The Western Energy Imbalance Market is importing relatively low-cost coal- and natural gas-fired generation into California, but attributing that power to clean, non-emitting hydroelectric resources from the Pacific Northwest, according to a study by Powerex, the energy-trading division of BC Hydro.
Based on a detailed analysis of 2021 data from the Western EIM, Powerex says that under the EIM's greenhouse gas emissions framework, clean resources can be "deemed" the source of imports into California, even if those resources do not produce any additional electricity, are not economic to dispatch, or if there is no transmission available to deliver the resource to California.
"Consequently, external coal and natural gas resources can, and routinely are, dispatched in the Western EIM to provide electricity imports into California, while clean hydro resources that do not increase their production are incorrectly deemed to be the source of that supply," the study says. "The Western EIM's GHG attribution challenges extend well beyond the 'secondary dispatch' problem, and in fact result in a broad and pervasive 'primary dispatch' problem."
The study—issued in July—says the root cause of this primary dispatch problem is the design of the least-cost dispatch algorithm employed by the Western EIM.
Instead of arranging imports to California based on each resource's fuel cost plus its GHG emissions costs—as required under the California Cap-and-Trade Program's "specified-source" approach—the Western EIM's "deeming" approach is best understood as a "mix and match" of two separate and independent decisions. That approach produces additional electricity from a resource with the lowest fuel cost, and attributes the resulting imports into California to the resource with the lowest GHG costs, regardless of its fuel cost.
"The Western EIM design can aptly be characterized as automating resource shuffling, dispatching coal and other high-emitting resources to serve California demand while labeling it as clean hydro supply," the report says.
Powerex has been criticizing the EIM's "deeming" approach and GHG accounting, since before it joined the imbalance market in 2018. Two years before that, Powerex released a report making very similar arguments.
At that time, Powerex said "the EIM algorithm does not properly recognize GHG emissions when dispatching out-of-state resources."
Since the start of the Western EIM in November 2014, the cumulative economic benefits of the market have totaled $2.39 billion and greenhouse gas emissions have been reduced by more than 760,000 metric tons, according to the EIM's 2022 second quarter report.
While trades volumes in the EIM are relatively small, Powerex cautions that the California ISO intends to use the "deemed" resource approach in its proposed Enhanced Day-Ahead Market, which would have much larger trading volumes.
The utility, which markets BC Hydro's surplus hydroelectricity, has been a vocal critic of the way the EIM prices hydroelectricity, arguing that it doesn't accurately take into account hydro's dispatchable, emissions-free profile. Several Northwest industry veterans who reviewed Powerex's report and asked for anonymity to speak freely wondered if the report was a "strategic ploy" by Powerex to influence Northwest utilities away from the CAISO's market efforts and toward the Southwest Power Pool's initiative.
"Any future regional organized markets need to be designed to accurately apply state GHG pricing programs, including California's Cap & Trade Program and Washington's Cap & Invest Program. This is even more critical for a day-ahead organized market, where the volume of transactions will be far greater," Powerex said, in an email to Water Power West.
The California Air Resources Board directed questions about the EIM's emissions accounting to CAISO.
Elliot Mainzer, CEO and president of CAISO, pushed back against Powerex's allegations in an email to Water Power West, saying that since the early days of the EIM, the ISO has "worked hard to develop a transparent GHG accounting methodology that respects and accommodates the different and evolving GHG policies in effect across the West."
"During that time, we have made enhancements to the WEIM GHG framework in response to stakeholder feedback and have incorporated additional learnings into our EDAM design," Mainzer said. "As we move towards our final proposal, we are confident that we have built a strong GHG accounting foundation and starting point for EDAM. We will continue to evolve our framework over time in response to changes in the policy landscape, stakeholder input, and learnings from day-to-day market operations."
The Powerex report says balancing authority areas (BAA) in the Southwest—PacifiCorp East, Salt River Project, Arizona Public Service, Nevada Power and Public Service Company of New Mexico—provide about 74 percent of the electricity imported into California. PacifiCorp East was the largest supplier, accounting for 36 percent of those imports. PacEast's portfolio is made up of 53 percent coal-fired generation, the report says, and the dominant fuel sources in all Southwest BAAs are coal and natural gas.
Northwest BAA's—Portland General Electric, Puget Sound Energy, PacifiCorp West, Idaho Power, NorthWestern Energy, Seattle City Light, Powerex—provided 26 percent of imports.
In 2021, the Western EIM determined that 47 percent of California imports were sourced from hydro generation, with the remainder mostly sourced from natural gas generation (about 49 percent), with only a negligible amount sourced from coal (less than 1 percent) and other generation technologies (about 3 percent).
"The Western EIM's determination of which resources supplied the electricity that is imported into California is completely inconsistent with the fuel mix of the BAAs that were the largest exporters when California was importing in 2021," the study says. "The Western EIM is systemically identifying the wrong external resources in its determination of the source of supply of the electricity imported into California, incorrectly identifying clean and lower-emitting resources when GHG-emitting resources are actually providing the supply."
The report says four BAAs—Idaho Power, PacifiCorp West, Portland General Electric, and Seattle City Light—are being compensated at the Western EIM's GHG shadow price for being "deemed delivered" for "quantities that are well in excess of any credible estimate of their production and delivery of electricity to California in the Western EIM."
The PacifiCorp East BAA is providing the greatest amount of export supply, but resources in this BAA are not sufficiently deemed delivered to California by the Western EIM's algorithm, the report says. Exports from the PacifiCorp East BAA totaled 3,493 GWh during the study period, but the resources in the PacifiCorp East BAA should have been deemed delivered to California for at least 2,202 GWh.
"However, resources in the PacifiCorp East BAA were only deemed delivered 292 GWh. This represents an estimated understatement in the quantity of 'deemed delivered' supply of 1,910 GWh or an understatement of 87 percent," the report says. "In other words, resources in this BAA are selling their supply, resulting in BAA exports and corresponding imports into California, but are not being required to report, or pay the costs associated with their GHG emissions."
The report says Southwest BAAs are providing 74 percent of the imports into California, but the resources in Northwest BAAs are being deemed the source of 57 percent of the imports to California.
"These outcomes are clearly contrary to the goals of the California cap and trade program (or any GHG-pricing program for that matter)," the report states. "And notably, they undermine the very activity that has been the greatest contributor to GHG reductions throughout the economy over the last three decades: decreasing electricity production from coal resources and replacing it with electricity production from natural gas and renewable resources."
"We hope that our analysis drives further opportunities for dialog with CAISO, CARB, Washington State's Dept. of Ecology, the environmental community, and other interested stakeholders, where we can explain our analysis and concerns in more detail, and explore solutions that are more consistent with the applicable states' environmental policy objectives," Powerex said.