Perceptions of Variable Energy Integration Innovations in the Pacific Northwest Power. Sector An Application of the Diffusion of Innovation Framework

Transcription

1 Perceptions of Variable Energy Integration Innovations in the Pacific Northwest Power Sector An Application of the Diffusion of Innovation Framework By Jeremy Eckstein MPP Essay Submitted to Oregon State University In partial fulfillment of the requirements for the degree of Master of Public Policy Presented on the November 6 th, 2014

2 Master of Public Policy thesis of Jeremy Eckstein presented on November 6, 2014 Approved: Denise Lach, representing Sociology Vijay Satyal, representing Public Policy Chinweike Esenou, representing Engineering I understand that my thesis will become part of the permanent collection of Oregon State University libraries. My signature below authorizes the release of my thesis to any reader upon request. Jeremy Eckstein, author

3 ABSTRACT Wind and solar energy levels are expected to increase in the Pacific Northwest as a result of maturing renewable energy technologies, and state and federal policies. Because wind and solar energy is intermittent, only producing electricity when weather conditions permit, the integration of these resources has posed challenges to operators of the electricity grid. These challenges are associated with managing the balance of electricity supply and demand in real time. This paper investigates which innovations are likely to be deployed by balancing authorities, the entities responsible for maintaining demand-supply equilibrium, in Oregon and Washington in order to address the integration issue. The possible adoption of an energy imbalance market, energy storage systems, and demand response programs are examined by analyzing interview responses of managers of each of Oregon and Washington s ten balancing authorities through the lens of the diffusion of innovations framework. By focusing on the framework s five innovation perception categories the study finds that an energy imbalance market offers the strongest perceived benefit and least perceived cost of the three integration innovations analyzed. Nonetheless, the deployment of a regional imbalance market faces significant challenges associated with perceptions held by the region s public utilities. Other innovations are currently perceived as cost-prohibitive.

4 Table of Contents 1. Problem Statement and Research Question Background Growth of Renewable Energy in the Pacific Northwest... 2 Figure 2: Graphic demonstrating Oregon and Washington state electricity generating profiles. Source: EIA website Challenges Associated with Integrating Variable Energy... 6 Figure 3: Graphic demonstrating wind energy production alignment with system energy demand. Source: BPA website Pacific Northwest Energy Market Structure Figure 4: Graphic outlining the ten balancing authorities in the Oregon and Washington. Source: Smart Grid Blog Potential Variable Energy Integration Solutions Figure 5: Graphic illustrating how an energy imbalance market would function in the Pacific Northwest. Source: BPA Presentation Table 1: Simple Northwest Power Pool Market Assessment and Coordination Committee Timeline. Source: BPA Presentation Regional Public Policy on Renewable Energy Integration Diffusion Theory Methods Application of Diffusion Theory Data Collection Method Table 3: Oregon and Washington balancing authorities Data analysis Table 4: Coding respondents perceptions of energy integration innovations Findings Background Perspectives Perspectives on Integration Innovations Energy Storage Relative Advantage Energy Storage Compatibility Energy Storage Trialability Perceptions of Demand Response Programs Demand Response Programs Relative Advantage Demand Response Programs Compatibility Demand Response Programs Complexity Demand Response Programs Trialability Demand Response Programs Observability Other Potential Integration Innovations Discussion Public Policy Options Enhanced Regional Coordination Facilitating the Development of Balancing Authority Flexibility Tools Mandates Supportive Regulations Lessons from the Energy Efficiency Sector Mandates

5 1. Problem Statement and Research Question The United States has seen increasing levels of renewable energy on its electricity grid. This trend is also present in the Pacific Northwest (United States Department of Energy, 2013). Because wind and solar energy (the two renewable energy sources generating the most electricity) are subject to the whims of the weather and are by nature intermittent, their integration into the power system carries specific challenges. Addressing these challenges has been the subject of consistent interest among energy market stakeholders in the United States and in the Pacific Northwest. A review of relevant studies, reports, and technical papers has revealed that multiple innovations can facilitate the integration of renewable energy resources in the Pacific Northwest. These include an energy imbalance market, more frequent energy trading between balancing authorities, improved weather forecasting, energy storage, and demand response programs (each of these technologies is described in detail in Section 2, Background ). This paper addresses the question: what renewable energy integration innovations are likely to be adopted by balancing authorities in the Pacific Northwest? In order to answer this question, semi-structured interviews were conducted with managers at the ten balancing authorities in Oregon and Washington. The research methodology utilized a qualitative analysis of respondents perceptions of integration technologies and applied the diffusion of innovation framework s five perception characteristics to help understand adoption and policy intervention. This paper addresses the research question by fist providing background information on renewable energy growth, renewable energy integration issues, the regional energy market structure, and potential integration innovations in Section 2. Section 3 briefly addresses existing state-level policy regarding renewable energy integration in Oregon and Washington. Section 4 introduces the diffusion of innovations framework, including past applications. The research methods are described in Section 5, followed by detailed finding in Section 6. Sections 7 and 8 provide a discussion of the findings and policy options. Perceptions of Variable Energy Integration Innovations p. 1

