eager to move forward with an EIM, while others, including public power and cooperatives, and even some investor-owned utilities, are skeptical of the potential high costs of implementation and its downstream implications.
“We want to respect all individual members’ opinions about EIM, but we remain concerned about its potential to morph into a regional transmission organization. Ideally, we would like to help create a wall that will prevent a western EIM from becoming an RTO,” said Elise Caplan, manager of the Electric Market Reform Initiative at APPA. Other concerns include bringing FERC jurisdiction into local and regional matters, introducing new costs, allowing for abuses of market power and opening the door to financial derivatives and possible market distortions. The mischief of Enron has not been forgotten in California.
“Given the market risks, we have a cautious approach and will be watching closely,” said Tony Braun, an attorney whose firm represents several public power entities, including the California Municipal Utilities Association and the Balancing Authority of Northern California. “We’re not opposed to the EIM, we just see it as the tail wagging the dog. Our general perspective is that the solution to renewable integration is through proper planning and procurement, not simply through real-time optimization.”
What is an Energy Imbalance Market?
What an EIM is, what it is not, and what it might become are the critical boundary issues dominating the current EIM debate. In principle, an EIM has a very limited, precise role in providing a sub-hourly, near real-time centralized dispatch of available generation, which by definition involves momentarily excess supply. At its heart, an EIM is a fine-tuning operation, an optimizing tool intended to improve the integration of variable generation which can cause such short-term fluctuations in supply. And by improving the integration of variable generation, an EIM in principle could facilitate the further growth of renewable energy, a much desired policy outcome.
The theoretical benefit of EIM is to bring into play a much broader array of wind and solar and other generation than is currently available to most balancing authorities. “An EIM is trying to take on the centralized dispatch function of a balancing authority but doing so over a larger area and applying it only to real-time imbalances,” said Caplan. It is intended to strengthen grid reliability by truing up supply and demand close to the point when electricity is consumed.
Northwest Power Pool draws a sharp distinction between the limited role of an EIM in squeezing the last kilowatt-hour out of renewable generation and the system operator’s more fundamental obligation to meet load. “The core function of the EIM is to optimizethe dispatch of the fleet of generating resources that must be already committed and more than sufficient to meet all load service, firm sales and ancillary service obligations,” the regional organization said in a market assessment. “The EIM does not perform a day-ahead (or longer) unit-commitment process.”
Origins of the Western EIM
The drive for an EIM goes back to early committee studies by the Western Electricity Coordinating Council of the potential benefit of centralized dispatch of generation to meet imbalances over much of the west. With encouragement by renewable energy supporters, such as the Western Grid Group, the council hired one consultant to look at the benefits and another to look at the costs. Argonne National Laboratory, among others, criticized the study results for oversimplifying the situation, in particular for not addressing the issue of transmission congestion and not looking at market power issues.
The initiative was then taken over by the PUC-EIM, a group of very pro-EIM western state regulatory commissioners. The PUC-EIM was formally created under the auspices of the Western Interstate Energy Board, an arm of the Western Governors Association. What followed were a series of workshops, conferences, webinars, and a commissioned study of the cost/benefit of an EIM by the National Renewable Energy Laboratories. The national lab found the benefits in the range of $146 to $294 million per year, not too dissimilar from those in the Western Electricity Coordinating Council’s study. But critics once again found significant deficiencies in the study’s methodology and pointed out that the benefits are, at best, close to the margin—only one to two percent of total production cost. Given the wide range of uncertainties, positive cash flow could easily turn negative under real-world conditions.
“Every time we have looked at the studies associated with EIM, we don’t see compelling economic benefits,” Braun said. “We’re not opposed, but we want the EIM to be able to justify itself on a cost-benefit analysis, and provide a business case for our customers.”
Regional Initiative: CAISO-PacifiCorp
Following the PUC-EIM, the momentum shifted to major regional efforts. On Feb. 12, 2013, California ISO and PacifiCorp announced a memorandum of understanding to create an EIM that would be operational by October 2014. The ISO already operates a real-time market with a five-minute dispatch capability, and the memorandum essentially expands the real-time portion of the market to the PacifiCorp footprint as an EIM. PacifiCorp’s service territory is shaped like a dumbbell, with one concentration of customers in Oregon and a piece of northern California, the other concentration largely in Utah and Wyoming. In between sit Nevada and Idaho.
