Regional market coordination delivers a win for climate change mitigation.
There’s an important experiment underway in the Western United States as we inject more and more renewable energy into the western grid. The picture below charts hourly solar and wind generation in California since 2015:
New renewable energy investments are driving down power sector greenhouse gas (GHG) emissions. If you are climate anxious like I am, this is welcome news. But these investments will fall short of their full climate change mitigation potential if they’re plugged into an old-school electricity market that’s not set up to absorb them. In other words, we need market design innovation to complement increasing renewable energy penetration.
Fortunately, we’re also seeing some encouraging market design experimentation on the western front. The Western Energy Imbalance Market (EIM) has been demonstrating how a more integrated electricity market can grease the wheels of renewable energy integration and negotiate the challenges of having states with very different GHG policies interacting in the same electricity market. This market may be small. But it’s laying the foundations for something much bigger.
Renewable energy integration gains from trade
With the rise of wind and solar, the supply-side of electricity markets is getting less dispatchable and less predictable. In California, trade with our neighbors is helping us balance this more variable supply with demand. We’ve talked about the duck curve of net load in California, but there’s a new duck in town. Net imports into California are dipping lower in the middle of the day when the sun is out and ramping more steeply as the sun rises and sets.
To some extent, trade flows are responding to the rise of renewables, but frictions between the 38 fragmented areas that balance electricity supply and demand across the west mean that there are gains from trade we’re not accessing. Cue calls for improved market integration.
The Western Energy Imbalance Market (EIM)
The EIM is designed to coordinate efficient “last minute” trading across participating regions. Generators bid into this centralized, state-of-the-art market which finds the most efficient and reliable way to balance supply and demand on short (5 and 15 minute) time scales. For this market to work well, participants must hand over control of their generators to the EIM. Back in 2013, the EIM began with just the California ISO and PacifiCorp. Success caught on quickly. The EIM has since grown to include parts of 8 western states and counting.
The EIM is still small in terms of transaction volume – it accounts for only 2-5% of overall energy demand. But as far as I can tell, it’s demonstrated two big successes:
Market coordination improves renewable energy integration: The EIM has demonstrated how a more integrated market can lower the costs of renewable integration. There are a number of ways to quantify these efficiency gains. The graph below shows one: avoided curtailment (in blue) within the California ISO footprint.
These avoided curtailment benefits (and other benefits, such as reduced reserve requirements) are just a fraction of what could be possible in a more integrated day-ahead market where the majority of short-term transactions are executed.
Reconciling our (climate policy) differences: The renewable integration benefits of improved coordination are clear. But the overall GHG impacts of this kind of market coordination are not so clear because the areas being integrated differ dramatically in terms of their appetite for GHG regulation. EIM architects thus face a daunting challenge: Improve coordination across balancing areas while at the same time preserving the integrity of California’s GHG compliance obligations while at the same time making sure that areas with less stringent climate policy are not paying for California’s climate ambition.
The EIM has skillfully negotiated these challenges. GHG accounting specifics are too complicated to unpack in a blog, but there are two important takeaways. First, the EIM market design respects the compliance obligations of California’s GHG trading program using a FERC-approved carbon adder that accounts for the direct emissions associated with imports into California.
Second, GHG accounting practices also assess the indirect emissions implications of supplying California with out-of-state resources. There are legitimate concerns that more GHG-intensive, out-of-state generation in the EIM footprint will “backfill” when low-carbon resources are preferentially selected to supply California. Because EIM market dispatch is really transparent, we can estimate (albeit imperfectly) these “secondary dispatch” emissions.
The GHG accountant in me gets really excited about our ability to track the direct and indirect GHG emissions impacts of EIM imports into California. But if we hold EIM participants accountable for indirect impacts, we run the risk of discouraging participation in the EIM relative to other markets (such as the bilateral contract market), where offsetting of emissions associated with resource shuffling is not required. In other words, there’s a balance to be struck between GHG accounting integrity and electricity market efficiency. The EIM has provided an important laboratory for negotiating these (and other) GHG accounting challenges.
The little energy market that could
Last year, California lawmakers rejected Assembly Bill 813 which would have fully integrated power markets across the west. This effort failed due to concerns that it would compromise California’s ability to determine its own power sector policies. Meanwhile, the EIM has been delivering significant benefits for renewable energy integration and navigating the tricky details of integrating states with very different appetites for climate change regulation into one well-functioning real-time market.
The Western EIM has helped to chart an alternative path to regional market integration. And it’s pulling an increasing number of supporters on board. Last month, EIM participants wrote a letter in support of an Extended Day-Ahead Market (EDAM). A stakeholder process is now moving forward. Everything will be bigger in the EDAM: efficiency gains, governance challenges, GHG accounting complexities. But as renewable energy penetration continues to increase across the west, the gains from day-ahead market coordination will be well worth the effort.
Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.
Suggested citation: Fowlie, Meredith. “The Little Energy Market That Could”, Energy Institute Blog, UC Berkeley, October 7, 2019, https://energyathaas.wordpress.com/2019/10/07/the-little-energy-market-that-could/