California is America’s undisputed clean energy leader, a kind of cultural and economic island, liberal enough to pass bold climate policies and big enough (the world’s sixth-largest economy, were it a nation) for them to matter, economically and environmentally.
The state has an independent organization that is dedicated to running its energy grid, so it’s free to decarbonize electricity as it sees fit. And thanks to a waiver under the Clean Air Act, it’s free to set its own carbon and fuel economy standards for vehicles as well. (Though the Trump administration is seeking to revoke the waiver and impose lower standards.)
But the state faces a much more difficult decision when it comes to its electricity system. For years, it has been arguing about whether to connect its grids with nearby states in a larger regional market system, along the lines of several regional markets in the eastern US.
Proponents claim that joining a regional market would bring numerous benefits, principally in lower prices. But a coalition of labor, consumer, and environmental groups warns that it also comes with risks, most notably the loss of California’s ability to control its own energy fate. Just how much control it would surrender is the subject of fierce debate, as we’ll see.
This decision carries enormous stakes. If California joins a regional market, it could create one of the largest energy markets in the country and complete, or come close to completing, the long-stalled march of electricity market deregulation. Most Americans would live in areas where power generators compete on open markets and transmission is regionally coordinated, which could lead to further cooperation and grid linkage.
A larger market could further drive down the price of renewable energy and help California deal with the challenges of integrating renewables. Many proponents see regionalization as the inevitable next step in decarbonizing the US grid.
If California decides not to join, regional coordination would inevitably be diminished and regional transmission coordination made more difficult. The current model of multi-state market cooperation could be cast into doubt. But California would retain ironclad control over its own clean energy policies.
It’s a big decision, and there are lots of moving parts, a lot of unknowns, and lots of technical, economic, and political twists. (A big piece of all this involves trying to predict what the Trump administration will do — no easy task.) It’s a genuinely tough call.
There are a million things to read on this — and oh boy, do they get technical — but I’ve found three primary documents particularly illuminating, if you want to dig in:
- For the pro-regionalization case, check out the superb Energy Transition Show podcast, wherein host Chris Nelder does a deep-dive interview on the subject with Laura Wisland, a senior energy analyst at the Union of Concerned Scientists.
- For the anti-regionalization case, see this letter from a coalition of opposed groups.
- For a thorough and balanced review of the arguments on both sides, see “A Regional Power Market for the West: Risks and Benefits,” by energy analyst Ben Paulos, commissioned by the nonpartisan think tank Next 10. (There’s also a companion paper, more of a basic introduction to California’s grid.)
Having absorbed as much of this stuff as will fit in my aching brain, I’m going to try to distill it down to readable, user-friendly language. We’ll walk through the decision from end to end, starting with a short primer on energy markets, covering the case for regionalization, detailing the fears and objections of opponents, and concluding, as such posts must, with some deep thoughts. It’s going to be great!
Electricity deregulation has created several large energy markets in the US
To understand energy markets, you have to understand the somewhat misleadingly named phenomenon of electricity “deregulation.” (It’s misleading because the whole system is still very much heavily regulated ... just less.)
There are two parts to it: retail and wholesale.
Retail deregulation, somewhat less widespread, refers to areas in which electricity customers can choose their own power providers. (The utility still handles billing and the distribution grid.) There’s some interesting stuff around retail choice going on in California, but that’s not the focus of this post, so let’s not get distracted.
Wholesale deregulation refers to the power generation side of the business. In traditional regulated markets, “vertically integrated” utilities run everything — they own the power plants, generate the electricity, and distribute it to customers. In deregulated wholesale markets, power generation is split off, owned by separate generation companies that compete on an open market. “Distribution utilities” buy power from that market and distribute it to customers, but they are not allowed to own generators.
The markets in which power generators compete are administered by Regional Transmission Organizations (RTOs) or Independent System Operators (ISOs). (For our purposes, basically the same thing.) These are nonprofit, independent organizations, designed to be unaffiliated with and uninfluenced by market participants.
