Big savings if Colorado utilities join regional electric markets. Did study understate gains?

by Allen Best

Another study, this one ordered by Colorado legislators in 2019, has delivered the now familiar news that greater participation in organized wholesale markets by the state’s electrical utilities can yield savings of 4% to 5%.

A half-dozen studies in recent years have drawn the same general conclusion about massive cost savings.

“A great step forward for Colorado ratepayers,” said State Sen. Chris Hansen in a Linked-In posting.

To read the report, go here.

Hansen was a prime sponsor of both the 2019 law that triggered this report and the law adopted in 2021 that creates a deadline of 2030 for Colorado utilities to join robust electricity-sharing markets.

Hansen says the report understates the likely benefits. He said he believes, based on what has happened elsewhere in the country, that participation in full markets will double the cost savings because the planning reserve margins employed by utilities can be lower.

Planning reserve margins are the extra energy generating capacity needed by utilities to ensure they are covered in case some assets cannot produce power.

Xcel Energy, for example, has a reserve margin today of a little over 16%. This is the amount of energy capacity it has over what is normally needed to supply peak demand. The current planning for new generation once more coal plants retire and new renewables are added will boost this to 20%.

In contrast, MISO, an organized market serving utilities in the upper Midwest, operates with a reserve margin of 12% or less. That difference—if realized in Colorado—could save hundreds of millions of dollars a year, said Hansen in an interview with Big Pivots. If a utility has a lower planning reserve margin, that’s much less it needs to spend on new solar farms or keeping gas plants operating on standby.

Fully developed markets “allow you to bring reserve margins down over time,” said Hansen. “I would say the 5% (cited in the study) is great but it doesn’t really take into account the lower reserve margins and higher reliability.”

Reserve margins can be lowered because organized markets across broad geographic areas can draw from multiple sources. The wind might not be turning turbine blades on the Peetz Table of Colorado, for example, but it might be in eastern New Mexico. Or it might be a rare cloudy day in Pueblo but nothing but blue skies in Arizona.

Why wasn’t this benefit of reduced margins delivered as a takeaway by the report?

Hansen said he believes that the consulting firm Siemens, authors of the study commissioned by the Public Utilities Commission, wasn’t able to quantify these benefits that he believes will come to fruition.

Knitting one step at a time

Ultimately, said Hansen, the goal will be to knit together the entire continental United States into one interconnected grid. Right now, there are three different grids. Even within the Western interconnection grid—seen in this graphic—are entities called balancing authorities, where utilities pool resources to ensure that supplies are balanced with demands.

The next, small step is creation of energy imbalance markets. They can shave costs of 1%.

One such energy imbalance market was launched in February in Colorado with several utilities and the Western Area Power Administration participating. Xcel and several others plan the launch of a different EIM next year.

The ultimate goal being pursued by Colorado is to integrate the electrical utilities in both the transmission network and the market mechanisms that will allow utilities to share their electricity across broad geographic areas with such features as day-ahead planning for resource sharing. One such market is called a regional transmission organization, or RTO.

This knitting together of supplies in order to meet demands has been hastened by the deepening penetration of renewable energy. The wind is always blowing somewhere, if not in Wyoming then in the Columbia River Gorge. Wind in those locations usually blows at different times.

Other developments have pushed along the conversation in Western states. Earlier this year, 12 investor-owned utilities announced plans to get together to study their options at integrating markets. They are banded together under the name Western Market Exploratory Group. Included are Xcel Energy and Black Hills Energy.

Hansen also points to the deepening crisis in the Colorado River Basin as an impetus for more focus on integrating utilities into broader markets.

“I think the risk associated with hydro in the West is also directing more attention to this issue. Hydro power used to be assumed, and now with the water crisis and the low snowpacks and the long-term drought, that’s not a given any more. So the entire West is going to need to do a better job of interlinking and sharing their resources.”

Nancy Kelly, an Idaho-based policy advisor for Western Resource Advocates, agrees that integrating higher levels of renewables will require more electricity sharing across broader areas.

“It cannot be done without it—at least not without a lot of expenses,” she said. “Battery storage has changed the equation somewhat, but battery storage can only do so much.”

Will California loosen reins?

Any number of challenges exist. Have you heard of pancaking? It’s sort of like the highways of old, where you had to stop every few miles to pay a toll. Except in electricity it’s called a tariff. A problem, says the new PUC report. So are contracts for electricity transmission that don’t correspond with how the electrons actually flow. Can existing transmission infrastructure be used more effectively?

Governance of regional markets poses a major challenge, as several studies have now documented. This new study may do the best job yet of examining that issue of governance. A bit of background:

Hansen, who has a Ph.D. in resource economics, describes Colorado having three doors to choose from. Should it join with the California’s RTO, called CAISO. CAISO—it stands for California Independent System Operator—already has a footprint across much of the West, including parts of New Mexico.

An argument can also be made for the Southwest Power Pool. It operates a regional transmission organization in the wind-whipped Great Plains. Last year, several times it had in excess of 80% of its generation from renewables.

SPP has also created the energy imbalance market that debuted in Colorado and adjoining states in February. (And Colorado Springs Utilities liked this new EIM enough to jump ship from its alliance with Xcel to join it.)

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A third option that has been discussed is for Colorado to create something new, perhaps with other states, such as New Mexico and Arizona.

The PUC report finds no major difference in cost benefits from one alignment over another.

CAISO has one major, likely fatal flaw, at least from Colorado’s perspective. California’s governor appoints the governing board. That just won’t work for Colorado even if the two states currently are in general accord on many issues.

“Given this governance structure, the risk exists that CAISO could protect California’s parochial interests at the expense of what is best for the region,” the new report notes.

Some California legislators in 2018 attempted to revamp this. They failed. The chief executive of CAISO has reportedly suggested that another attempt will be made in the coming legislative session.

“I would hope something is figured out, either a change in California’s governance or their contracts, to enable a West-wide organization,” she says. She points to greater powerful potential synergies such that even Colorado could benefit from the hydroelectric and storage capabilities of British Columbia.

How about the Southwest Power Pool?

The new report notes that other members might not have the same dedication to achieving carbon-free electricity as Colorado does.

And, more broadly yet, might submerging utilities into new regional markets impair what Colorado thinks it does well already?

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