california electricity opportunity turned into risk risk turned into challenge challenge turned into...

California Electricity

Opportunity turned into Risk

Risk turned into Challenge

Challenge turned into Crisis

Crisis turned into Blight

Source: California Energy Commission http://www.energy.ca.gov/html/energysources.html


Opportunity turned into RiskRisk turned into Challenge



Electricity Restructuring

• Assembly Bill 1890, September 1996

• Created wholesale markets– PX, CA-ISO

• Isolated Consumer from producer of electricity– Retail price control

– “Transition charge” to pay for “stranded assets”

• Increased utility risk bearing– Encouraged divesture of generating assets

– Discouraged long term wholesale electricity contracts

Operational Capacity: California’s Three Utilities

All Coal, Some Nuclear: Out of State Source: California Energy Commission

Wind3.8%

Oil0.7%

Coal 5.4%

Hydro: QF0.4%

Geothermal10.3%

Solar0.3%

Nuclear11.2%

Hydro: Utility13.5%

Natural Gas51.8%

Biomass2.6%

Operational Capacity: California’s Three Investor Owned Utilities

Divested44%

Utility Owned29%

QF23%

Self-Gen.4%

Some Utility Owned: Out of State Source: California Energy Commission



Risk turned into ChallengeChallenge turned into Crisis


California Electricity Use (Average MW)

0

5,000

10,000

15,000

20,000

25,000

30,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000(est)

Ave

rage

MW

Residential Commercial Industrial Agicultural Other

Source: California Energy Commission

Problem Was Not Because Californians Are “Energy Hogs”

Source: Energy Information Administration; 1999 Data

Item California All US

Monthly Average Residential

Consumption of Electricity (Kwhr)

548 866

California Relative to

US

37% Below National Average

Retail Price (cents per Kwhr)

10.71 8.16 9th Highest

Average Monthly Residential Bill

$59 $7117% Below

National Average

Present Status of Plants: Applications Since 1980

0

1000

2000

3000

4000

5000

6000

7000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Application Year

Tota

l M

W c

ap

ac

ity

Cancelled/ On Hold

Under Review

Construction To Begin Soon

Under Construction

Operational

Basic Market Forces

Demand for Electricity Increased a Bit More than Expected Healthy California Economy Growth of Electricity-intensive Products Decline in the Retail Price of Electricity

Supply of Electricity Did Not Increase Until Recently No New Generating Plants on Line

But Many in pipeline Slow Regulatory Approval Process

Supplies from Pacific Northwest and Southwest Decreased

Costs of Electricity Generation Increased Prices of Natural Gas increased Prices of NOx Prices skyrocketed under RECLAIM project

Pacific Gas & Electric

Southern California Edison

San Diego Gas & Electric




Challenge turned into CrisisCrisis turned into Blight

Day-ahead Prices in the PX

$0

$50

$100

$150

$200

$250

$300

$350

Apr

-98

Jun-

98

Aug

-98

Oct

-98

Dec

-98

Feb-

99

Apr

-99

Jun-

99

Aug

-99

Oct

-99

Dec

-99

Feb-

00

Apr

-00

Jun-

00

Aug

-00

Oct

-00

Dec

-00

Dol

lars

Per

Mw

hr

NP15SP 15

Limitations on Market Adjustment Processes

Normally, when demand increases faster than supply, prices rise. Price rises increase supply and decrease demand, thereby limiting further price increases.

This process cannot occur here Supply cannot adjust upward once generators reach

capacity. Capacity cannot increase quickly, especially with siting regulations.

Demand does not adjust normally Retail price control insulates retail prices from

wholesale prices No time-of-use pricing which differentiates

between high price times and low price times Net result is high wholesale prices and shortages

Rolling blackouts are direct result of shortages

Source: California Energy Commissionwww.energy.ca.gov/electricity/wepr/

Quantity of Electricity

Price of Electricity

Supply Function

Demand Functions

Exercise of Market Power By Generators

Individual generators have much market power They can hold back electricity supplies and

cause prices to increase disproportionately No demand response Supply response of rivals very limited

when rivals are at capacity Market power would have decreased if much

electricity were sold on long term contracts But this was precluded by AB 1890

Quantity of Electricity

Price of Electricity

Supply Function

Demand Functions

Average Daily Generating Capacity Offline

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Ma

r-9

9A

pr-

99

Ma

y-9

9J

un

-99

Ju

l-9

9A

ug

-99

Se

p-9

9O

ct-

99

No

v-9

9D

ec

-99

Ja

n-0

0F

eb

-00

Ma

r-0

0A

pr-

00

Ma

y-0

0J

un

-00

Ju

l-0

0A

ug

-00

Se

p-0

0O

ct-

00

No

v-0

0D

ec

-00

Ja

n-0

1F

eb

-01

Ma

r-0

1A

pr-

01

Ma

y-0

1J

un

-01

Meg

aw

att

s (

Avera

ge D

ail

y)

Source: California Energy Commissionhttp://www.energy.ca.gov/electricity/1999-2001_monthly_off_line.html