6 2. Background 2.1 Growth of Renewable Energy in the Pacific Northwest Since the 1970s federal and state policies have promoted the development of renewable energy resources. As a result of these policies and due to increased competitiveness of renewables, levels of solar and wind energy resources have steadily increased, particularly in the Western United States. In Washington wind generation increased from 1,038,000 MWh in 2006 to 4,745,000 MWh in 2010 (a 357% increase). In Oregon, over the same period, wind generation increased from 399,000 MWh to 2,004,000 MWh (a 402% increase). Comparatively, this increase was 294% in the same period in Texas (6,671,000 MWh to 26,251) 1. On a national level total wind generation grew from 25 TWh in 2006 to 95 TWh in 2010 (a 280% increase). 2 Commercial-scale wind and solar energy production has its roots in 1970s energy policy, which sought to promote the development of alternative energy supplies in reaction to oil embargoes and fossil fuel price shocks. While initial policy actions, such as the passage of the Public Utilities Regulatory Policies Act (PURPA), were responses to global energy market factors, later policy choices (such as renewable energy portfolio standards in individual states) were driven in part by concerns about the environmental impacts of carbon emissions from electricity production (United States Department of Energy, 2008). According to a National Renewable Energy Laboratory (NREL) report, wind energy, after gaining a foothold during the 1980s [ ] slipped as favorable policy and tax provisions dried up [...]. However, with the return of a more favorable policy regime at both the state and federal levels, and continued reductions in the cost of energy from wind, the U.S. industry regained traction in the late 1990s (Hand et al., 2012, p. 11.1). Today the United States Energy Information Administration (EIA) predicts that non-hydroelectric renewable energy growth will be dominated by solar and wind energy resources through According to the EIA, renewable energy will account for approximately one fifth of US electricity production by 2040, with 46 additional GWs of solar energy and 42 GWs of wind energy coming online between now and then. According to the agency the continued growth of these energy 1 Data retrieved from the Energy Information Administration website s state profiles ( Last accessed October 27, Data retrieved from the Energy Information Administration website s Today in Energy ( Last accessed October 27, Perceptions of Variable Energy Integration Innovations p. 2

7 resources is primarily driven by state-level renewable energy portfolio standards, and state and federal tax credits (United States Department of Energy, 2013). The growth of wind and solar energy has been pronounced in the Northwest United States. According to data available on the EIA website, the contiguous Pacific states saw a 13.5% increase in wind energy production between March 2012 and March Idaho saw a 29.3% increase and Montana saw 40.1% increase in wind energy production over the same time period. 3 California has been a particular driver of growth in the renewable energy sector, having raised its renewable energy portfolio standard to 33% by While California s standard has historically also driven wind and solar production in the its neighboring states, a 2011 state law to restrict energy imports has somewhat slowed renewable energy growth outside of California (Northwest Power and Conservation Council, 2013). A graphic below demonstrates the current regional distribution of solar and wind projects in the Northwest. A report by the Western Governors Association (WGA) states: State laws and policies put in place in the last decade requiring energy suppliers to bring on-line large amounts of wind and solar generation have changed the traditional mix of fuels used for energy generation. By 2022, these policies are expected to more than double the amount of renewable resources in the Western U.S. compared to 2010 (Porter et al., 2012, p. 1). The WGA represents 19 states and Pacific provinces reflecting part of the Western Interconnection, the interconnected electricity grid falling under the auspices of the Western Electricity Coordinating Council (WECC). WECC is one of nine regional electricity reliability councils under the North American Electricity Reliability Council (NERC). NERC works to ensure the reliability of the power system by developing and enforcing reliability standards. 4 The Federal Energy Regulatory Commission (FERC) regulates the wholesale interstate electricity market. 5 3 EIA website: 4 See NERC website for more details on the NERC mission and general practices: 5 See FERC website for more details on the FERC mission and general practices: Perceptions of Variable Energy Integration Innovations p. 3

8 Figure 1: Graphic showing wind and solar projects in the Pacific Northwest. Source: Renewable Northwest website6 While uncertainty about federal incentives for renewable energy production remains, solar and wind power growth in Washington and Oregon is driven by the states renewable energy portfolio standards. The Washington standard requires qualifying utilities (serving more than 25,000 customers) to get 15% of their electricity form renewable energy resources (hydro-facilities becoming operational before 1999 do not qualify). The Oregon standard requires utilities to get 25% of their electricity from renewable sources by The states utilities integrated resource plans show that utilities are planning to increase their levels of renewables to meet the specified targets. Renewable Northwest, an Oregon-based renewable energy advocacy organization, notes that there are currently 54 wind projects and 42 solar projects operating in Oregon and Washington. According to the group these projects are operated and owned by a diverse set of actors, 6 Project list and data from Renewable Northwest s website. Last accessed July See desireusa.org for a detailed summary of the states standards. Perceptions of Variable Energy Integration Innovations p. 4

