The Little Energy Market That Could
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/
Thanks for this uplifting post on the EIM and upcoming EDAM, which I agree are helping to effectively integrate both California renewables and Western electricity markets. I have a couple of comments on the second chart.
First, I think there must be something wrong with the scale – California has never imported anywhere near 140,000 MW, let alone in April (the capacity of the transmission lines is about a tenth of that). Perhaps the vertical scale is actually total MW by hour over the month, so the data should be divided by 30 to convert to average MW by hour?
Second, it is clear that (net) imports are indeed subject to their own “duck curve”, with an increasing ramp over the years as the EIM has expanded and more solar is built in California (and not as much in adjoining states). But it’s even more than that: the ramp in net imports is actually increasing faster than the ramp in CAISO net load, at least proportionally. In other words, the share of maximum 3-hr ramp in CAISO net load met by the ramp in net imports has been consistently increasing since 2012, meaning that out-of-state resources have effectively been shouldering a larger *share* of the ramping need every year since 2012 (based on daily Renewables Watch data). The catch is that once Arizona, Nevada and other adjoining states start installing Gigawatts of solar like we have, they will have to deal with their own ramping needs and may not be able to absorb as much of California’s. Hopefully, by then energy storage costs will have come down enough that storage can be built to help both California and adjoining states manage their respective ducks.
Thanks for the great comments
First, great catch on the duck chart. I should have caught that! The orignial duck erroneously summed within the hour and then averaged these hourly sums. So numbers off by a factor of 60/5=12! Figure now averages across 5 minute interval readings of CAISO net imports by hour of day. But these numbers still look a little high. I am looking into this. I welcome your thoughts.
I could not agree more with your important second point! The extent to which regional market integration will reduce California’s RE integration-related costs will decline as other states increase their wind and solar generation. This important point notwithstanding, I continue to believe there are significant benefits of market integration in support of renewable energy integration across the west. Thanks for reading!
Jan, you and i have had good discussions on this in a more fruitful forum. One question about increased solar penetration to the east. Does that provide resource diversity in timing, and essentially shift the low and high points of the ramp in the manner that you discussed as an option in that forum?
Waddaya mean Richard, a more fruitful forum? 🙂 About geographic resource diversity in timing, I agree there would be some from earlier sunrise/set east of California, but nowhere near the diversity effect one gets from (especially out-of-state) wind, since there you not only have different drivers entirely, but can also can have different weather systems and thus timing even at the same longitude.
Thanks for this, it’s good to know about. Is there anything like EIM in Europe?
Integration of various supply resources and alignment of markets with new goals and objectives is indeed an area in need of innovation. A proposal was submitted to NAESB as one such market innovation that seeks to achieve reliable electricity supply and DER integration with climate change initiatives: https://www.naesb.org/pdf4/weq_aplan100219w2.pdf