California energy players fear isolation, reliability impacts as SPP eyes Western market expansion

Experts in California worry that as the Southwest Power Pool's energy market proposals move forward, California could lose access to renewable energy resources that are critical to the state's grid.

As the Southwest Power Pool's efforts to expand its footprint into the West begin to gain traction, some experts in California are concerned that the state could find itself isolated, and potentially lose access to renewable energy resources and power imports that are critical to the state's electric grid.

The West is one of the regions of the country that doesn't have a regional transmission organization, and conversations around creating one have been ongoing for over two decades. Currently, 22 entities in the region participate in the California Independent System Operator's real-time wholesale energy trading market — the Western Energy Imbalance Market — and the grid operator is setting up a voluntary extended day-ahead market, or EDAM, as well. The grid operator expects to begin onboarding EDAM participants in early 2025, with PacifiCorp as the first entity to move to implementation.

At the same time, the Southwest Power Pool — an RTO based in Arkansas that operates across 17 states — is working on propping up its own Western-focused energy market, called Markets+. In early March, SPP announced that several entities — including Arizona Public Service, NV Energy and Puget Sound Energy — have entered into funding agreements to develop this market.

That announcement has raised concerns among some in California's energy industry, who worry that SPP's potential expansion could isolate the state's energy system by making it more complicated to import energy. Energy imports have been a key part of California's electricity portfolio for many years and amount to an average of 18% to 20% of its power supply during the summer.

These developments also come amid a broader conversation among stakeholders around the creation of a West-wide RTO, which would go beyond operating real-time and day-ahead energy markets and include other aspects of energy planning, like transmission and grid reliability.

In addition to its Markets+ initiative, SPP is looking into expanding as a full RTO in the region and in mid-2021, its board of directors and strategic planning committee approved a framework of terms and conditions for this RTO West effort.

If SPP were to pull entities who are part of the WEIM, or committed to the EDAM, into their RTO footprint, "the concern I have is that California would be isolated from the rest of the West," said Amisha Rai, vice president of policy and advocacy at Advanced Energy United, a trade group focusing on clean energy.

Looking back over the last few summers, California has pulled on energy imports when the grid is especially stressed, she said, and so "that isolation will create a significant challenge for all of us in California… to really meet demand."

Given this reliance, experts say there is a lot of upside to California getting more heavily involved in regional conversations around Western grid expansion.

"A [Western energy] market is going to happen one way or the other, and our inaction has prompted SPP to start trying to play catch up," said Michael Colvin, director of regulatory and legislative affairs at the Environmental Defense Fund.

"So do we want California to become a virtual island, or do we want us to actually have a seat at the table and to help influence this market from the beginning?" he added.

The Western Energy Imbalance Market, which was created nine years ago and is run by CAISO, extends over parts of 11 states, including Arizona, Idaho and Montana. Since its launch, the WEIM says it has produced cumulative benefits of $3.4 billion.

A West-wide day-ahead market could grow these benefits even further — an analysis conducted by Energy Strategies late last year found that such a market could lead to up to $1.2 billion in annual savings from operational and capacity efficiencies, and boost renewable output in the region by over 1,800 GWh. A West-wide RTO, meanwhile, could create up to $79.2 billion in additional gross regional product per year across the 11 Western states, a report from Advanced Energy United found.

This is the context in which SPP — an RTO based on "the western edge of the eastern grid" — has been creating its alternative to the CAISO markets, said Andrew Campbell, executive director of the Energy Institute at the Haas School of Business at the University of California, Berkeley, and a WEIM governing body member.

The RTO launched a real-time balancing market, called the Western Energy Imbalance Service market, in the West in 2021, and is now looking at Markets+ as a "conceptual bundle of services... that would centralize day-ahead and real-time unit commitment and dispatch."

"It's essentially a competing market and for any given utility, it's sort of either/or whether you join the SPP market or join the California ISO-run market."

Andrew Campbell

Executive Director, Energy Institute at the Haas School of Business

"It's essentially a competing market and for any given utility, it's sort of either/or whether you join the SPP market or join the California ISO-run market," Campbell said.

In early April, SPP said 31 entities have joined the effort to develop and launch Markets+, and that it has begun developing the market after receiving enough funding a month ahead of schedule.

The first phase of developing Markets+ will conclude with a tariff filing with FERC in January 2024, Meghan Sever, a spokesperson for SPP, said in an email. The next phase will include acquiring the necessary software and hardware, and creating Markets+ systems and processes. Participants in the second phase of development will be integrated into the market once it launches, expected to happen in late 2025 or early 2026.

Some stakeholders in California, however, are concerned about the implications that SPP's expansion into the West could have for the state. If SPP were to stand up its market, it would make the CAISO-run real-time and day-ahead market far less valuable, said Colvin, "because people are not going to want to have to participate by two different sets of rules and be in two different markets..."