9 including utilities and independent power producers, such as Ibadrola, Horizon Wind, and Energy NW. 8 The Northwest Power and Conservation council estimates that the Pacific Northwest had, installed, by 2012, 7,183 MWs of wind capacity and 2012 MWs of solar capacity. 3,000 MWs of the wind capacity is exported to California (Northwest Power and Conservation Council, 2013, p. 30). Oregon and Washington differ significantly in their state level energy-generation profile. According to data from the EIA, Oregon gets approximately 22 percent of its energy from natural gas, six percent from coal, 56 percent from hydroelectricity, and 16 percent from renewables. For Washington the mix is approximately nine percent natural gas, seven percent coal, 70 percent hydroelectricity, seven percent nuclear, and six percent renewables. 9 Finally, load growth in the Pacific Northwest is projected to grow at one percent over the next ten years, after regional loads saw a drastic decline following the 2008 recession (Pacific Northwest Utilities Conference Committee, 2013). Figure 2: Graphic demonstrating Oregon and Washington state electricity generating profiles. Source: EIA website. 10 Oregon (July 2014) Washington (July 2014) 8 Project list and data from Renewable Northwest s website: Last accessed July Retrieved from the EIA website at and Last accessed November 5, Ibid. Perceptions of Variable Energy Integration Innovations p. 5

10 2.2 Challenges Associated with Integrating Variable Energy Because wind and solar energy facilities produce electricity only according to prevailing (and relatively unpredictable) weather patterns the integration of these resources can be challenging for balancing authorities. Balancing authorities are entities registered with NERC 11, and maintain a balance between resources and loads (or between scheduled and actual generation) within their respective Balancing Authority Area in real-time. [ ] Balancing Authority responsibilities carry with them financial costs that are not directly realized by generators (McLellan & Opatrny, 2011, p. 10). Many of these costs are associated with keeping energy reserves on hand for the case that changes in energy supply or energy demand occur. One of the responsibilities of balancing authorities is to carry energy reserves (regulating and contingency reserves) which can be deployed in case of a sudden drop in energy generation or sudden, unpredicted increases in demand. 12 These balancing reserves can be used to offset the variability of wind and solar energy sources. NERC provides balancing authorities with reliability operating requirements, which are approved by FERC. Amongst these requirements is the need to maintain adequate balancing reserves in order to maintain the reliability of the electricity grid. Balancing authorities can be fined by NERC for failure to comply with operating requirements and reliability standards. Not all utilities are balancing authorities. Nor are all balancing authorities utilities. The costs of keeping balancing reserves on hand can be higher in smaller balancing authorities. One PNNL report states, for example, that it has been proven that the impact of intermittency and uncertainty caused by [variable generation] becomes relatively smaller if these resources are lumped together over a large geographical area and if they are more dispersed over a territory 11 The National Electricity Reliability Corporation s Glossary of Terms for Reliability Standards defines a Balancing Authority as: The responsible entity that integrates resource plans ahead of time, maintains load-interchange-generation balance within a Balancing Authority Area, and supports Interconnection frequency in real time. 12 NERC provides guidelines on carrying three different types of operating reserves in its Reliability Guideline: Operating Reserve Management. This document can be found on the NERC website at % pdf. Last accessed 27 October Perceptions of Variable Energy Integration Innovations p. 6

11 (Markov, et al, 2010, p. vi). Under conditions of uncertainty and variability, balancing authorities must adjust their non-renewable electricity sources (such as gas and hydro power), or buy electricity from outside their areas, according to variations of the wind or sunshine in order to ensure that electricity demand is met with supply (Kirby & Milligan, 2009). Industry analysts write that integration challenges are especially high for smaller balancing authorities that have high levels of variable electricity generation (Makarov et al., 2010) and that increases in variable energy in the West continue to raise questions about how system-wide balance can be maintained (Milligan, Kirby & King, 2012). Analysts note that while balancing authorities appear to have adequate resources available to generate the power necessary to account for the variability of renewable energy, energy prices can be driven up significantly if a balancing authority runs low on generating capacity to make up for the intermittency of renewable energy sources (Milligan, et al., 2009). For example, the Northwest Power and Conservation Council (NPCC) noted that the cost of wind energy rises as the share of wind energy within a specific balancing authority increases. The Council also noted that the cost of 100 MWs of wind energy is much higher in a balancing authority with a peak load of 500 MWs than in a balancing authority with a peak load of 5,000 MWs. The cost differential is caused by the balancing authority s need to maintain adequate flexibility in its system to account for the variability of wind energy (Northwest Power and Conservation Council, 2007). Larger balancing authorities, due to their larger pools of diversified energy resources and greater resources flexibility experience a reduced cost in balancing supply and demand (Milligan et al., 2012). A NERC report highlighted challenges to integrating rising levels of variable renewable energy in terms of the power system s overall reliability. The report noted that while power system operators are accustomed to managing variability in terms of electric demand and have systems in place to mange demand cycles, large-scale integration of variable generation can significantly alter familiar system conditions due to unfamiliar and increased supply variability and uncertainty (North American Electric Reliability Council, 2009, p. 4). The report makes a number of Perceptions of Variable Energy Integration Innovations p. 7