Once the memorandum was signed, the two companies went through an extensive stakeholder process and several iterations of potential market rules. The ISO’s governing board approved the detailed market rules in November 2013, and on Dec. 18 approved the framework for a governance structure. The next major steps include the creation of a transition committee, and the submission of the market design tariff to FERC. The transition committee, a temporary advisory committee to the CAISO board, will have two basic duties. The first is to advise and comment on the start-up testing of the EIM in the spring and summer of 2014. The second task is to develop a proposal for creating an independent EIM governance structure.
All sectors of the industry, including public power, will nominate members of the transition committee, but no individual sector is guaranteed representation. The transition committee is scheduled to be approved by the ISO’s board in the spring of 2014. The new entity is on track, and initial operation is set for the target date of October 2014.
Regional Initiative: Northwest Power Pool
The EIM initiative in the Northwest is a bit more complicated. There is no ISO upon which to build a real-time market, there are large hydro facilities to factor in, balancing authorities are already involved in bilateral trades, and the membership is diverse and highly independent. “The NWPP is a reserve sharing group,” said Braun. “We have a commercial platform where members can call on each other to share reserves in cases of contingency. The economic benefits of reserve sharing are very significant.”
In March 2012, executives of the regional organization created its Market Assessment and Coordination Initiative to explore an array of options to meet the integration challenges posed by renewables. The initiative’s cost/benefit analysis of an EIM showed annual benefits of $70 to $90 million, or about 2 percent of production costs. The initiative also examined other enhancements to the markets to improve the integration of renewable resources. One, an extension of current practice, involves automating the bilateral trades that already exist among balancing authorities. In addition, the initiative is developing a proposal for a following reserve assistance program that would involve a sharing of intra-hourly reserves among balancing authorities. The first step in the program is a “shadow trial” involving computer simulation to calculate the potential reserve savings, and the second step will be to take the program concept into a field trial.
“The issue for the NWPP [initiative] participants is how best to manage intermittent resources while ensuring grid reliability,” said Jim Shetler, general manager of the Balancing Authority of Northern California. “An EIM might help, but there are questions as to the overall value versus cost for this option. Other items identified, such as Resource Sufficiency and Capacity Markets, may provide a better return on the investment. At this stage, I believe a majority of the NWPP [initiative] participants would like to pursue the next step, the Phase 3 analysis, to better understand the alternatives in front of us before making any final conclusions on next steps.”
Braun sees three major issues that must be addressed as part of any decision the organization makes on an EIM. “First, there is so much economic benefit from reserve sharing in the Northwest, there must be assurances that nothing would interfere with those existing benefits. Second, there are a lot of public power entities within the NWPP, and they are concerned about the jurisdictional implications of a centralized market. Third, many feel that capacity issues, including reserve sharing, have a lot more ‘bang for the buck’ than marginal energy efficiencies, and don’t want to lose sight of those opportunities.”
Expansion and Evolution of the EIM
Once the California ISO/PacifiCorp EIM is launched, pressure for extension and expansion will likely come from all directions—from parties in the immediate vicinity and from others a step or two away geographically, looking for transmission linkages for their growing renewable resource generation. NV Energy, which sits directly between PacifiCorp’s two main service regions, plans to approach its state regulators for permission to join the new EIM. Inclusion of NV Energy would effectively fill in the better part of a five-state Western EIM, covering much of California, Oregon, Nevada, Utah and Wyoming.
Eastward, Caplan said, “Xcel has expressed a strong interest in joining the new EIM.” The Western Area Power Administration, which sits between Xcel and PacifiCorp, is now undergoing a very deliberative stakeholder evaluation process to determine what an EIM would mean for its members.
PacifiCorp appears to be leading the charge on expansion. Its joint statement with the CAISO said, “both the ISO and PacifiCorp remain fully supportive of efforts to move toward broader coordination between balancing authorities in the west. As the EIM expands, the benefit to customers will grow.”
Whither an RTO
Not everyone is convinced that customer benefits will flow naturally as the EIM expands, in part because an EIM, they are convinced, will not stay with its original design. Rather, it will grow incrementally into something altogether different. “One of our concerns is that an EIM eventually evolves into an RTO, which leads to market complexity, layering of multiple revenue streams and a high likelihood of mandatory capacity markets, which have been very problematic for utilities across the country,” Caplan said.
