The Issue:
I recently had the opportunity to sit on a panel with my team, Senator Chris Hansen (CO), Senator Don Coram (CO), David Bobzien (NV Governor's Office), and Mona Tierney-Lloyd (Enel). We discussed the economies of scale and potential economic consequences of a West Wide Regional Transmission Organization (RTO). The work was sponsored by AEE and was conducted in conjunction with Energy Strategies as PI, and Peterson and Associates. You can find a link to the report and the press briefing Here.
Why is the formation of a western RTO an "Issue?" Because of efficiency and reliability. Currently the west is the largest area in the U.S. not served by an RTO (see the map from eia below). The west is part of the Western Grid, but it is not managed by an RTO. RTOs are able to more efficiently balance electricity loads such that less energy is wasted. This reduces rates for users.
The Theory:
Energy is one of those industries that benefits immensely from economies of scale. In the context of an RTO those efficiencies are realized by increasing the number and locations of energy producers and overall volume of consumers. We have all heard about "balancing energy loads." If you are producing electricity you need a consumer to absorb that electricity. If consumers are demanding electricity but there is no production...we call that blackouts. Balancing supply and demand loads can be difficult because turning up and shutting down hydroelectric facilities, for example, doesn't happen with the flip of a switch. And it isn't as though we can tell everyone on an extremely hot day to turn off their air conditioners. But balancing supply and demand becomes easier and more efficient with more producers and consumers in the market. This is true of almost every market.
Here is a great discussion on the grid and balancing the electricity load. #PracticalEngineering is a great YouTube channel for understanding what happens when grids go out, like it did in Texas last winter, and how transmissions and distribution work.
The Data:
Aggregation of any type of data often times hides nuances that are quite important. If I look at say, Utah's electricity use year over year it looks fairly predictable (see figure 2). If I narrow that down from a year to a month, or to an hour, we start to see massive fluctuations. The same thing is true if I move towards smaller and smaller geographies.
Figure 2: Utah's Electricity Consumption 1960-2020 (millions of kilowatthours)
Source: eia.gov
The aggregated data is smooth relative to the more granular data, and this is exactly why economies of scale work in this context! By moving to a larger scale we are introducing stability into the system and reducing volatility. The difficulty is that the transmission and distribution centers need to coordinate with a larger number of providers, and that is the job of the RTO. They provide that coordination and organization.
Our View:
RTOs provide a vehicle for monitoring and managing energy across multiple market dimensions. they provide stability to a remarkable unstable market with significant infrastructure constraints. The fixed costs of production are spread over a larger number of consumers, less energy is wasted, and those gains in efficiency return to consumers in the form of reduced rates.