With the largest population and economic output of any state, California occupies an important but unusual place in the U.S. energy market. In such areas as renewable energy and energy-efficiency policy, it’s a trend-setter on initiatives among the states and the federal government. This is particularly true given the ambitious program the Obama Administration unveiled to simultaneously move toward a comprehensive greenhouse-gas (GHG)-reduction effort, while dramatically expanding investment in the nationwide energy grid with special emphasis on wholesale power demand-response (DR) programs. These goals reflect policies that California already began: A landmark climate change law (AB 32) passed in 2006 that calls for substantial GHG reductions and for a cap-and-trade program to limit emissions from the largest GHG emitters; an ambitious renewable portfolio standard (RPS) requiring retail power providers to supply 20 percent of their power from renewable resources by 2010; and aggressive energy-efficiency goals with supporting DR programs.
However, in terms of the wholesale energy market design that governs the dispatch of generation and transmission of power, California only now is catching up to the other centralized energy markets in the country. On April 1, 2009, California implemented its Market Redesign and Technology Upgrade (MRTU) initiative to improve the current wholesale electricity market system through new market features and advanced computer software technology. First proposed nearly 10 years ago as Market Design 2002, MRTU means that California now joins the centralized markets in the Northeast, Mid-Atlantic, and Midwest in establishing a truly integrated wholesale power and transmission market design.
An analysis of this dichotomy between California’s advanced energy regulation in certain areas and its lagging energy market structure is especially timely, given the federal government’s push for GHG regulation, increased renewable energy output and a “smart” electric power grid. Comparison between state and federal initiatives demonstrates those areas in which California should be regarded as a leader, and those in which it still is playing catch-up.
The U.S. House of Representatives in June passed legislation—HR 2454, the American Clean Energy and Security Act (ACES)—that would impose limits on GHG emissions and also establish a national RPS. The regulatory process this legislation would create on a national basis already is well under way in California. In June 2008, the California Air Resources Board (CARB) unveiled a wide-ranging draft plan that will guide how GHG-emissions reductions are achieved in accord with AB 32. Among other mandates, AB 32 requires California GHG emissions to be reduced to 1990 levels by 2020, which translates into a reduction of some 170 million metric tons of carbon-dioxide equivalent (CO2e) in 2020, compared to current emissions trends.
A large proportion of emissions in California come from the electricity, transportation fuels, natural gas, and large industrial sectors. For these sectors, emissions reductions would be achieved through a cap-and-trade program as part of traditional regulatory efforts. To meet the 2020 reduction goals, these sectors would have to account for more than 85 percent of the CO2e reductions. Of these reductions, three-quarters would be achieved through traditional programs and one-quarter through a cap-and-trade program.
The cap-and-trade program would cap emissions from the largest GHG emitters beginning in 2012. Over time, the emissions cap would be lowered at a rate designed to meet the reduction goal mandated by AB 32. Once the cap is established, CARB can determine the total amount of allowances (permits to emit a specified quantity of carbon) available in the program. CARB envisions that some allowances initially would be allocated freely to the large emitters. However, initial plans call for a majority of allowances to be auctioned as part of the carbon-trading market. Offsets (verifiable emission reductions from individual projects) may be part of the program for compliance purposes, with a possible limit on how many offsets an entity could rely on in meeting its compliance obligations.
The CARB program eventually would link with a regional cap-and-trade program under the auspices of the Western Climate Initiative, an effort involving Arizona, New Mexico, Oregon, Washington, Utah, and Montana, along with the Canadian provinces of British Columbia, Manitoba, and Quebec. Regulations to implement the cap-and-trade program need to be developed by the end of 2010, which will of course require integration with any federal government GHG program developed by that time.
It should also be noted that, like 27 other states, California has RPS requirements. California’s RPS calls for investor-owned utilities to obtain 20 percent of their electricity from renewable resources by 2010 and 33 percent by 2020.
On February 26, 2009, the Obama administration offered the initial view into its thinking on federal climate-change and carbon-trading legislation when it released an outline of its budget plan for Fiscal Year 2010. For the first time, the Office of Management and Budget (OMB) placed a dollar value on the right to emit GHGs, and used this value as the basis for a $645.7 billion assumption about a new and sustained source of government revenue generated from the auctioning of carbon-emissions allowances.
According to the Obama plan, the new emissions allowances would be created under a federal cap-and-trade system for greenhouse gases modeled on the acid-rain program launched following the 1990 amendments to the Clean Air Act. Under the acid-rain program, most emissions allowances were distributed at little or no cost to regulated industries according to one of several formulas that considered, among other things, each facility’s historic emissions. In contrast, the Obama cap-and-trade plan for GHGs called for 100 percent of the emissions allowances to be sold at auction to the highest bidders. By treating auction proceeds from a carbon cap-and-trade program as a revenue generator, the Obama plan spurred Congress and the regulatory agencies to proceed with implementing steps—the most recent step being the House’s approval of ACES. But whether that legislation prevails or not, GHG policies are moving forward at the federal level.
For example, on March 10, 2009, the EPA proposed regulations to require reporting of GHGs from all sectors of the economy. The rule would apply to fossil-fuel suppliers and industrial gas suppliers, as well as to direct GHG emitters, including manufacturers of vehicles and engines, and facilities that emit 25,000 metric tons or more per year of GHGs, including carbon and methane. According to the EPA, approximately 13,000 facilities, accounting for approximately 85 to 90 percent of GHG emitted in the United States, would be covered under the proposal. Under the proposed rule, the first annual report would be submitted to the EPA in 2011 for calendar year 2010 emissions, except for vehicle and engine manufacturers, which would begin reporting for model year 2011. Such national, economy-wide monitoring and reporting of GHG emissions could help support a national GHG cap-and-trade registry and, in turn, trading regime.