“In the EIM there is no day ahead market; there is a proxy base schedule with a penalty mechanism to try to enforce accuracy,” Braun said. “ The question will arise, ‘Why don't we just have a financially binding day ahead market rather than this proxy?’ If a forward market is desirable, congestion hedging mechanisms will be needed. Also, a forward market squarely raises the need for uniform Resource Adequacy rules. Pretty soon, it looks like the CAISO’s existing market. There really hasn't been a halfway house developed where you stop at an EIM.”
Kenneth Rose, an independent economic consultant, spoke about the slippery slope as a cautionary tale to the Western Electricity Coordinating Council’s in March 2012. “You cannot view an EIM in isolation. The current RTOs developed step‐by‐step with one part leading to another over time, without any overall design plan. Each step seemed logical and necessary, but when the system is viewed in its entirety, it’s not so pretty. It is unlikely that an EIM would be the last step; more often it is the first.”
Public power’s concerns about RTOs stem from experience, said Seth Voyles, director of government relations for APPA. “Public power utilities located in areas of the country with electricity markets run by RTOs and ISOs have experienced ongoing difficulties that adversely affect the consumers they serve. These problems include complexity and costly market-pricing mechanisms, price volatility, and absence of cost-effective measures to assure resource adequacy through capacity markets.”
Voices of Caution
In addition to public power and cooperative utilities, there are other strong voices of caution asking for more thought, and if necessary, an exit strategy. Ron Litzinger, president of Southern California Edison, is one of them. “[Southern California Edison] believes there are four areas not adequately addressed in the proposed EIM,” Litzinger said in a recent letter to the utility’s board These include the potential for market power, convergence bidding, the greenhouse-gas-bid adder, and tariff authority to suspend the EIM market. The latter amounts to an institutional circuit breaker; it would allow the ISO to suspend the EIM in real time if necessary to prevent detrimental market impacts. Litzinger’s letter concludes, “It is important for CAISO to successfully implement an EIM free from material controversy that can serve as the template for future expansion.”
Key members of Congress have recently expressed caution, as well. In a letter to Energy Secretary Ernest Moniz, dated Sept. 10, 2013, House Natural Resources Committee Chairman Doc Hasting and Ranking Member Peter DeFazio said, “Despite the intent, some are finding that the operating costs of an EIM may outweigh the benefits…We are particularly concerned that Bonneville and [the Western Area Power Authority], may be required by your Department to join an EIM without regard to whether an EIM is in the best interest of the customers and consumers in their region.”
The Western Area Power Authority itself is in the process of evaluating the impacts if a number of adjacent balancing authorities were to join the California ISO/PacifiCorp EIM. Their assessment includes a high-level, qualitative study by the Argonne lab of possible risks and benefits to functional areas within the authority’s territory. The lab is looking at multiple scenarios and impacts on specific balancing authorities. “Western plans to summarize and report on what is learned through this study effort and work collectively with customers to determine next steps,” said WAPA Administrator Mark Gabriel. In an October 2013 interview with Public Power, Gabriel elaborated, "We have to understand, for our customers’ own protection, what is going to happen in the marketplace. If we will see an EIM in the future, it is critical to be involved now so we can shape its direction rather than have to live with whatever is ultimately formed. We have to participate in this conversation. We are not out here proposing an energy imbalance market. We are trying to help—with our customers’ understanding and guidance and involvement—what does a market look like in the West? What should our role be? Then again, jointly making a decision on a financial basis, on a business-case basis, if and what our participation should be in the market."
Consultant Ken Rose closed his March 2012 comments to the Western Electricity Coordinating Council with a strong admonition to be careful. “Once you start down the RTO path, it is hard to stop. As the wholesale structure expands, so does FERC’s role and the states’ role diminishes. Any savings from an EIM would likely be relatively small, and likely more than offset by the costs. WECC should consider alternative structures for energy imbalance.”
Clearly, some see the EIM as a panacea for renewables integration in the West and are rushing headlong into its establishment, convinced they can head off trouble as it arises. Whether an EIM and an RTO can exist separately and overlap at the same time is part of the experiment about to begin in the West.
APPA is among those advocating for caution and restraint. “Our members will need to make their own decisions about whether to participate in an EIM,” Caplan said. “We would like to be able to represent their interests and help set in place protections to help protect an EIM from imposing excess costs on our members and from turning into a full RTO.”
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