POLICY ANALYSIS EXERCISE MARCH 2018 Submitted in partial fulfillment of the requirements for the degree of Master in Public Policy. This Policy Analysis Exercise reflects the views of the authors and should not be viewed as representing the views of the Bonneville Power Administration or those of Harvard University or any of its faculty. REALIZING THE VALUE OF BONNEVILLE POWER ADMINISTRATION’S FLEXIBLE HYDROELECTRIC ASSETS In the context of an increasing penetration of renewable generation and evolving electricity market designs in the Western Interconnection, what are the various market and policy constraints related to Bonneville Power Administration’s ability to realize additional value for its flexible hydropower generation assets? What are the most promising ways for BPA to maximize the value of its resources in the short-term (next 18-24 months)? AUTHORS Patricia Florescu & Jack Pead Master in Public Policy May 2018 Candidates Business and Government Policy Concentration ADVISORS William Hogan & John Macomber CLIENT SEMINAR LEADER Elliot Mainzer & Douglas Marker John Haigh Bonneville Power Administration Acknowledgements We would like to thank the following people for their invaluable support and guidance: Our Client—Bonneville Power Administration Elliot Mainzer, Administrator and CEO Douglas Marker, Constituent Account Executive, Intergovernmental Affairs Our Advisors William Hogan, Raymond Plank Professor of Global Energy Policy at Harvard Kennedy School of Government John Macomber, Senior Lecturer in the Finance Unit at Harvard Business School Our Seminar Leader John Haigh, Lecturer in Public Policy and Co-Director of the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School of Government Expert Interviewees Bonneville Power Administration Elliot Mainzer, Administrator and CEO Douglas Marker, Constituent Account Executive Todd Miller, Attorney-Advisor Tim Johnson, Assistant General Counsel Eric Federovitch, Manager, Pricing and Transaction Analysis Rob Petty, Manager, Power Forecasting and Planning Larry Kitchen, Manager, Long Term Sales and Purchases Ravi Aggarwal, Supervisory Electrical Engineer Kelii Haraguchi, Operations Research Analyst Stephen Gaube, Financial Analyst, Debt & Investment Management Other Randy Hardy, former Administrator & CEO, Bonneville Power Administration Phil Pettingill, Director of Regional Integration, California Independent System Operator Ralph Cavanagh, Co-Director, Energy Program, Natural Resources Defense Council Arne Olsen, Partner, Energy and Environmental Economics, Inc. (E3) Therese Hampton, Executive Director, Public Generating Pool Michael Deen, Senior Policy Analyst, Public Power Council Ben Kujala, Power Division Director, NW Power and Conservation Council John Ollis, Power System Analyst, NW Power and Conservation Council Mike Starrett, Energy Analyst, NW Power and Conservation Council Sonya Gustafson, Product Manager of DataSignals at Yes Energy Table of Contents EXECUTIVE SUMMARY ...................................................................................................... 2 1. INTRODUCTION TO THE BONNEVILLE POWER ADMINISTRATION ................... 5 2. RELEVANT HISTORY .......................................................................................................... 7 3. REGIONAL CONTEXT ........................................................................................................ 10 THE WESTERN ELECTRICITY COORDINATING COUNCIL REGION ........................................................... 10 THE PACIFIC NORTHWEST ................................................................................................................................. 12 CALIFORNIA ........................................................................................................................................................... 15 Policy Drivers ........................................................................................................................................................ 15 Changes in Electricity Market Structure ................................................................................................................ 16 Operational Challenges .......................................................................................................................................... 17 The Western Energy Imbalance Market ................................................................................................................ 21 4. THE ECONOMICS OF INTER-REGIONAL SALES ........................................................ 24 POTENTIAL MECHANISMS TO INCENTIVIZE INTER-REGIONAL FLEXIBILITY SALES ............................. 26 Flexible Resource Adequacy Criteria and Must Offer Obligation ........................................................................... 28 Day-Ahead Imbalance Reserve Product ................................................................................................................. 29 5. TECHNICAL CONSTRAINTS ............................................................................................ 30 BPA’S FLEXIBLE GENERATION ASSETS ........................................................................................................... 30 BPA’S TRANSMISSION ASSETS ............................................................................................................................ 33 STRUCTURE OF TRANSMISSION CHARGES ....................................................................................................... 34 TRANSMISSION INTERTIE CAPACITY ................................................................................................................ 35 The California-Oregon Intertie ............................................................................................................................... 35 Pacific DC Intertie ................................................................................................................................................ 40 STRUCTURE OF BPA’S ENERGY CONTRACTS AND ENERGY PRODUCTS ................................................... 40 Energy Contracts ................................................................................................................................................... 41 Traded Energy Products ........................................................................................................................................ 42 6. STATUTORY CONSIDERATIONS .................................................................................... 44 BPA’S MANDATE .................................................................................................................................................. 44 PUBLIC AND REGIONAL PREFERENCE ............................................................................................................. 45 FERC JURISDICTION ............................................................................................................................................ 47 ENVIRONMENTAL CONSIDERATIONS .............................................................................................................. 48 Water Use ............................................................................................................................................................ 48 Clean Energy Policies ............................................................................................................................................ 52 Endangered Species ................................................................................................................................................ 55 7. RECOMMENDATIONS ...................................................................................................... 57 LIST OF ABBREVIATIONS .................................................................................................... 64 1 Executive Summary The Bonneville Power Administration (BPA) is a non-profit federal power marketer1 based in the Pacific Northwest (PNW). Although BPA is part of the U.S. Department of Energy, it is self-funding and covers its costs by selling its products and services at cost-based rates. BPA’s principal mandate is to market the power generated from 31 federal hydroelectric projects with combined installed capacity of 22.5 GW, one non-federal nuclear plant (the Columbia Generating Station in Hanford, WA) and several small non-federal power plants. BPA provides about 28% of the electric power used in the Northwest and operates and maintains about three-quarters of the high-voltage transmission network in its service territory.2 A major challenge facing BPA is a recent pattern of cost escalation and increasing rates that are diverging from a general trend of decreasing market prices, as shown in Figure 1. Since 2011, market prices in the Pacific Northwest3 have dipped below BPA firm power rates after being on average 50% higher during the previous decade. Today, BPA’s firm rates are $37.4/MWh, compared to prevailing all-hours market prices of around $23/MWh. While BPA’s rates are not perfectly comparable with wholesale market prices, due to additional load balancing and ancillary services that BPA provides its priority firm customers (attributes which are priced in), the growing divergence of prices poses a sustainability problem for BPA. This creates an incentive for market participants to rely on short-term energy purchases rather than on long-term BPA contracts that are designed