Source: California Energy Commissionwww.energy.ca.gov/electricity/wepr/

Other Crisis Impacts

• Rolling Blackouts

• PG&E Bankruptcy

• Edison Electric Near Bankruptcy

• State Budgetary Surplus Eliminated

Retail vs Wholesale Electricity Prices (Estimates)

0

5

10

15

20

25

30

35

PG&E RetailPrice

SpotPurchases:

Q1

SpotPurchases

(Now)

QF Contracts Price Caps(No Alerts)

States' NewLong TermContracts(Current)

Cen

ts P

er K

whr

Non-Energy Costs

Energy Through

2000

PUC Ordered Increases

Class Discussion Possibility: Did California’s Retail Price Control Protect Consumers?

People of California paying entire wholesale cost Utilities Virtually Bankrupt; They are not paying this cost State Surplus is Being Spent (For a while, over $50 Million per

day) State revenue bond sale would not avoid, but

would simply delay payments. Failure to Raise Rates Simply Hides Costs

Higher retail prices provides incentives to reduce demand Higher retail prices can increase supply

Utilities collect more revenues and pay suppliers QFs could be fully paid and all can come back on line

Demand decreases and supply increases beneficial to consumers Reduce wholesale price Avoid rolling blackouts (shortages)

Bond Payments

• $13 Billion Bonds Proposed• 15 Year Payments

• 4% to 5% Interest

• Annual Payment for Next 15 years:

$1.2 Billion Per Year

Total MW Under Contract

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Me

ga

wa

tts

New State Electricity Contracts: Price ($/MWhr) over time

$-

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

$120


Time (months)

$/M

Wh

r

Expected Price Range with $3 - $5 Gas

Annual Rate of Expenditures

$-

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0


Bill

ion

s o

f D

olla

rs P

er Y

ear

State Actions to Watch

• Buy transmission assets from utilities ?

• State Power Authority ?

• Acquire generating assets by eminent domain ?

• Elimination of Direct Access ?

Primary Lessons

Don’t interpret as “deregulation doesn’t work”

Electricity system restructuring that isolates the supply side of the market from the demand side can lead to disaster

System structuring that does not allow appropriate risk sharing can lead to disaster

Fundamental restructuring will invariably lead to errors Legislature and the governor must monitor system and

be prepared to take timely actions Failure to take timely decisive actions can lead to

disaster

Some Solutions

Energy Demand Reduction Measures

Retail Price Increases Time-of-Use Metering Legislation to require companies to reduce

use Incentives to replace inefficient

refrigerators and other appliances Subsidies on compact fluorescent lights Public Energy Efficiency Investment

LEDs in Traffic Lights Other Energy efficiency initiatives

Reductions In Use, 2001 Vs 2000

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

PeakMWhr

Source: California Energy Commission

Real Time Pricing

Current system provides no incentive to move electricity loads from peak time to off peak time

Time of Use Pricing, particularly real time pricing will provide that incentive

California Legislature is providing for time of use pricing for large commercial users How effective will this be in reducing peak

demands? Experience by other utilities, e.g. Puget

Sound Public Utility District Experience in other countries, e.g. France

Two Part Real Time Pricing

-$1,000

-$500

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

0 2000 4000 6000 8000 10000 12000

Purchases of Electricity

Paym

ent b

y U

ser

Historical at $0.10 RPT at $1.00 RTP at $0.05

Historical Purchases

FERC Actions

• Bid Price Caps Initially Set During Stage 1, 2, or 3 Emergency Based on Index of Natural Gas Prices

–Requirements to Bid

–Market Clearing Price (MCP) Set by Highest Accepted Bid

–Cost-Based Payments at Higher than MCP

• Last FERC Order

–Keeps Bid Caps during Alerts

–Adds Price Cap for all other times at 85% of MCP

–Extends Controls to entire region, based primarily on California conditions

• Settlement Hearings for past wholesale prices

–“Fair and Reasonable” Standard

Problem Solving For California’s Electricity System

DON’T CHANGE ITDON’T CHANGE ITDID YOU

SAY IN PUBLICYOU COULD

FIX IT?

DID YOU SAY IN PUBLICYOU COULD

FIX IT?

DOES IT STILL

FUNCTION?

DOES IT STILL

FUNCTION?YES NO

YES

YOU IDIOT !YOU IDIOT !NO

DO THE POLLS LOOK BAD?

DO THE POLLS LOOK BAD?

NO

PRETEND THERE IS NO PROBLEM

PRETEND THERE IS NO PROBLEM

HAS THE PRESS CAUGHT ON?

HAS THE PRESS CAUGHT ON? YOU POOR

BASTARD!

YOU POOR BASTARD!

YESYES

NO

HIDE ITHIDE IT

CAN YOUBLAME

EVERYONE ELSE?

CAN YOUBLAME

EVERYONE ELSE?

NO

THEN, THERE IS NO PROBLEM.

YES

california electricity opportunity turned into risk risk turned into challenge challenge turned into...

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