12 recommendations to manage increasing levels of variable energy, from a systems reliability perspective, including the need for diversifying renewable energy sources, deploying them over a larger geographical area, and planning for additional transmission capacity and quicklyresponding generation capacity. A NREL report describes the characteristics of a balancing authority (and the market structure in which it operates) that would make it conducive to integrating variable wind energy. The report notes that: Wind-friendly physical characteristics include geographically and electrically large balancing areas, as well as generator characteristics such as fast-ramping, loadfollowing capability. They also include generation and transmission market structures that provide access to conventional generation flexibility and maneuverability; the ability of a generator to ramp up and down quickly and accurately, to turn on and off quickly and at low cost, and the ability to operate at low minimum loads. Advanced wind forecasting, integrated into the power system control room, can also help wind integration costs by providing the power system operator with a reliable look at the near future balancing requirements (Milligan, et al., 2009, p. 1-2). Another NREL report demonstrates that wind energy integration costs, in terms of keeping additional balancing reserves to compensate for volatility, are more significant for cases where wind energy is produced within one balancing authority and sold in another, and where subhourly markets do not exist. In such cases the producing (sending) balancing authority is required to keep (and dispatch) reserves to ensure the supply of the scheduled (hourly) amount of wind energy. The report s authors note that these intra-balancing authority reserve generating costs can be reduced by implementing a sub-hourly intervals at which wind energy can be traded (dispatched) across balancing authorities (Kirby & Milligan, 2009). The challenges associated with integrating increasing amounts of variable energy into the western electricity system are well known to market participants and are frequently discussed. In 2007 a working group under the auspices of the NPCC drafted a Wind Integration Action Plan. The plan sought to address questions around the operational impacts of integrating large measures of wind energy into the regional electricity market, the recovery of integration costs, and future transmission line planning (Northwest Power and Conservation Council, 2007). Perceptions of Variable Energy Integration Innovations p. 8

13 The NPCC's 2007 Wind Integration Action Plan provided an early framework for addressing the issue of integrating variable energy resources into the North Western electricity system. The discussions have since continued and the complications associated with brining increasing levels of wind energy online were brought front and center to public debate in 2011 when the Bonneville Power Administration s (BPA) requirements to manage regional hydroelectric sources, market electricity, and comply with a number of environmental regulations caused it to curtail windenergy during a period of high wind energy production and low regional electricity demand. In light of this issue, one analyst noted that the biggest difficulty in coping with the variability of wind energy is not about how to respond when wind energy unpredictably declines, but about how to manage high wind events when [electricity] demand is low (Dragoon, 2012, p. 5). Many of the wind projects in the Pacific Northwest are connected to the BPA balancing authority, which provides integration services for the projects. Ibadrola, a renewable energy producer, however, has an agreement in place with BPA whereby it provides its own balancing service. In some cases BPA has been unable to maintain sufficient balancing reserves given the variability on its grid. For those cases it created Dispatch Standing Order (DSO) 216, which allows it to limit electricity generation from wind producers when it lacks of reserves to balance rising or declining energy output from wind producers. 13 The graphic below demonstrates that wind production does not always follow the demand on the system. In the week below, which shows load, wind production, and other generation on the BPA system, DSO 216 was not invoked. 13 Summary of DSO 216 Phase II Update, Bonneville Power Administration, Accessed from BPA website: II_summary.pdf. Last accessed July Perceptions of Variable Energy Integration Innovations p. 9

14 Figure 3: Graphic demonstrating wind energy production alignment with system energy demand. Source: BPA website 14 According to one media report in 2011 the BPA could not slow hydroelectric production as laws protecting endangered species [prevented] it from sending all the excess water through spillways and around the dams. [ ] Grid operators [said that] they [had] run out of capability to sell the surplus electricity, store the water or shut down gas, oil, and nuclear plants leaving wind farms the unfortunate victim (Fought, 2011). This situation may have cost wind developers millions of dollars (the BPA estimated the cost to wind developers at USD 50 million for a 3 month curtailment), primarily through the loss of federal renewable energy tax credits [to wind producers] (Fought, 2011). The curtailment issues led the BPA to re-evaluate its over-supply policies in March Under its Oversupply Management Protocol the federal power marketing agency, in events where there is a shortage of energy demand and federal hydro-output cannot be reduced, can curtail generators connected to its grids according to the lowest cost energy sources. This curtailment applies to both renewable and non-renewable generators. Renewable energy producers are able to include tax credits as part of their curtailment costs. Under the protocol curtailed energy producers are reimbursed at cost for the energy that they are not able to sell, including tax credits 14 Retrieved from BPA website: Perceptions of Variable Energy Integration Innovations p. 10

