from Standford | Climate & Energy Policy Program, Woods Institute for the Environment - August 2024
by Mareldi Ahumada-Paras, Michael Mastrandrea, and Michael Wara
In recent years, parts of the U.S. electricity grid have experienced increasing impacts from weather and climate related extreme events that have disrupted system operations, triggered emergency responses, and motivated stakeholders to make substantial changes to planning strategies. In the West, extreme heat events combined with severe drought that limits availability of hydropower have proven particularly challenging for grid operators to manage.
Balancing Authorities (BA) are the entities responsible for ensuring electricity supply and demand balance – that is, bulk power system (BPS) reliability – within their service territory of the grid. Each BA can meet their needs by either dispatching generating units within their footprint, establishing forward contracts, or trading energy with neighboring BAs by participating in wholesale markets. In the western grid, called the Western Interconnection, all BAs at times use and to varying degrees rely on electricity imports to meet their demand primarily due to operating system efficiency and the economic benefits of participating in wholesale markets. However, when the system is most stressed because of extreme weather events that span across a large area, availability of resources in wholesale markets may be compromised, thus reducing access to imports and increasing the risk of not meeting demand. In such situations, operators in each BA make decisions based on imperfect information and rely on best practices and operator experience to overcome challenges in real-time. This uncertainty in the system poses a higher risk of failing to meet reliability and security standards and potentially leads to local or widespread power outages. As operations have evolved throughout the growth and structural evolution of the electrical grid, so have the responsibilities and organizational structures that define each BA. In today’s BPS operations, the most comprehensive structure is a regional transmission organization (RTO) having oversight of centralized unit commitment, economic dispatch, coordinating over a larger, multi-utility footprint and planning transmission system expansion. Naming conventions have also varied with time; we refer to an Independent System Operator (ISO) and an RTO as the overarching terms for cooperation areas comprised of multiple BAs. For the purposes of this study, we refer to ISO/RTO as entities that maintain operational and planning responsibilities within their region, without specifying a particular structure or governance framework. The latter falls outside the scope of this work and requires the ongoing consideration of decision makers who must balance multiple policy priorities.
This study evaluates shifts in utilization of generation, imports, and exports as we assign different cooperation regions in the West. We do this to illustrate the potential benefits to operations and reliability - under stressed grid conditions created by extreme heat and drought - of expansion and adaptation of existing markets, like the Extended Day-Ahead Market (EDAM), into a larger ISO/RTO. EDAM is a day-ahead market proposed by a number of western BAs and recently approved by the Federal Energy Regulatory Commission (FERC) as a component of the California ISO’s (CAISO) tariff. EDAM will become operational across its initial footprint in 2026. Several recent analyses have evaluated the potential economic benefits of increased cooperation among western BAs, but none have focused on the potential reliability impacts to date. These studies have generally shown real but modest economic benefits from a shift to organized regional electricity markets with larger footprints.
Simulating reliability impacts with power system optimization models is challenging because these models assume perfect information to optimize dispatch across all western BAs and optimization across the entire Western Interconnection footprint. In other words, they behave as if an RTO exists, with some limited economic frictions. In the real world, especially during stress events, system operations can divert substantially from the optimal outcome due to incomplete information, risk aversion by individual BAs, and other factors. Because of this challenge in simulating stress conditions using these models, we interpret our results as illustrative and directional rather than a precise estimate of the reliability benefits of a larger, ISO/RTO footprint.
Despite these challenges, we show that growing the footprint of an organized market for electricity in the West has the potential to substantially reduce risks to reliability under extreme heat scenarios derived from the September 2022 California heat event. Our case study of simulated extreme stress conditions shows a 40% decrease (from 25% down to 15%) in West-wide hours at risk following expansion from an ISO/RTO with a footprint similar to EDAM to the entire Western Interconnection. Simulated unserved energy is also more than cut in half (from 1901 to 877 GWh). In other words, by creating and expanding an ISO/RTO beyond the current EDAM members (detailed in appendix A), our work suggests that western BAs can substantially reduce the risks of unserved energy and rotating outages. This work thus complements earlier work on economic benefits of a western ISO/RTO and adds an additional dimension to the ongoing stakeholder efforts to broaden and enhance coordination of electricity operations in the West. Further studies and analysis are needed in order to fully understand all the potential benefits and costs of creating an ISO/RTO that spans across multiple states in the West.
Our results also lend an additional dimension of support for the reforms being undertaken to create a more equitable and independent governance structure for the EDAM and the Western Energy Imbalance Market (WEIM) via changes to the CAISO tariff, as well as the West-Wide Governance Pathways Initiative Phase I and Phase II efforts. Given the growing impacts of climate change on extreme heat events that translate directly into grid stress events, our results also indicate the value to all parties of greater integration that can only result from shared and equitable governance structures that facilitate greater sharing of resources. Our work is intended to motivate those efforts by providing a more complete picture of potential benefits to energy market regionalization that should be balanced against potential risks of such shared governance.
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