This is the second in a blog series on the opportunities presented by the Pathways Initiative. Check back for additional publications in the series coming soon.
An expanded regional electricity market is coming into focus in the West. A bill is currently moving through the California legislature that will enable the state to join a West-wide electricity market operated by a regional organization and overseen by an independent governing board — a move that will unleash California’s clean electricity potential and benefit the entire West. New analysis underscores how this market will deliver cleaner, cheaper and more reliable electricity to its participants.
Why a regional electricity market in the West?
Cutting pollution from electricity generation is key to the U.S. reducing emissions in line with what science tells us is needed to avoid the worst impacts of climate change. This is the case for primarily two reasons: first, the electricity sector provides the greatest opportunity for achieving deep near-term reductions consistent with U.S. climate goals set under the Biden Administration — to cut climate pollution by at least 50% below 2005 levels by 2030. Second, deep electricity sector emissions reductions are critical because clean electricity is the primary engine for reducing climate pollution from nearly all other sectors — including transportation, buildings, and industry.
In the West, numerous states and electric utilities have ambitious economy-wide and electric sector-specific targets. These include statutory economy-wide and electric sector targets in California, Oregon, Washington, Colorado, and New Mexico; and corporate targets covering major electric utilities in Arizona and Idaho. Approximately 80% of electricity customers in the West are in a state with clean energy requirements in some form.
The West has tremendous clean energy resources and has been at the forefront of both policy and technological innovation to utilize those resources to cut emissions from the electric sector and leverage a cleaner grid to decarbonize other major portions of the economy. However, the Western U.S. has lagged behind other regions in establishing an organized regional market to help coordinate efficient use of the grid to get clean power from the cheapest sources to the cities and industrial hubs that need it most.
As described in detail in the first blog in this series, electricity markets help enable cheaper, cleaner and more reliable electricity throughout the region. Markets save customers money by enabling sharing of clean energy resources, improving efficiency of existing generation resources and right-sizing the investment in new electricity generation. Clean energy facilities are the cheapest resources on the grid, but sometimes all the energy they produce cannot be used by the buyers located in a specific geography. Expanding that geography creates more opportunities for sharing resources — allowing buyers to access cheaper power from across the region, and minimizing situations in which energy that could be produced goes unused. All of this increases efficiency and decreases costs.Markets also improve reliability by expanding the area in which cleaner and lower-cost resources are available when the grid is stressed, including during extreme weather events or other outages. And finally, markets can increase the use of clean energy resources because those resources are frequently lowest-cost, increasing their use relative to alternatives in a system that enables efficient integration and dispatch of generating resources.
The Pathways Initiative
The Pathways Initiative, which was started by utility regulators in numerous states across the West and now consists of a diverse coalition of utilities, independent power producers, electricity customers, consumer advocates and public interest organizations — including EDF — aims to establish an independent entity (a Regional Organization, or RO) to help develop a regional electricity market across much of the West. In an electricity market, more participants means a market covering a wider geographic area and with more diverse electricity demand and generation, which leads to a cleaner, cheaper and more reliable electricity system.
One critical tenet of the market envisioned by the Pathways Initiative is that the benefits of a West-wide market will be felt both in aggregate and for each individual utility participating in the market. To date, analyses evaluating these aggregate and utility-specific benefits have demonstrated significant potential to save money, reduce emissions and enhance grid reliability. Analyses of the Extended Day-Ahead Market (EDAM), which will be the first market service offered, demonstrate major benefits across the entire Western Electricity Coordinating Council, in California as a whole, and to individual utilities including PNM, NVE, PacifiCorp and BPA. These benefits include lower electricity costs, reduced emissions and increased economic development and job growth.
The creation of an independent Regional Organization to oversee operations of the regional market will start with the Extended Day-Ahead Market (EDAM). This is a critical step, in large part because it unlocks independent governance of the market, a key priority of many utilities around the West when considering whether to join an electricity market. To facilitate this, a bill in California (SB540) is necessary to enable the California utilities to participate in this market. The bill is currently moving through the California legislature — thus far, it has passed two committees with strong support from legislators. The California legislature, as it evaluates how the bill will save customers money and enhance grid reliability, will also need to consider how such a market can help facilitate pollution reductions from the electric sector west-wide. California can continue its long-standing leadership in fighting climate change, alongside regional collaborators, by unlocking more efficiencies in the electric sector and driving down the cost of decarbonization across the entire region.
Examining impacts of regional market options: the Colorado case
To evaluate the potential utility-level benefits for a regional market supported by the Pathways Initiative, EDF commissioned a new analysis, performed by Aurora Energy Research, to analyze the impact of electricity market choices for different utilities around the West, including Xcel Energy in Colorado, and help demonstrate to California’s legislators and stakeholders the important benefits outside of their state borders that could be realized by authorizing participation in an independent regional organization.
Colorado, like California, has ambitious climate and clean electricity goals. Evaluating how participation in the Pathways market stacks can contribute to the significant clean electricity investments necessary in Colorado provides a valuable data point for the regional effort. In addition to requiring utilities to achieve at least an 80% reduction in their emissions from 2005 levels by 2030, the state has economy-wide targets requiring a 50% reduction in 2030, 65% reduction in 2035, 75% reduction in 2040, 90% reduction in 2045, and net-zero emissions by 2050 (all relative to 2005 levels). Colorado Governor Jared Polis has also championed legislation to require utilities to achieve a 95% reduction in emissions by 2035 (relative to 2005 levels) and 100% clean electricity by 2040.
