By Robert Mullin

Energy Imbalance Market officials on Thursday approved a proposal to prevent market participants outside California from skirting the state’s greenhouse gas compliance obligations by “shuffling” low-emissions resources into CAISO while ramping polluting resources to serve load closer to home.

The EIM Governing Body’s decision nearly completes a two-year effort to reach agreement on the issue among a broad swath of stakeholders, including the California Air Resources Board, environmentalists, and power producers and utility regulators in the inland West.

“This has been a long effort,” Governing Body Chair Valerie Fong said during the group’s July 12 meeting. “It has required active engagement by market participants. It has required active listening and rethinking by ISO staff and management. So, I do think we’re in a better place today than we were a year ago.”

Under CAISO rules, the proposal falls under the Governing Body’s “primary” decisional authority, meaning it will now advance to the consent agenda of the ISO’s Board of Governors before submission for FERC approval.

Secondary Dispatch

The reason for “resource shuffling” is that under the EIM’s rules, California load-serving entities are subject to GHG emissions caps and compliance obligations, while LSEs elsewhere in the West are not.

The EIM Greenhouse Gas Attribution Enhancements proposal was designed to prevent what CAISO refers to as the “secondary dispatch” of higher-emitting resources in the EIM to replace lower-emitting generation transferred into CAISO. Under current EIM practice, the ISO’s least-cost dispatch process typically selects the lowest-emitting resources to serve load in CAISO’s balancing authority area because those resources tend to submit the lowest GHG bid adders into the market.

“Because all resources in an EIM balancing area are generally equally effective in supporting energy transfers to another balancing area, the market minimizes costs by designating the resources with the lowest GHG costs as supporting transfers to the ISO balancing area,” CAISO management explained in a memo to the Governing Body.

The problem: The market currently designates all of a resource’s output with a corresponding GHG adder as supporting a real-time transfer into CAISO, even if that output was already submitted to the EIM as part of a base schedule — indicating the supply was already slated to support load outside ISO.

“The market may designate a resource as supporting a transfer into the ISO even though that resource would have operated at the same output to serve load outside of the ISO without an energy transfer,” CAISO said. “The market will dispatch another resource or resources to ‘backfill’ this dispatch to serve the load outside of the ISO that would have been served by the resource designated as supporting the transfer.”

If the backfilling resource has higher emissions than the one supporting the transfer, this “secondary dispatch” results in the market undercounting the actual GHG emissions attributable to California, the outcome ARB was trying to prevent when it prompted CAISO to develop the proposal. (See CAISO, ARB to Address Imbalance Market Carbon Leakage.)

Headroom

CAISO’s proposal seeks to address ARB’s concerns by limiting a resource’s energy transfers into the ISO to “an amount no greater than the headroom” above the resource’s base schedule.

Under the plan, the EIM would calculate that headroom by subtracting the base schedule from the megawatt quantity for which a resource has submitted an energy bid and corresponding GHG bid adder. CAISO expects the changes will reduce the GHG emissions from secondary dispatch and more appropriately account for emissions produced by units dispatched to serve California.

“Unfortunately, this approach doesn’t fully eliminate the potential for secondary dispatch. It only minimizes it,” Don Tretheway, the ISO’s senior adviser for market design policy, told Governing Body members.

Tretheway also noted that some EIM stakeholders have expressed concerns the new rules could incentivize suppliers to hold the base schedules for their non-emitting resources such as hydro to zero, while simultaneously base scheduling an emitting resource. That would leave the non-emitting resource with all the headroom in the EIM, possibly positioning it to capture a GHG premium if an emitting resource with a GHG adder sets the marginal price for transfers into CAISO — an opportunity for gaming the market.

“But this concern doesn’t recognize that there’s consequences for having suboptimal base schedules. Because we will redispatch, and this leads to additional costs,” Tretheway said. “So, at a minimum, you’re going to have imbalance energy costs as you decrement down that gas resource and increment up the non-emitting resource.”

Tretheway also pointed out that an EIM participant would face additional costs for creating real-time congestion if it didn’t resolve congestion ahead of an operating hour — resulting in uplift costs for the BAA — before submitting its suboptimal base schedule.

‘Simple is Always Better’

CAISO’s final GHG plan won out over a more complicated proposal that would have developed a “two-pass” market mechanism to address secondary dispatch. Under that proposal, a first pass in the market would have determined the optimal schedule across the EIM footprint while restricting net transfers into the ISO. A second pass would allow transfers into the ISO but limit each EIM resource’s GHG bid quantity to the difference between the resource’s upper economic limit and the optimal schedule determined in the first pass. (See EIM Members Seek More Details on GHG Accounting Plan.)

“We were, as [were] other stakeholders, concerned about the two-pass approach that was considered, so the final approach we think is very reasonable,” said Eric Hildebrandt, director of CAISO’s Department of Market Monitoring. “There is the issue of monitoring the base schedules and looking for that potential gaming opportunity. We think that is something the ISO is committed to doing.”

Speaking ahead of the vote, Governing Body member Kristine Schmidt applauded ISO staff for developing a proposal that “has resolved a really strong, outstanding issue … very important to the state of California.”

Body member John Prescott congratulated staff for a solution “that seems to be workable.”

“I can understand it, which means its fairly simple,” Prescott joked. “But simple is always better.”

Prescott said the proposal allows California to meet its environmental goals with “minimal impact to the external EIM participants — that’s very important.” He added that he hoped EIM participants would monitor the proposal after it becomes policy.

“If those out there that are actually implementing this find that it is a problem for them, that it causes unanticipated results, I’d sure like to hear that, so I just put that request out there,” Prescott said.

While Governing Body Vice Chair Carl Linvill added his praise, he reminded his fellow members they will likely have to deal with the issue again after CAISO deploys its day-ahead market to the EIM.

Speaking during his first meeting as a Governing Body member, Montana Public Service Commission Vice Chair Travis Kavulla said he would support the proposal “with a little bit of reluctance.”

“I wouldn’t want the opportunity to pass by without at least questioning a little bit of the premise of what we’re trying to do here,” Kavulla said. “I do think we have to realize that resource shuffling is a natural and economically rational consequence of having a local carbon dioxide price that doesn’t persist across the entire footprint of the market.”

Kavulla said that by assigning a “local” emissions price to backfill generation, CAISO was doing what it has admitted is impermissible, “which is to subject generation outside of California to a California air regulation even when the generation is not being used to serve California load.”