15 (Dombek, 2013) and (Wind Power Monthly, 2012). The BPA notes that the oversupply of energy is most likely in springtime, when rivers run high, and during the night, when demand is at its lowest.15 FERC has approved BPA s protocol. Energy oversupply issues are not unique to the Pacific Northwest. A recent study by the consulting group E3 examined scenarios for how California might operationalize a potential 50 percent renewable energy portfolio standard. The report noted that the largest integration challenge that emerges [ ] is over-generation, [which] is pervasive at RPS levels above 33% (E3 Economics, 2014, p. 10). The study proposes a number of potential solutions to address overgeneration, many of which are also examined in this report. 2.3 Pacific Northwest Energy Market Structure NREL highlights that electricity markets operated by Regional Transmission Organizations (RTO) or Independent System Operators (ISO) over large geographical regions, with monthly, daily, hourly, and sub-hourly electricity markets are particularly efficient at integrating variable energy and that wind greatly benefits from a long-term, regional approach to transmission planning (Milligan, et al., 2009, p. 3). In addition, the report states that larger balancing areas are better able to integrate large amounts of wind because the random variability of individual wind generators and individual loads partially cancel each other out (Milligan, et al., 2009, p. 8). The Pacific Northwest does not have a RTO or ISO. Rather the Pacific Northwest energy market operates on a bilateral basis, where balancing authorities and utilities trade energy in hourly blocks. Whereas RTOs and ISOs are subject to FERC oversight, due to FERC approval of these bodies transmission policies, much of Pacific Northwest energy market is not subject to such oversight because many of the wholesale energy traders are public entities. 16 Independent power producers connect to the transmission grid and can sell their energy on wholesale markets or directly to customers through long-term contracts. 15 See BPA website: last accessed July One report states that FERC has clear authority to regulate wholesale power sales, except when the seller is a public agency (Regulatory Assistance Project, 2011, p. 13). Perceptions of Variable Energy Integration Innovations p. 11

16 Figure 4: Graphic outlining the ten balancing authorities in the Oregon and Washington. Source: Smart Grid Blog 5 17 Legend: AVA: Avista BPA: Bonneville Power Administration CHPD: Chelan County Public Utility District DOPD: Douglas County Public Utility District GCPD: Grant County Public Utility District PACW: Pacific Power PGE: Portland General Electric SCL: Seattle City Light TPWR: Tacoma Power and Water Department. McLellan and Opantry (2011) describe how the landmark FERC Orders 888 and 2000 encouraged the formations of RTOs and ISOs, and suggest that decisions to create these bodies rested on economic decisions by balancing authorities regarding access to power. They argue that as RTOs and ISOs facilitate transmission of electricity across multiple transmission areas, decisions to establish these bodies rested on the current costs of energy. For these reasons, in some pockets of North America with extremely low power costs, ISOs and RTOs did not form (McLellan & Opantry, 2011, p. 20). The Pacific Northwest has some of the United States lowest energy prices. In Washington and Oregon there are ten balancing authorities, which includes the BPA, investor owned utilities, city agencies, and public utility districts. The significance of the BPA cannot be overstated. Not only does the BPA market over 30% of the electricity used in the Northwest, but it also operates about three quarters of the region s high voltage transmission lines. The agency provides preference rate power to 54 cooperatives, 42 municipalities, and 28 public utility districts. It currently has approximately 4,500 MWs of wind on its transmission system and estimates this number to increase to 7,000 MWs by the end of Source: Smart Grid Blog 5 Forest Hiker: Last accessed July BPA 2013 Factsheet retrieved from BPA website: Last accessed July Perceptions of Variable Energy Integration Innovations p. 12

17 Balancing authorities in Oregon and Washington are also diverse in their relative size (by customers and generation capacity) and levels of renewable energy on their grids. Some of these balancing authorities are traditional, vertically integrated utilities that own and operate electricity transmission lines, electricity distribution systems, and electricity generation. The regulation of the electricity market is separated between federal and state oversight. FERC, under the authority of the interstate commerce clause of the United States constitution, regulates the wholesale electricity market. Public utilities and federal power marketing agencies, such as the BPA, are exempt from FERC regulation. Investor owned utilities are regulated by state public utilities commissions (PUCs) that establish what rates can be charged to electricity consumers, based on the utilities rate-base, in their service territories. Public utilities are overseen by their own boards, which are in many cases made up of elected officials (Regulatory Assistance Project, 2011). Given its authority FERC played a role in reshaping the electricity transmission system in the United States through a series of landmark orders. Three FERC decision, in 1996, 2000, and 2012 were critical to reshaping the regulatory framework of the transmission system with consequences for renewable energy integration. FERC s 1996 landmark Order 888 established that transmission system owners were required to provide open access on their systems to independent power producers. The order permits public utilities and transmitting utilities to seek recovery of legitimate, prudent and verifiable stranded costs associated with providing open access and [ ] transmission services. The Commission's goal [was] to remove impediments to competition in the wholesale bulk power marketplace and to bring more efficient, lower cost power to the Nation's electricity consumers. 19 One of the cost factors for which balancing authorities are able to recover costs is for the balancing reserves that they are required to carry in order to maintain the reliability of the electricity grid given the incremental increase in variability brought by interconnected renewable 19 FERC Order 888 (Summary Section), Perceptions of Variable Energy Integration Innovations p. 13