ISO and RTOS (I’ll just say “ISOs” from here on out) are under the jurisdiction of the Federal Energy Regulatory Commission (FERC), which writes the rules they must follow and ensures that the rates being charged by power providers are “just and reasonable.” FERC approves new rules proposed by ISOs and adjudicates all complaints or appeals filed by ISO participants, states, or interested parties. (Anyone can appeal to FERC.)
The line between state jurisdiction (energy policy, local energy distribution grids) and federal jurisdiction (transmission lines and wholesale markets) used to be fairly clear, but these days it has gotten a bit fuzzier. New market participants like batteries are often mandated by state energy policy and implemented on local distribution grids, but directly affect wholesale energy prices, and FERC has mandated that they be allowed to participate in wholesale markets.
Possible tension between FERC and state policies (which we’ll examine more closely in a minute) is a big part of the decision California faces.
California’s ISO is unique
You’ll notice that three of the ISOs on the map above share an important feature: CAISO (California), NYISO (New York), and ERCOT (Texas) each encompass only one state. (Well, technically, there’s a small chunk of Nevada in CAISO.) That means the ISO does not have to balance multiple state interests; it can more readily align with state policy.
California’s situation is unusually bespoke. CAISO’s board of directors is appointed by the governor and approved by the state Senate. It is the only North American ISO with that governance structure; in other ISOs, the board is appointed by an independent committee and state policymakers play only an advisory role.
In 2004, FERC tried to force changes to that structure, arguing the CAISO board was not independent enough from stakeholders. California sued and won. A DC Circuit court ruled that while FERC could fail to certify any new ISO structured that way, it did not have the authority to force California to change its ISO. (Remember this; it comes up later.)
So California currently has a competitive wholesale market in which there is a unique degree of shared vision among state regulators, legislators, and the ISO. Everyone is pulling in the same direction. And CAISO is, state wonks are fond of claiming, the best-run ISO in the country.
The question facing California — in the form of Assembly Bill 813, currently being debated — is whether to work with as many as 15 nearby states to form a larger regional ISO, something more along the lines of PJM in the East.
The board of that larger ISO would definitely not be appointed by the California governor or approved by its legislature. State policymakers would have an indirect advisory role, but the board would be appointed by an independent committee and designed to take the interests of all participating states equally into account. (The exact structure is being hashed out in the debate over AB 813.)
Before looking at the risks of that choice, let’s take a look at the benefits of regionalization — the reasons California’s Gov. Jerry Brown, the state Chamber of Commerce, renewable energy developers, and environmental groups like NRDC support it.
Linking up with other states to form a regional grid has substantial potential benefits
It’s important in this debate to keep two things distinct: the benefits of regionalization, i.e., of trading energy over a larger geographic area, and the benefits of regionalizing via a multi-state ISO during the Trump administration. They overlap but are not the same.
The benefits of regionalizing in the first sense are widely understood.
As I’ve described in detail (see here and here), when a grid integrates more wind and solar power (variable renewable energy, or VRE), it begins experiencing new, more extreme swings and ramps in energy supply and demand. That calls for greater flexibility on the grid. Unless such flexibility is added, grid operators eventually must “curtail,” i.e., shut off, VRE at times of particularly high production.
California curtails quite a bit of renewable energy, mostly solar — north of 270 GWh so far in 2018:
It’s getting to the point that curtailment is affecting investment forecasts. “The balkanized, fragmented state of Western markets is starting to factor into resource-owner energy output and revenue forecasts,” said Matthew Crosby, policy director for Coronal Energy, a renewable energy developer. In other words, curtailment is beginning to mean real money.
There are numerous ways to add flexibility to the grid. In one direction, toward more local solutions, you can “intensify” the grid, adding more storage and other distributed energy technology, creating more microgrids, and bringing more demand under control so it can be shifted to meet variable supply. All these solutions allow existing grids to absorb more VRE.
In the other direction, you can grow the grid, extending its boundaries over a broader geographic area. That’s what the ISO decision is about.