Northwest Energy: A Thoughtful Approach Needed for Regional Transportation Organizations
By Steve Wright
Former Rep. George Nethercutt recently said on this page that the Northwest should adopt a Regional Transmission Organization (RTO) structure. (“It’s Time for Washington State to Establish a Competitive Electricity Market,” August 31) While it looks like technical details, this problem has important ramifications for consumers in Northwestern Canada. Peaceful. A careful and thoughtful approach is advised.
The Pacific Northwest and Southeast are the two U.S. regions with the lowest rates in the country and have yet to adopt an RTO. They observed and learned that RTOs across the country had a mixed record of performance.
RTOs are complex entities. They are not implemented in the same way in different regions. They cover topics such as transmission planning, operation and pricing, short-term electricity trading, and managing the instantaneous balance of supply and demand necessary to maintain reliability. Although these functions are now performed by the utilities of the North West, the question is whether to transfer these functions to a centralized entity.
There are four key functions that top the list for consideration in the Northwest: increased use of organized markets for short-term electricity trade, establishment of minimum standards that ensure sufficient supply to maintain reliability, which controls decision making and transportation planning.
Markets: The choice in the PNW is not whether or not to support free electricity markets. The question is whether to create or expand an RTO that overlaps the existing market with a larger centralized system.
Organized markets offering greater sharing of production and transportation over large footprints have led to lower wholesale prices and improved reliability under certain circumstances. They can be valuable in regions that commit to making greater use of renewable energy production to reduce carbon emissions.
But centralized markets don’t always lower prices and solve reliability issues, and unless they are complemented by strong signals to invest in resources, they arguably make matters worse. The last two major blackouts and high price incidents in America occurred in California last summer and Texas earlier this year. Both states operate RTOs. The fundamental problem in both cases was the lack of investment in the right types of production and demand response to ensure adequacy under stress conditions such as extremely high or low temperatures.
It is the advantage of RTOs that creates the reliability challenge. Markets producing low prices under average system conditions make unprofitable capital investments that would ensure that supply always meets demand. But production failures and / or inclement weather inevitably occur. At that point, prices skyrocket and system operators start calling for emergency operations, including turning off lights.
The early indicator of this problem is the increased volatility in wholesale electricity prices, which the Northwest has experienced in recent years. Markets signal the struggle to balance supply and demand.
The last time the Northwest saw this kind of market behavior was in the late 1990s, before the West Coast energy crisis of 2001, when tens of thousands of people lost their jobs and environmental protection has been compromised. Many citizens have struggled to understand why their lives have been seriously disrupted without their being responsible.
Resource Adequacy Standards (RA): The best antidote to the problem of supply and demand is to establish binding minimum standards to ensure adequate supplies under stressful situations. These requirements ensure appropriate investments even when wholesale energy prices are low. Many RTOs do not have strong adequacy standards. Ensuring the adequacy of resources is the most important issue facing electricity consumers in the Northwest today. RA standards are expected to precede or coincide with short-term market expansion. Fortunately, a process is underway with broad stakeholder engagement and substantial momentum to establish binding standards for North West AR in 2023.
Governance : Since RTOs are managed by centralized non-governmental organizations, governance is extremely important. The rules of the electricity market determine the distribution of payments and costs that affect consumers. Although there are guidelines, RTOs have some latitude in setting the rules. For this reason, OTRs should be governed by an independent board which is not beholden to any market interest.
The only operational RTO in the West is in California, the state with the highest electricity rates in the country. The Northwest and California have a long history of electricity trading with elements of both synergy and contentious disputes. The California RTO is ultimately governed by California elected officials representing their constituents. It would be incredibly reckless and devoid of historical perspective to risk losing the economic and environmental benefits enjoyed by the Northwest, especially our low-cost, reliable, carbon-free hydroelectric system, by handing control of electrical operations to a system. run by Californian politicians.
Transport planning: The transition to a clean energy economy will require substantial transportation additions to connect large amounts of renewable resources requiring strong transportation plans.
An RTO has a future in the Northwest. But not just any RTO. Regulators and elected officials should support carefully designed solutions to deliver benefits to consumers in the Northwest.
Steve Wright is the former CEO / Director of the Bonneville Power Administration. BPA owns and operates approximately 75% of the Northwest transportation network.