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Greening the Grid

Can markets co-exist with renewable mandates?

Fortnightly Magazine - April 2007

So building the robust transmission system is absolutely key … sitting back and waiting for scarcity pricing or LMP signals … is simply going to leave us with a very inadequate system.”

Former Congressman Glenn English, now head of the National Rural Electric Co-op Association, points out that government and its regulators always have been engaged in one way or another in mandating preferences for energy development:

“If you recall,” said English, “we decided in the 1970s we were short of natural gas. Then we decided we had plenty of natural gas. Now we’re deciding we’re short of natural gas. We had to switch from natural gas to coal because we had plenty of coal. Now we decide we can’t use coal. …

“If we’re going to incorporate renewables,” he adds, “if we’re going to deal with climate change, we’re going to have to take some action that’s far more aggressive than what we’ve had up to date, and that means that Congress will most likely lead the way.”

By contrast, Harvard Professor Bill Hogan, a market advocate, concedes that regulation remains essential to make electric competition work, but he uses the terms “Big R” and “Little R” to illustrate the problem of engineering the right mix of rules.

By Little R, he means setting up financial incentives to allow market participants to make their own decisions on fuel choices and resource development, and then to “allow those incentives to unfold.”

By contrast, says Hogan, “Big R regulation is the opposite, which is creeping integrated planning.

“It’s a slippery slope problem,” he warns. “Regulators are called on to mandate this and mandate that until we reach a very expensive breaking point.”

California’s New Mandate

If there is a breaking point approaching, it may be in California, where lawmakers have accelerated the state’s renewable energy portfolio requirement—20 percent for all utilities and all load, regulated or not—from 2017 to 2010, less than three years away.

It is there that the California Independent System Operator (Cal-ISO) has asked FERC for a special regional waiver from federal transmission funding rules to help build new, high-voltage trunklines designed to help develop and connect multiple new renewable energy projects to the ISO-managed grid, especially in distant or remote areas. Already, however, one can see difficulties arising in how this new initiative will mesh with the ISO’s plans for its new regional market regime. The future Cal-ISO market, known as the MRTU (Market Redesign and Technology Upgrade), envisions a day-ahead market styled after “day two” RTO markets in the Northeast, with nodal pricing, LMP, financial transmission rights for hedging congestion (CRRs), and a bid-based and security constrained dispatch.

This new Cal-ISO grid planning initiative  (see “ States of Denial ,” January 2007)  would apply not only to new wind energy projects, but also to all so-called “location constrained resources,” such as solar energy, geothermal power, or even landfill gas. The ISO’s recent proposal, to create a new category of transmission assets, known as MURT or MRT (multi-user resource trunklines), would recover grid expansion costs through the ISO-wide transmission