The draft ACES bill passed by the House in June included RPS with targets of 6 percent of national power from renewable power sources by 2012 and 20 percent by 2020.
Effective April 1, 2009 CAISO implemented its MRTU initiative that is intended to:
• Enhance wholesale market efficiencies through use of a more accurate grid model;
• Provide more transparent prices for the generation and delivery of energy;
• Enhance electric reliability by coordinating with the California Public Utility Commission’s Resource Adequacy program; and
• Prevent market manipulation by market participants.
MRTU is intended to prevent the market manipulation that led to the statewide energy crisis in 2001, when virtually all energy came through the California Power Exchange, which (along with giant utility PG&E) filed for bankruptcy. CAISO President Yakout Mansour has said that MRTU will provide “the flexibility and visibility of an intelligent grid,” creating power-trading transparency that shows the cost of generating power at a certain location, as well as the actual delivery price. This is possible because MRTU encompasses 3,000 pricing nodes, a level of detail that reveals key market signals and allows more efficient addressing of grid logjams to prevent having to buy more expensive power at the last minute.
MRTU is actually two projects. The first is the revised market design. MRTU will use a full network model to analyze energy schedules and address grid bottlenecks the day before the schedules are due to run. Identifying and resolving congestion problems a day in advance, when more options are available, is intended to ensure a more reliable grid and to reduce costs. With MRTU, CAISO fine-tunes energy schedules to address congestion and meet energy needs in the day-ahead time frame and continues that process right up until electricity is consumed. MRTU also allows for locational marginal prices (LMPs) that reflect the true cost of generating and delivering electricity at specific locations. This information helps CAISO choose the less-costly option when more power is needed to keep the grid balanced.
The second project is the implementation of the technology necessary to allow the redesigned market to operate. This aspect of the project implements the hardware and software needed to manage all aspects of the market from the dispatch of generators to the movement of electrons over the transmission grid. Specifically, CAISO computer hardware and software now have the technologies capable of running the grid in accord with the new market design. The system software is supposed to analyze the best use of the grid and help create pricing consistency between what generators have scheduled a day in advance and what the system operator needs in real-time to meet demand. Taken together, the several different elements of the new market redesign, working in concert, manage the state’s electricity transmission system more efficiently and at less cost. In addition, simultaneous management of energy and transmission resources eases the market’s time-price differential and reduces the opportunities for gaming the system.
While California’s MRTU effort is notable and necessary, it isn’t novel or visionary. MRTU was approximately 10 years in the making, and was implemented more than 10 years after the centralized markets in the Mid-Atlantic adopted a similar market design. In so doing, California now joins the markets in New England, New York, the Mid-Atlantic, and the Midwest in implementing a more efficient, cohesive power market. Moreover, California’s effort is not done. It has not yet implemented virtual trading, which allows market participants to financially arbitrage prices between the day-ahead and real-time markets, which cause price convergence and generally produce more accurate pricing of energy. It also has instituted the lowest price caps of any organized market. This lower price cap runs the risk of creating mitigated prices that don’t fully reflect market signals for investment.
The Obama administration’s 2010 budget, which funds and expands upon the American Recovery and Reinvestment Act (ARRA), which the president signed into law on February 17, 2009, places tremendous emphasis on expanding and improving the power-system grid that distributes electric energy. Plans call for spending $32 billion to transform the nation’s energy transmission, distribution, and production systems by allowing for a smarter and better grid and focusing investment in renewable technology. The effort intends to transform how Americans get electricity, and it will include:
• Demand-side management of electric use that will include conservation programs and rebates;
• Dynamic retail pricing and metering that respond to demand patterns;
• The rise of wholesale power DR programs that will reduce usage in response to price signals, paying the reduction as a wholesale power price; and
• An overall philosophy of energy efficiency that is a hybrid of utility, state, federal and private consumer initiatives.
Included in the ARRA, with proposed funding in the budget, is a provision for spending more than $11 billion to expand and improve the electric power grid, through construction of more than 3,000 miles of new and modernized transmission lines and deploying 40 million “smart meters” to reduce electric power usage in homes. This includes pilot projects and federal matching funds for the Smart Grid Investment Program (established in the Energy, Independence and Security Act of 2007). The matching program would reimburse up to 20 percent for investments in smart-grid technologies.
This will be a major challenge for the organized wholesale electricity market. First, the federal smart-grid plans fall into areas of both federal and state jurisdiction. Adding to this complexity, centralized markets operated by independent system operators (ISO) or regional transmission organizations (RTO), satisfy the electricity demand in their regions by using a coordinated dispatch of all generators, and wholesale electricity is bought and sold at prices based on that dispatch. In such markets, ISOs and RTOs also operate and assist in planning of, but do not own, transmission assets and also coordinate interconnection and transmission requests and services—all of which would be implicated by the federal plans.
On the GHG and renewable-energy front, it must be noted that although California’s GHG program and RPS efforts are farther along than the federal government’s plans, they are still very much in the embryonic stage. The first emissions credit trade is still several years away. However, California has been a leader on such initiatives and offers the federal government some real world examples to consider before a full-scale implementation. On the other hand, California hasn’t been a thought leader with respect to wholesale market design structure. Although it has implemented some demand response and energy-efficiency programs covered by the ARRA, California’s wholesale market design is 20th century—not 21st century. To implement its smart-grid proposal, including the necessary investment into thousands of miles of new transmission lines, the federal government cannot look to California as an example, and has much work yet to do.