How markets can drive innovation: the Western Energy Imbalance Market

Photo Credit

How can you encourage development of renewable energy while decreasing costs? On the surface, this goal may appear like a contradiction, but in the Western United States it’s becoming a reality.

Recall that one of the fundamental weaknesses of most solar and wind technology is that it is intermittent – the sun is not always shining and the wind is not always blowing. However, the Western U.S. does have a formidable network of electric transmission lines crisscrossing the region.  Theoretically, these transmission lines can be leveraged to balance the intermittency between resources. When the sun is shining in Southern California – that energy can be shipped to Portland, and when the wind is blowing in Washington – that energy can be sent to Salt Lake City.

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Photo Credit: Major electric transmission paths across the Western U.S.

The science of electricity is well understood, but the tougher question is “what is the best way to utilize the grid to encourage renewable development?”

It is easy to imagine a group of electrical engineers and computer scientists furiously writing on whiteboards to develop complicated control equations to enable this functionality.

“If a cloud comes over Southern Nevada, we’ll ramp up power in Utah.”

“Then, if a windstorm hits Wyoming we’ll turn off power in Oregon.”

“What if there is too much hydropower in the Northwest? Ok we’ll ship it to California at night.”

TERMINATORThankfully, the illusion of control did not dictate the strategy, and a Skynet type control system never came to be.  Instead grid operators realized that the best way to manage the system was to embrace chaos, a.k.a. develop a market.

Markets are essential to innovation because they are typically complex, but not complicated.  The rules of a market are simple – buy low, sell high; but by aggregating this rule on a grand scale (say, with over 35 million customers) one creates an entity with opportunity greater than a sum of its parts.  The opportunity of the Western Energy Imbalance Market (EIM) can be summarized with one picture:

CAISO LMP

CAISO EIM Price Map (April 3, 8:38 a.m.)

On a basic level, the Western EIM is a network of nodes where the price of energy (per megawatt-hour) is posted publicly and drives the buying and selling of energy in near-real time. The price at each node is dictated by the estimated cost of generating the next megawatt-hour of energy and the transportation cost to get it there (losses and transmission congestion).

This model is a boon for innovators in that it unmasks the otherwise opaque and high-barrier-to-entry energy market, paving the way for new businesses and entrepreneurs to find ways to deliver energy.  Making this market data publicly available allows innovators the opportunity to ask “how can I get energy to these nodes at cheaper prices than the market?”

Solar and energy storage companies are already testing out new technologies and business models in the market. Meanwhile, analysts are predicting that the market may be so successful it may supercharge grid modernization, even in the midst of federal opposition and stagnation. There will be difficulties as the model evolves, but based on the principles of innovation it is easy to predict that the Western EIM could become a significant step forward towards a smarter grid.

In gardening, one cannot pull flowers to grow, you can only create the conditions for growth to occur.  For innovation, markets are fertile soil, and the Western EIM may be the plant bed of the future’s power grid.

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