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Fast is not always better. That is the lesson that California’s electric grid managers are starting to learn as discussions continue about a proposed transition of California’s Independent System Operator (CAISO) into a multi-state regional system operator (RSO). Last week, Governor Jerry Brown sent a letter to leaders in the California Legislature saying that the plan to transition CAISO into a multi-state RSO was not ready yet and that his administration would work toward getting a proposal put forward in January of 2017. This delay is a good thing. It is also a really big deal.
Over the past year, some of the most influential voices in California energy policy have been jockeying and debating the merits of a plan to merge California's grid with PacifiCorp, a utility owned by Warren Buffett that operates in Utah, Oregon, Wyoming, Idaho, Washington and a small part of California. For a while, it looked as if the authorization for CAISO to expand would be jammed through the Legislature before the details could be worked out. If that had happened, California would have once again been at the forefront of an energy market experiment with uncertain results and with significant aspects of its climate leadership on the line.
Proponents of the plan tout the potential savings that an integrated western grid could have as California and other states accelerate the development of renewable energy generation to meet higher renewable portfolio standard goals. And they're right; there are potential benefits of a regional market that could lead to better and lower cost development of renewables. But there is also a big problem with the plan as currently proposed: coal.
PacifiCorp is by far the largest owner of coal plants in the Western United States. Coal supplied more than 60% of PacifiCorp's energy in 2015 and generated approximately 45 million metric tons of CO2. That’s more than half of what the entire electric sector in California produces (including imports) even though PacifiCorp load is only about one-fifth compared to California each year. In other words, the carbon-intensity of PacifiCorp's generation is off the charts compared to the significant and beneficial gains that California has made over the years.
Concern over integrating California's relatively clean grid with coal-dominated PacifiCorp percolated over the past year as CAISO worked on a series of studies mandated by Senate Bill 350. The issue came to a head in late May when CAISO released the results of its study showing that indeed the proposed expansion of CAISO would lead to a near-term bump in coal generation across the west; as much as a 3% increase in some scenarios. Even in the longer-term scenarios that looked out to 2030 and assumed a massive infusion of new renewable energy onto the system, the CAISO's models predicted that PacifiCorp's coal units would continue to operate at current levels rather than being driven off the market as some had predicted. This bump in the productivity and profitability of PacifiCorp's coal plants set off alarms.
PacifiCorp is notorious for defending its coal plants and fighting new clean energy development. The utility is also facing several upcoming laws and regulations that would require over $1 billion in capital expenses to bring its plants into compliance with modern pollution control standards. The problem for PacifiCorp is that under current conditions, those expenses do not pencil out. Coal plants have been losing money across the country as they compete with the plummeting cost of renewable energy and low natural gas prices. When those plants are forced to comply with modern pollution control laws, they can’t compete with cleaner alternatives. CAISO's studies suggested, however, that PacifiCorp's coal plants could receive a much-needed boost if they got access to California's markets. Driving up the production of those plants in the near term would create a substantial risk that otherwise defunct plants could get a new lease on life. In other words, California's market could rescue those plants.
The threat of saving coal plants in an expanded market intensified the debate through the summer. Several stakeholders began looking to the recently developed energy imbalance market (EIM) as a potential solution to the coal problem. The EIM, which trades smaller amounts of energy on a 5-minute basis, had set up a mechanism called a “GHG Adder” that was intended to discourage the dispatch of coal and other fossil fuel resources into California. Proponents of the day-ahead market argued that a similar mechanism could be developed to limit the dispatch of PacifiCorp’s coal plants in an expanded RSO.
Then the California Air Resources Board (CARB) dropped a bombshell (if you’re an energy wonk it was a bombshell—otherwise it was a very technically dense set of proposed regulatory reforms): the GHG mechanism in the EIM was failing. Rather than discouraging fossil-fuel dispatch, the EIM computers were simply doing a paper shuffle that made it look like California was mostly getting carbon free resources. In reality, new fossil fuel generation was firing up to meet the need created by the gap of clean energy that was being rerouted to the EIM (known as "secondary dispatch" or "resource shuffling"). Even worse, the market mechanism that had been put in place to restrict carbon-intensive generation appeared to be creating a benefit for fossil generators by boosting the clearing price of energy outside of California. So rather than discouraging carbon-intensive resources, the EIM’s GHG mechanism was actually creating a windfall for coal and natural gas generation.
The revelations from CARB have, for now, thrown off the attempts to slam through legislative changes this year. The problems with tracking GHGs in the EIM are still being worked out, but the conclusions were clear: the markets needed more work to ensure that California was not inadvertently boosting GHG emissions in the region. This is especially true for the proposed day-ahead market, which would be orders of magnitude bigger than the EIM.
For months, legislative leaders have forced the CAISO and PacifiCorp to a table with other stakeholders, including Sierra Club. That discussion helped expose and highlight the problems that could occur with regionalization. Fortunately, Governor Brown acknowledged the problems and tapped the brakes on the process that would have led to hasty legislation this year. It is now up to the various stakeholders to roll up their sleeves and develop a smarter proposal—one in which the GHG mechanisms will work—before the next legislative session. We need to make sure that California’s quest for cheaper renewables doesn’t have the perverse incentive of extending the lives of the most polluting plants in the West.