Elliot Mainzer

President and CEO, CAISO

"Certainly if a lot of other entities were to join into the SPP Markets+ or beyond, we face the potential of losing participants in the Western Energy Imbalance Market, which could have significant reliability and financial implications for California. We also lose the potential for the upside of having a truly broad group of entities join EDAM – so, it is a risk," Elliot Mainzer, president and CEO of CAISO, said.

The existence of two day-ahead energy markets in the West would make it more complicated for California to import energy during times when its grid is strained, agreed Fred Heutte, senior policy associate with the NW Energy Coalition. This would create a "hard" seam between the two markets, he said, and that would require a more formal approach to dealing with issues like congestion management.

These barriers could also have implications for the reliability of California's grid. Last September, for instance, when the state faced a record-breaking heatwave, electricity imported from neighboring balancing authorities was one of the reasons that CAISO was able avoid outages, according to an analysis released by the grid operator in November. The state imported around 6,500 MW during that period, with an additional 1,000 MW of WEIM transfers during the times of tightest supply on the grid, according to CAISO.

"Creating these regional markets really lowers the barriers to trading across state boundaries and across utility boundaries, and also greatly enhances just visibility and coordination between these different areas," Campbell said.

But if entities in neighboring states were to join SPP's energy markets, "I think it’ll make it more difficult for Californians to trade with other states. And those other states will have a much easier time coordinating with each other," he said.

SPP's Sever, however, said that seams between balancing authorities, transmission service providers, bilateral markets and organized markets will continue to exist regardless of SPP's continued expansion into the West.

"Importantly, transfers between the West and California will continue and Markets+ provides an opportunity to more effectively manage seams to support and enhance reliability for all participants," Sever said.

The Markets+ design proactively contemplates support for existing bilateral transactions, and as the market operator, SPP will work with transmission service providers, balancing authorities, and other market operators to support coordination of transfers and systems, Sever said.

For California stakeholders, while part of the concern is that entities that are part of the CAISO-operated WEIM and have committed to the EDAM may switch over to SPP's Markets+, there's also the broader question of a full Western RTO, and what that could look like.

Nine entities that are operating in the West are currently evaluating membership or expansion of facilities in SPP's RTO West. Prospective members will execute a membership commitment agreement this year, and SPP will prepare tariff modifications and file a modified tariff with FERC next year. SPP plans to welcome new members to RTO West by April 2026, becoming the first RTO to operate in two interconnections, according to Sever.

More broadly, many clean energy advocates prefer the idea of a single western RTO footprint, Vijay Satyal, deputy director of regional energy markets at Western Resource Advocates, said.

Having two RTOs in the West "would be an undesirable situation," he added, as it would require stakeholders to participate in two different markets, track two different processes and follow different forms of reporting. While having two RTOs is better than having nothing — the status quo — "it still is not the ideal solution… because the West is unique and the footprint is so diverse that the maximum benefits can be harnessed by having the complete diversity of time zone and resource mix changes under one large market," he said.

Given these concerns, some stakeholders see a lot of upside to California pushing forward with the regional conversation around Western grid expansion. In a policy brief issued in March, the Union of Concerned Scientists noted that some Western states and utilities have started to organize into markets without California, including through SPP.

"All of this indicates that, with other offerings available, California may see some of its collaborators peel off to join other organizations, especially if the state chooses not to enable the expansion of the CAISO into a western RTO. As time goes on and these various forms of western grid collaboration mature, California may lose its ability to influence the design and governance of these systems," the brief said.

"[T]here are other entities who are taking a serious look at the SPP market and seeing if that might be an alternative path under a different governance structure, if California can't get its long-term governance evolution in place."

Elliot Mainzer

President and CEO, CAISO

The big question surrounding expanding CAISO into a West-wide RTO is its governance structure. CAISO's board of governors is appointed by California's governor and confirmed by the state senate, Vivian Yang, Western states energy analyst at the Union of Concerned Scientists, said. If the grid operator were to expand into a full Western RTO, this would need to change, since it's unlikely that other entities in the West would want to join the current structure.

CAISO's governance structure is one of the primary issues that market participants want to see solved over the longer term, in order to get the conversation around an RTO moving, CAISO's Mainzer agreed.

"[T]here are other entities who are taking a serious look at the SPP market and seeing if that might be an alternative path under a different governance structure if California can't get its long-term governance evolution in place," Mainzer said.

While conversations around the creation of a Western RTO and its governance structure have been ongoing for a while, SPP's expansion "definitely adds an element of urgency," according to CAISO's Mainzer.

"It has allowed us at the CAISO and our many partners in the utility and regulatory space to further recognize the value of our regional partnerships, the absolute importance of continuing to develop infrastructure inside California… to make sure that we’re able to get our resource adequacy stack as robust as possible…" he added.