Extra electricity slides
Electricity Markets – Basic Conditions Demand – energy vs. power Reliability Area under curve is energy Power 24 hours time Probability Density Loss of load probability Power system demand (kw)
Basic Questions What demand level should system be designed for? Electricity = power + energy + reliability Supply – 3 activities: Generation Transmission Distribution
Operation of Power System Load Duration Curve: Area under LDC is energy Peak Load Power at Least this high Intermediate Load Baseload 100% Fraction of Year
Regulation of Electricity Markets Historically natural monopoly Rate of Return Regulation Utilities allowed to price to achieve “fair rate of return” Problems: Inefficient Average Cost Pricing More recently (worldwide): deregulation
The California energy crisis Pre-1999 3 regulated monopolies that owned and operated generation, transmission, distribution (PG&E, SCE, SDG&E) Federal Energy Regulatory Commission regulates wholesale power transactions (one utility to another) California Public Utilities Commission regulates retail prices (to consumers)
Restructuring electricity Designed competitive wholesale market Suppliers bid to supply electricity on daily basis “Grid” accepts lowest bids; price at margin Goal: more competitive California Argued it would decrease prices Could pass savings on to consumers by giving them a choice of supplier But consumer side still regulated. Didn’t work Prices skyrocketed over 500% between 1999-2000. Utilities paying far more than consumers paid. State had to bail out industry, cost $60 billion.
From Joskow: “The wholesale prices prevailing between June and September 2000 were much higher than the fixed retail price that the utilities were permitted to charge”
Why did wholesale prices rise? Rising natural gas prices (natural gas is an input to electricity production) Large increase in demand in CA (growth) Reduced imports from other states (heat waves) Rising prices for NOx emissions credits (costs of producing electricity) Market power (in wholesale spot mkt)
Why didn’t it work & lessons Technically challenging to create competitive wholesale market Consumers were insulated from wholesale market prices (because retail market still regulated). Deregulated wholesale, failed to deregulate retail prices or to allow forward contracts. Required utilities to buy at unregulated price and sell at regulated retail price.
What next? State committed to long-term contracts at unreasonably high prices – cost $60 billion. Prices likely to remain high to pay off. