Northwest Energy: A thoughtful approach needed for regional transmission organizations
- Nov 4, 2021 11:35 am GMT
The Pacific Northwest and Southeast are the two U.S. regions that have the lowest rates in the country and have not as yet adopted RTOs. They have been watching and learning as RTOs across the country have displayed a mixed performance record.
RTOs are complex entities. They are not implemented the same in various regions. They address such topics as transmission planning, operations and pricing, short-term electricity trading and managing the instantaneous balancing of supply and demand necessary to maintain reliability. While these functions are performed by utilities in the Northwest today, the question is whether to transfer those functions to a centralized entity.
There are 4 key functions that rise to the top of the list for consideration in the Northwest; expanded use of organized markets for short term electricity trading, establishing minimum standards that assure sufficient supply to maintain reliability, who controls decision-making and transmission planning.
Markets: The choice in the PNW is not whether to support free markets for electricity. The question is whether to create or expand an RTO that overlays the existing market with a larger centralized system.
Organized markets offering greater sharing of generation and transmission across large footprints has led to lower wholesale prices and improved reliability in some circumstances. They can be valuable in regions committing to greater use of renewable generation to reduce carbon emissions.
But centralized markets do not always reduce prices and solve reliability problems and, unless complemented by strong resource investment signals, arguably make things worse. The two most recent significant outages and high price incidents in America occurred in California last summer and in Texas earlier this year. Both states operate RTOs. The fundamental problem in both cases was a lack of investment in the right kinds of generation and demand response to assure adequacy under stress conditions like extraordinary high or low temperatures.
Ironically, it’s the benefit of RTOs that creates the reliability challenge. Markets producing low prices under average system conditions make uneconomic capital investments that would assure supply always meets demand. But generation outages and/or inclement weather inevitably occur. At that moment, prices skyrocket, and system operators begin calling for emergency operations including turning the lights out.
The early indicator of this problem is increased wholesale electric price volatility, something the Northwest has witnessed in recent years. The markets are signaling the struggle to balance supply and demand.
The last time the Northwest saw this kind of market behavior was in the late 1990s prior to the 2001 west coast energy crisis when tens of thousands of people lost their jobs and environmental protection was compromised. Many citizens found it hard to understand why their lives were severely disrupted through no fault of their own.
Resource Adequacy (RA) Standards: The best antidote to the supply-demand problem is establishing binding minimum standards assuring adequate supply under stress situations. These requirements ensure proper investments even when wholesale energy prices are low. Many RTOs lack solid resource adequacy standards. Assuring resource adequacy is the most important issue facing Northwest electricity consumers today. RA standards should precede or coincide short term markets expansion. Fortunately, there is a process underway with broad stakeholder engagement and substantial momentum to establish binding Northwest RA standards in 2023.
Governance: Because RTOs are operated by centralized non-governmental organizations, governance is extremely important. Electricity market rules determine how payments and costs get allocated that affect consumers. While there are guidelines, RTOs are provided latitude in setting the rules. For this reason, RTOs need to be governed by an independent board not beholden to any market interest.
The only operating RTO in the west is in California, the state with the highest electric rates in the country. The Northwest and California have a long electricity trading history with elements of both synergy and contentious disputes. The California RTO is ultimately governed by California elected officials representing their constituents. It would be incredibly unwise and lacking historical perspective to risk forfeiting the economic and environmental benefits the Northwest enjoys, particularly from our low-cost, reliable, carbon-free hydro system by turning over electricity operations control to a system run by California politicians.
Transmission Planning: Transitioning to a clean energy economy will require substantial transmission additions to connect large amounts of renewable resources necessitating strong transmission plans.
An RTO has a future in the Northwest. But not just any RTO. Regulators and elected officials should support carefully crafted solutions to assure benefits for Northwest consumers.
Steve Wright is the former CEO/Administrator of the Bonneville Power Administration. BPA owns and operates roughly 75% of the Northwest transmission system.a
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