To achieve these goals, Colorado utilities will not only need to build and contract for much more wind, solar, batteries, and other clean electricity resources, they will also have to ensure that electricity remains affordable and the grid remains reliable and resilient, even in the face of more extreme, climate-fueled weather and natural disasters that can disrupt the electricity system.
Aurora Energy Research evaluated the impacts of Xcel Energy’s participation in two different regional market options, both of which offer day-ahead market services beginning in 2026-2027:
- Extended Day-Ahead Market (EDAM): currently operated by the California Independent System Operator (CAISO) and oversight would transfer to the independent RO proposed via the Pathways Initiative
- Markets+: operated by the Southwest Power Pool
Please see full analysis and disclaimer here.
There are currently 38 balancing authorities in the West, which are the organizations in charge of managing electricity supply and demand across a geographic area — they manage the dispatch of power generating resources to ensure that the lights stay on. Currently nine balancing authorities, including CAISO, PacifiCorp (East and West), Nevada Energy, L.A. Dept. of Water & Power, Turlock Irrigation District, Imperial Irrigation District, Public Service New Mexico and others, have either committed or publicly signaled their intent to join EDAM — we estimate this represents 45% of total electricity demand across the West. By comparison, eight balancing authorities including Bonneville Power Authority, Arizona Public Service, Salt River Project and Xcel Energy — which we estimate to make up approximately 28% of total demand in the West — have signaled their intention to join Markets+. The other balancing authorities have not yet made a decision, and are most likely waiting to see which market structure will yield the most benefits at the lowest cost.
These percentages are critical because, when it comes to markets, the more participants the better. More participants mean more clean electricity on the grid at more times of the day — resulting in cleaner, cheaper and more reliable electricity for the entire market. Below is a map of market footprints used in this analysis; the map relies on estimates of where balancing authorities appear to be leaning in terms of market participation, but it represents a best-guess designed to inform this analysis.
Modeled Balancing Authority (BA) Market Decisions
The bigger the market, the bigger the savings
To evaluate outcomes associated with participation in these two different market options, Aurora Energy Research used a production cost model to compare the revenues and costs associated with production and delivery of electricity for Xcel.
The modeling estimates that, under a business-as-usual scenario, Xcel Energy Colorado would reduce costs on average $13.2 million annually by participating in the Extended Day-Ahead Market (EDAM) as compared to Markets+ between 2028 to 2060. Zooming in on a shorter window of time, we see comparable results in the nearer-term: in the 2028 to 2040 timeframe, for example, the analysis estimates average savings at $11.2 million per year. As Aurora’s analysis shows, these benefits vary based on assumptions regarding transmission expansion but in all modeled scenarios EDAM provides millions in annual benefits as compared to Markets+. As additional market services are added, the total number of benefits will also increase.
Though this analysis does not include an evaluation of emissions impacts associated with participation in these different markets, there are several reasons that participation in the larger EDAM (and ultimately RO-led market with additional services) is likely the better choice for enabling Colorado to meet its climate and clean energy goals. First, keeping electricity costs low is critical to reducing emissions from other sectors via electrification; in other words, the savings associated with EDAM will further support people’s decisions to buy heat pumps and electric vehicles, because it makes doing so comparatively cheaper. Second, this analysis only evaluated outcomes assuming resources included in Xcel Energy’s most recent resource plan, which assumes participation in Markets+ and did not evaluate either outcome under additional emissions constraints (e.g. consistent with the Governor’s 100% by 2040 goal) or when modifying resource mix to optimize for participation in EDAM. While more analysis is needed on these fronts, there is good reason to expect that EDAM will deliver significant pollution reductions.
Considerations for future electricity markets in the West
This analysis only evaluated the impact of different day-ahead market options in the West. However, the Pathways Initiative also expects to consider adding voluntary additional market services at some point in the future. These may include transmission optimization, ancillary services co-optimization, balancing authority consolidation and others, and there is good reason to expect that additional services would lead to significantly greater cost savings for customers.
Colorado law requires utilities, including Xcel, to join an “organized wholesale market” no later than 2030. Colorado’s mandate defines the wholesale market requirement as “a regional transmission organization (RTO) or an independent system operator (ISO) established for the purpose of coordinating and efficiently managing the dispatch and transmission of electricity among public utilities on a multi-state or regional basis.” Expanding market services would very likely increase efficiency and thus further improve outcomes related to clean energy deployment, cost, reliability and resiliency. Moreover, the scale of efficiency gains associated with these services is very likely to be strongly correlated to the size and diversity of the market in which they are offered.
But to enable Xcel Energy and other utilities across the West to take advantage of this larger market and additional services, California lawmakers must act to enable the independent governance structure capable of delivering it. Now is the time to deepen collaboration in support of a clean energy future, both in California and across the West, and the next few months are crucial. If California lawmakers demonstrate they are willing to do so, the Pathways Initiative will unlock a strong independent market that provides the most compelling outcomes for utilities across the region in the near-term to deliver clean, affordable and reliable electricity across the West.