18 energy. Under the FERC order transmission service providers and balancing authorities can charge independent power producers for the cost of interconnecting power plants to the transmission grids. In 2000 FERC issued Order 2000, which promoted the establishment of RTOs by transmissionowning utilities. While this order did not mandate the formation of these bodies, it did lay out selected minimum conditions on issues such as governance (Regulatory Assistance Project, 2011). In 2012, specifically addressing renewable energy integration, FERC issued Order 764. While FERC had initially thought to establish a common standard for determining integration costs for variable energy generators, Order 764, which states that transmission providers should offer intra-hour scheduling opportunities to energy producers, opted to allow transmission providers flexibility in establishing integration charges and approves integration charges for jurisdictional balancing authorities on a case by case basis (Porter et al., 2013). Order 746 required transmission service operators to offer opportunities to independent energy generators, such as wind energy producers, to schedule their electricity generation on a subhourly basis. As one analysis stated, prior to Order 764, hourly-scheduling was the norm. Wind generators had difficulty meeting their hourly schedules because of the tremendous variation, even within an hour [ ]. Accordingly, FERC required that transmission customers be given the ability to adjust its schedule at 15-minute intervals to reflect changing conditions. [ ] FERC signaled its intent to readjust the relative scheduling and balancing obligations between [variable energy generators] and transmission providers (Dotten, 2014, p. 2-3). FERC Order 764 is but one of a number of orders that sought to reshape how independent power producers, including variable energy generators, are able to connect to the electricity grid. A NREL report notes that the process for determining variable energy integration costs has been a dynamic subject area, as there is disagreement within the industry as to the proper methodology that should be used. In short, there is no one generally accepted methodology to Perceptions of Variable Energy Integration Innovations p. 14

19 calculate variable generation integration costs (Porter, et al., 2013, p.2). 20 The report notes that the determination of variable integration costs is at an early stage and [is] more art than science, as is often the case in electric utility ratemaking and its regulation (Porter, et al., 2013, p. 6). 2.4 Potential Variable Energy Integration Solutions The Northwest Power and Conservation Council Action Plan noted that, Short of actual [balancing authority] area consolidation, the two most significant steps toward realizing [the] benefit [of consolidating balancing authority areas] are the development of expanded wholesale markets for control area services and greater operating reserve sharing. If successful, these steps can help shift the existing wind integration supply curve to the right (Northwest Power and Conservation Council, 2007, p. 11).. In addition, Good wind forecasting is an essential element of managing wind power (Northwest Power and Conservation Council, 2007, p. 23). The plan further stated that: Although new technologies such as pumped storage, compressed air and demand management may play a greater role in providing system flexibility in the future, at present, the principle alternative to hydro generation for providing system flexibility is natural gas-fired generation. In an increasingly carbon-constrained world, the tradeoffs between losses of hydro system flexibility and greater reliance on fossil-fired generation to integrate wind need to be formally evaluated alongside other tradeoffs between competing uses of system flexibility (Northwest Power and Conservation Council, 2007, p. 12). The WGA provided a number of non-carbon generating options to increase flexibility of the regional electricity grid to reduce the cost of integrating renewable energy resources in the West. The report highlighted a number of options for increasing flexibility of the grid, including scheduling practices, reserve sharing, and the establishment of an energy imbalance market (Porter et al., 2012) Energy Imbalance Market An energy imbalance market can address variable energy integration inefficiencies by providing a centralized market mechanism that [enables] dispatch of [electricity] generation and 20 The NREL report profiles 12 balancing authorities and finds that each has a unique methodology for determining integration costs by quantifying certain system impacts of variable energy generation. Perceptions of Variable Energy Integration Innovations p. 15

