Is It Finally Time for a Western Power Market?

The debate around whether Western states should join together in a formal electricity market has been going on for at least two decades. It may be coming to a head — or at least get closer to coming to a head — if the legislature passes AB813, a bill that sets conditions for how California utilities could join a Western RTO.

At the request of Next10, the California think tank, I tried to make sense of the issues, weigh and and analyze the arguments on both sides, and explain them to policymakers, the press and the public, especially those that aren’t involved in power sector policies every day.

The result is A Regional Power Market for the West: Risks and Benefits, a new report released this week. 

The arguments can be complicated, involving legal and regulatory issues, technical and financial issues, and lots of politics. If you need to start at the beginning, I also wrote a companion report that covers the basics of the California power system.

To save time, here are some takeaways on key topics of concern, including:

Jobs — A Western RTO could result in some renewable energy construction jobs moving from California to other states, but it would likely create a much larger number of California jobs overall. That’s because increasing renewable generation across the region would lower electricity prices for all Californians, lowering costs for businesses and broadly encouraging job growth.

Governance — A regional RTO would require a new board that is completely independent, unlike the current CAISO board which is appointed by the Governor of California. While opponents worry that this would threaten state sovereignty, CAISO, like all RTOs, is already subject to FERC regulations and federal law. RTOs have limited ability to affect state policy decisions, and their actions are subject to FERC oversight. FERC, meanwhile, is subject to oversight by the courts. And if it comes to it, California can require its utilities to withdraw from the RTO, since membership is voluntary.

Policy — Because most court challenges to state policies happen under interstate commerce rules, which apply whether a state is in an RTO or not, a change to a Western RTO would not substantially change the threats to California’s pioneering climate and clean energy policies. As for FERC, their primary mandate is to provide “just and reasonable” rates through fair competition. As long as California clean energy policies don’t interfere with competition – and they generally haven’t so far – joining a Western RTO would not subject the state to additional risk from FERC.

Integrating renewables — There are many ways to integrate renewables into the grid, including distributed energy resources, whose costs are falling rapidly. Bulk solutions, such as transmission lines and regional markets, remain the lowest cost option for now. But distributed energy – as discussed in my other companion report for Next10 – is a wild card to keep an eye on.

Coal — Despite concerns about the Trump administration’s support for propping up the coal industry, coal generation is in decline nationwide due in large part to being subject to competition with more affordable natural gas power, renewables, and energy efficiency. A Western RTO with truly competitive market rules would likely increase pressure on aging Western coal plants. However, policymakers must be sure to avoid market rules that allow old coal plants to survive, such as capacity payments.

Perhaps my most fundamental conclusion is that the great divides between California and other Western states on climate and clean energy policies are shrinking. The steady stream of announcements of super-cheap renewables in places like Nevada, Colorado, and Arizona suggest that the future of those states is going to look a lot like California’s future — a lot more clean energy, and a lot less coal.

They too will have to deal with the task of integrating wind and solar power in large amounts, and will come to see the benefits of a bigger market.

Plus, the success of CAISO’s energy imbalance market has allowed utilities and regulators around the region to get comfortable working in a formal market. The EIM is a glimpse of the future, five minutes at a time.

With more people on the same page, the likelihood of a regional market is rising. Still, change is hard, and there is a lot of opposition remaining. The fate of AB813, at least, will be set by the end of August. But if it passes, it is just the beginning of a long process of negotiation among market participants and regulators, and the political debate will move to other states.