Wholesale Power Markets: Transition in Progress

The Third annual Northwest Wholesale Power Market Conference, held in Portland on May 15, provided attendees (myself included) with a great opportunity to learn about wholesale power markets – including challenges and innovations unique to the Western market.

Important Background:
Natural gas and electricity are traded in bulk in wholesale energy markets that consist of the natural resources, infrastructure, institutions, and market participants who produce and deliver energy to consumers. In the United States, the wholesale market for natural gas and electricity is competitive, with supply and demand for a resource determining its price. Consequently, any demand or supply-side shocks or changes lead to price fluctuations in that energy market. The level and volatility of wholesale prices of energy has important implications for ratepayers.

The conference keynote speaker, wholesale market consultant Randy Hardy, summarized the evolution of the Western energy market environment. He described how the Pacific Northwest wholesale markets are moving from capacity surplus to capacity shortages due to coal retirements and the current nature of clean energy technologies. Hardy identified three replacement resources: (1) battery storage; (2) pump storage; and (3) inter-regional transmission to meet shortages. Yet each option has its limitations. 

Battery storage currently has a maximum capacity of 50MW on top of durability and performance uncertainties. Pump storage is essentially a hydro project, representing a relatively older and more familiar technology. Building pump storage is a long process requiring huge capital investment. Finally, inter-regional transmission lines are critical to reliable provision of electricity generated from renewable sources, but also require large capital investments.

Resource load balancing needs, emerging and uncertain technologies, coal retirements, growing demand for direct access, carbon markets, energy imbalance markets, reliability and resilience concerns, as well as policy changes, are just some of the factors shaping the energy market at present. For instance, the natural gas market is currently dealing with storage and pipeline infrastructure issues, while electricity markets have to incorporate high renewables penetration, flexible ramping needs from mid-day through evening, and seasonal hydro conditions –all of which contribute to uncertainty and price volatility in the wholesale energy market. 

Back to the Conference:
Conference panelists pointed out recent changes in demand for and supply of energy, and their impact on energy prices. On the gas side, the October 2018 Enbridge pipeline explosion in British Columbia led to a decrease in supply resulting in significant increases in the spot price of natural gas. Similarly, cold temperatures here in Oregon on March 1, of this year, coupled with tight energy supply, caused the power price to soar to around $800 per MWh for wholesale electricity buyers.

For utilities who purchased electricity on the wholesale market, this meant that they bought electricity at 80 cents/kWh and sold it to customers at about 10 cent/kWh.  These wholesale price levels hadn’t occurred since the early 2000s and persisted for several days in early March. The significant impacts of supply and demand side shocks on energy market outcomes are clearly visible in the Pacific Northwest. Markets must prepare for these shocks to keep prices stable.

The transition in the energy market is also triggered by recent clean energy policies, namely, the 100% Clean Energy bill adopted in Washington and Oregon’s Climate Action Program (HB 2020) bill, which is under consideration this legislative session. These new policy mandates will impact energy prices.

Speakers from Renewable Northwest, Avangrid Renewables, Chelan County PUD, and Energy GPS discussed energy price impacts of these new policy mandates. While a move toward a clean energy future is necessary to address climate change, the speakers pointed out some challenges such as determining who bears decommissioning costs, accounting for non-linearly increasing the cost of deep decarbonization, coordination concerns between state agencies and utilities, and the variation of carbon reduction policies across states.

Any conference on the wholesale power market would be incomplete without a session on the Energy Imbalance Market (EIM), which is a real time intra-hour market used to balance the differences between the day-ahead scheduled amounts of electricity based on day-ahead forecast and the actual real-time load.

In our region, the EIM operates under the California Independent System Operator (CAISO).  Traditionally, most of the Western United States’ power markets have operated under hourly and even year-ahead purchase agreements between two counter parties. At present, however, the EIM is expanding with more utilities joining the real time market. This allows CAISO to dispatch electricity within a given hour based on the least cost generation available from multiple utilities across the West to reduce price volatility.

A particularly interesting discussion concerned the Extended (or Enhanced) Day Ahead Market (EDAM), an innovative market mechanism under evaluation by CAISO. The key regional benefits of having an EDAM include improvement in market efficiency caused by day-ahead unit commitment and more effective integration of renewables.

Ultimately, while I would have appreciated some discussion around customer participation in energy markets, that may be a topic for a future power market conference. The conference did, however, offer a platform for experts to share their views and insights regarding the future of energy markets in the Northwest, many of which have important implications for the rest of the Country.

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