20 transmission resources across balancing authorities to resolve energy imbalances differences between generation and demand (Porter, et al., 2012, p. 6). Such a market still allows balancing authorities to trade bilaterally and does not set up a RTO or ISO. Rather it augments the existing bilateral markets by providing an automated system of filling energy imbalances (for example, drops in wind generated electricity due to changing wind patterns) at the least available cost from excess resources elsewhere in the energy imbalance market. An energy imbalance market is a means of supplying and dispatching electricity to balance fluctuations in generation and [demand] (National Renewable Energy Laboratory, 2012, p. 1). Further, an energy imbalance market is a real-time energy market providing centralized, automated generation dispatch and prices for each 5-minute interval covering participating balancing authorities in the market area. Participation in the market would be voluntary [and the energy imbalance market] would incorporate real-time generation capabilities, transmission constraints, and pricing; [and] would dispatch generation to balance supply and demand and manage congestion [on the electricity grid], to the extent it is offered, available, and deliverable, rather than using bilateral trading between buyers and sellers (Western Interstate Energy Board, 2011, p. 5). The central idea of an energy imbalance market is that it would allow multiple balancing authorities to pool their generation variability (from renewable energy sources) across a larger area. In effect it would create a larger, virtual balancing authority that could pool a larger range of energy production resources. Under this arrangement, imbalances [due to variability] would be netted out, much as they would be in a single [balancing authority] (King, et al., 2011, p. 11). Under an energy imbalance market participating balancing authorities would still trade energy bilaterally with each other. However, outstanding supply and demand variations would be managed, resulting in less net variability within the local [balancing authority] and less required [up or down powering of reserve energy] across the [market] footprint (King, et al., 2011, p. 11). The system would become more efficient as more balancing authorities participate, and the larger the footprint of the energy imbalance market becomes. This is because more variability would be aggregated and netted out with more participants (i.e. there is a higher likelihood that instances of Perceptions of Variable Energy Integration Innovations p. 16

21 over-production are cancelled by instances of under-production elsewhere in the imbalance market). Establishing an energy imbalance market would require significant start up costs to create a body to account for trading activity, a monitoring body, a governance structure, required hardware and software, and training costs. These costs would be shared amongst the market participants. The net economic benefits would depend on the level of participation, but are estimated to significantly outweigh costs (King, et al., 2011, p. 11). The WECC commissioned both a cost and benefit study in 2011 to evaluate the opportunities and risks in establishing an energy imbalance market across the Council s 11-state region. The cost study was limited to examining the costs of setting up a market operating system (i.e. it did not look at the cost associated with a governance or monitoring entity) and was constrained by uncertainty about the size of the market (i.e. the number of participants). The report estimated the cost of the market operator to be between $33 million and $128 million (this figure did not include start up costs, which were estimated by the report to range between $25 million and $220 million, and would include software, hardware and infrastructure costs) (Utilicast, 2011). The benefits study modeled the impact of an energy imbalance market in 2020 based on forecasted renewable energy levels. It modeled a voluntary market run by a central market operator that would supplement [the current] system of bilateral energy trading. [ ] The principal benefit of such a market [would be] reduced production costs due to more efficient dispatch of existing generating resources (E3 Economics, 2011, p. 6). According to the analysis the implementation of an energy imbalance market across the Council s 11-state area would result in a savings of $141 million in Of this amount, over $99 million would result from reducing the need to hold flexibility reserves after pooling variable electricity generation across a much larger area. The remaining savings would result from a reduction of rates currently imposed on trading electricity between zones in the West (E3 Economics, 2011). Perceptions of Variable Energy Integration Innovations p. 17

22 Figure 5: Graphic illustrating how an energy imbalance market would function in the Pacific Northwest. Source: BPA Presentation 21 Current Practice Energy Imbalance Market Each balancing authority maintains balance within its own bubble. It relies on its own resources to maintain balance and is connected to other balancing authorities only according to scheduled interchanges. An independent entity takes over responsibility for maintaining balance in the market with access to resource in the entire footprint. A market operator optimizes resource use based on bids placed into the market by participating balancing authorities. Legend: BA balancing authority, L load, G generator, NSI net scheduled interchange, S schedule A later cost-benefit analysis was conducted by NREL in order to expand on the WECC studies. The new evaluation found that an energy imbalance market in the Western United States could result in a total social benefit of $150 to $300 million. The revised study modeled the projected costs and benefits for each of the 30 potential participating balancing authorities, finding that most would experience a significant savings. However, the study projected that the BPA would see its cost rise by up to $313 million (Milligan, King, Clark, Kirby & Guo, 2012). Western coordinating bodies have acknowledged the need to reduce the cost of integrating renewable energy and have considered options for establishing an energy imbalance market. The members of the Northwest Power Pool established a market assessment committee in early 21 From a BPA presentation at the August 11, 2014 NWPP MC SCED Workshop. Available at: Last accessed August Perceptions of Variable Energy Integration Innovations p. 18

