Oregon's new RPS and coal divestment policy

Recently I've been thinking about the interaction between western state energy policies and wholesale electricity markets. Many successful state energy policies take the form of "procure resource X" or "divest resource Y"; however, in the context of regionalized wholesale markets, the mechanics become much more complicated.

Case in point: Oregon just passed SB 1547, a bill that doubles the state's RPS by 2040 and requires its two investor-owned utilities to stop serving customers with coal-fired power by 2030.

As Marten Law's Richard Allen puts it

Section 1 of SB 1547 requires that an “electric company” – Pacific Power and PGE – must eliminate “coal-fired resources” from its “allocation of electricity” on or before January 1, 2030. The term “allocation of electricity” is expressly tied to the utility’s rate base for Oregon retail customers[11]—although PGE serves retail customers only in Oregon, Pacific Power serves retail customers in Oregon, Washington and California. The definition of “coal-fired resources,” moreover, recognizes that utilities often make short-term wholesale power purchases to meet customer load. SB 1547 defines “coal-fired resources” to expressly exclude “a limited duration wholesale power purchase made by an electric company for immediate delivery to retail electricity consumers that are located in this state for which the source of the power is not known.”[12]

Because organized wholesale markets generally don't match sources and deliveries, it seems to me this could exempt some kinds of wholesale electricity trading from Oregon's coal divestment policy—especially if Oregon decides to join an expanded CAISO. To use a common metaphor: in organized markets like CAISO, wholesale suppliers dump buckets of water into the reservoir, and wholesale customers take buckets of water out. No one knows whose water goes into which customer's bucket, only that supply matches demand. 

Right now this might not be much of a problem. But if we think about expanding CAISO to include territory in both Oregon as well as states with more coal-fired units, the issue potentially becomes much more significant. Similarly, if regulators can't track the ultimate source of all deliveries, coal still can enter the Oregon retail market via bilateral wholesale imports.

That said, Oregon's new law accomplishes a great deal. Its RPS should create new demand for renewables. The divestment policy sends a clear signal to electricity markets, where the economics disfavor long-term contracts with existing coal-fired power plants and it's almost impossible to build new coal-fired units. In addition, the time horizon on divestment (2030) gives legislators and regulators plenty of time to adjust policies, if necessary. 

Nevertheless, Oregon's divestment policy illustrate the risks of the current state-oriented approach to energy policy. If western states continue on a path towards regionalized wholesale electricity markets, state policymakers will need to grapple with the details of wholesale market design in order to push environmental outcomes beyond what market forces would otherwise deliver.