M-RCBG Associate Working Paper No. 91
Realizing the Value of Bonneville Power Administration's Flexible Hydroelectric Assets
Patricia Florescu
Jack Pead
2018
Abstract
The Bonneville Power Administration (BPA) is a non-profit federal power marketer based in the Pacific Northwest (PNW). Although BPA is part of the U.S. Department of Energy, it is self-funding and cover 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.
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. Since 2011, market prices in the Pacific Northwest 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 to meet the net requirements of BPA customers. Under this dynamic, priority customers may not resubscribe for firm power with BPA when current long-term contracts expire in 2028.
The decrease in wholesale market power prices relates to recent dramatic changes to the energy industry taking place not only in the Pacific Northwest, but across the country. These secular changes include sustained low natural gas prices (traditionally the marginal fuel that sets power prices) and the increasing penetration of solar and wind resources (which have reduced the cost to serve load at times of high renewable output). Moreover, unprecedented low electricity demand growth of below 1% per year is increasingly leading to surplus generation conditions. For example, the Pacific Northwest is expected to meet peak demand through to 2030 exclusively through energy efficiency measures.
Given that BPA provides access to such a large amount of reliable and carbon-free electricity, it seems paradoxical that BPA’s flexible generation would not stand to benefit from the new direction of the electricity industry. This paper investigates the reasons why BPA is constrained from reaping the rewards of its large hydroelectric fleet. In addition, we provide recommendations for initiatives to pursue in the next 18-24 months that would improve Bonneville’s competitive position and help mitigate some of the problems identified. In particular, we have focused on market design improvements that can have revenue enhancing potential in the context of BPA’s operational constraints.
We broadly categorize the constraints facing BPA into two groups: policy & market design constraints and technical constraints. Our approach has been to diagnose the nature of these constraints through expert interviews with generation, transmission, energy trading, and market design specialists, supplemented by industry and academic research to isolate the binding constraints. Addressing these limiting factors has the potential to support system operations and provide economic benefits across the Pacific Northwest.