23 2012 to address the issue of managing increasing levels of variable energy without systematically sharing the diversity between their systems; [which] may be resulting in increased costs and wear and tear on generating resources. 22 The committee reviewed some of the benefits and costs of establishing an energy imbalance market across the Northwest Power Pool s area, but has made no concrete recommendations to its members on establishing the market. The Northwest Power Pool s Market Assessment Committee, in response to the NREL s costbenefit study, which found that the BPA was set to loose over $300 million under an energy imbalance market, stated that it would conduct its own cost-benefit analyses and explore the possibilities of a more limited energy imbalance market (under the Power Pool s smaller regional footprint). 23 The Northwest Power Pool is comprised of 33 electricity generators, including all of the region's balancing authorities in the Northwestern United States, as well as the Canadian provinces Alberta and British Columbia. The market assessment committee is comprised of 22 of these utilities. Members of the Northwest Power Pool have been coordinating their efforts regularly under the Market Assessment and Coordination Committee and have moved through three of its four planned phases. Each of the phases includes specific objectives (see table below) and provide options for members to opt out of moving the market design forward at each stage. The Committee s executive body is represented at the highest level of regional balancing authority leadership and is well funded by participating utilities Northwest Power Pool, Market Assessment Coordinating Committee Presentation Slides, p. 4 (Internal document 23 Letter to Commissioner Marks, Chairman of the PUC EIM Task Force, August 31, 2012, signed by the CEOs of the Bonneville Power Administration and PacifCorps (one of the region s largest investor-owned utilities). 24 From a BPA presentation at the August 11, 2014 NWPP MC SCED Workshop. Available at: Last accessed August Perceptions of Variable Energy Integration Innovations p. 19

24 Table 1: Simple Northwest Power Pool Market Assessment and Coordination Committee Timeline. Source: BPA Presentation 25 Phase Dates Activities Costing evaluation and policy issue identification Update cost evaluation, implementation plan development, technical and policy recommendations Develop tools for situational awareness, increase coordination, develop tools for establishing the market Market tools development, finalize policy issues Deployment of the energy imbalance market In addition, Columbia Grid, another regional utility not-for-profit, drafted a Members Statement of Alignment on Energy Imbalance Market Opportunities where it defined the following problems: 1) that the increase in variable energy require members to pool their balancing energy resources, 2) that increasing cost of operating a balancing authority under these conditions require new methods of collaboration, pooling diversity and reducing overall balancing requirements, and 3) that the region s increasingly congested transmission system requires new tools for managing existing infrastructure. 26 The statement, which was drafted before WECC released its cost and benefit reports in 2011, stated that Columbia Grid members are in conceptual agreement that a voluntary energy imbalance market with both energy and capacity components, developed in collaboration with other regional parties, with a well-structured and responsive governance framework may have the best chance of providing the necessary functionality to address these issues. 27 Next steps included reviewing the cost and benefit studies and reconvening in order to further evaluate how to establish an energy imbalance market. 25 Details from p. 25 of BPA presentation at the August 11, 2014 NWPP MC SCED Workshop. Available at: Last accessed August Columbia Grid, ColumbiaGrid Members Statement of Alignment on Energy Imbalance Market Opportunities, p. 1 (Internal document Last accessed August Columbia Grid, ColumbiaGrid Members Statement of Alignment on Energy Imbalance Market Opportunities, p. 2 (Internal document Last accessed August Perceptions of Variable Energy Integration Innovations p. 20

25 In October 2011 Columbia Grid presented its analysis on the cost and benefits of establishing an energy imbalance market to a committee of the Western Interstate Energy Board in Monterey, CA. The presentation opened with a statement that the earlier Statement of Alignment on Energy Imbalance Market Opportunities is not an endorsement, by Columbia Grid or any of its individual Members, regarding supporting or opposing an energy imbalance market. The presentation provided an overview of the cost and benefits of an energy imbalance market, but did not propose any further steps to actualize the market. 28 In a July 2011 statement WestConnect, yet another regional utility body 29, also acknowledged the importance of addressing the challenges of integrating rising levels of variable renewable energy and the need to find new methods of collaboration, pooling diversity and reducing overall balancing requirements. The statement highlighted the need to more closely evaluate the costs and benefits of establishing an energy imbalance market and to provide a more detailed plan of how a proposed energy imbalance market would be designed. 30 Despite much dialogue and strong commitment by some of the Members of the Northwest Power Pool initiative, to date the most significant action on energy imbalance markets occurred, however, bilaterally between a regional utility, PacifiCorps, and the California Independent Systems Operator (CAISO). On February 12, 2013 the two bodies signed a Memorandum of Understanding that sets the stage for them to establish an energy imbalance market by PacificCorps would pay a start up cost associated with its entry into the market. 31 According to publicity materials developed by PacifiCorps and the CAISO, the newly established energy imbalance market would allow other balancing authorities to enter the market in the future. 32 The move leverages existing hardware and software, which is part of the ISO s existing mechanisms. 28 Columbia Grid, Columbia Grid Members EIM Analysis Observations and Preliminary Finding Presentation to CREPC, October 26, 2011, p. 2 (Internal Document Last accessed August For more information see 30 WestConnect, WestConnect Members Statement on the Proposed Energy Imbalance Market (EIM), July 19, 2011, p. 2 (Internal document Last accessed August Energy Imbalance Memorandum of Understanding, PacifiCorps and the California Independent Systems Operator, February 12, UnderstandingLaunchesNewEnergyImbalanceMarketInitiative.htm. Last accessed August Fast Facts, California Independent Systems Operator and Pacificorps. Available online at Perceptions of Variable Energy Integration Innovations p. 21