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Study shows possible benefits don't justify energy imbalance market in West, APPA, NRECA say

From the November 9, 2012 issue of Public Power Daily

Originally published November 9, 2012

By Robert Varela
Editorial Director

Any potential benefits of an energy imbalance market (EIM) in the West appear to be "far too small and too speculative to justify making far-reaching changes to current practices in the Western Interconnection at this time," APPA and the National Rural Electric Cooperative Association said Nov. 8. APPA and NRECA commissioned a detailed critique of the methodology the National Renewable Energy Laboratory used for its preliminary report analyzing the costs and benefits of an EIM in the West.

Economist Ken Rose did the analysis for APPA and NRECA.

The net societal benefits of an EIM as estimated by NREL are very small relative to the total production costs in the Western Interconnection, Rose found. The potential cost savings range from just 0.72 percent to 1.36 percent, and "even those net benefits are probably overstated," APPA and NRECA said in their Nov. 8 statement. A significant portion of the estimated savings derives from a reduction in natural gas generation and an increase in coal use without any accounting for the reduced availability and higher cost of coal expected to result from new Environmental Protection Agency regulations.

At least half of the estimated benefits would accrue to entities not participating—meaning not sharing in the costs—in the energy imbalance market, according to Rose’s critique. He also found the benefits are not evenly distributed among the region’s balancing areas, with some actually seeing significant net costs, raising questions about whether all areas will participate, as assumed.

By not incorporating existing bilateral contracts for reserve sharing, economic interchange, power supply, ancillary services and other arrangements, NREL is ignoring existing efficiency benefits from these arrangements and therefore overstating potential benefits, Rose said.

The NREL analysis also overstates the benefits of hydro power by not reflecting constraints on much of the hydro power in the WECC region, including running requirements (minimum, maximum, ramping), statutory, contractual and environmental constraints, Rose said.

Savings in production costs may not translate directly into lower prices paid by consumers, as NREL assumes, Rose said. Actual market prices will generally be higher than production costs, and can be higher still when there's transmission congestion or market power (both common occurrences that will need to be addressed), APPA and NRECA said.

An energy imbalance may be an early first step in a step-by-step progression that leads to a regional transmission organization, Rose said. "RTOs operate an array of complex and problematic markets which have created additional costs for consumers," APPA and NRECA said.
In addition to these methodological problems, the NREL study does not account for all of the cost to implement an energy imbalance market or the substantial costs that each market participant in the West would incur to participate in an EIM, they said. In the only comprehensive cost-benefit analysis of an EIM to date, commissioned by the Western Electric Coordinating Council, the combination of market operator and market participant costs outweighed the benefits in some scenarios, APPA and NRECA said.

"When all these factors are taken together, they suggest that NREL's results are highly uncertain and speculative, and certainly not robust enough to recommend or commit to far-reaching changes to current practice in the Western Interconnection," they said.


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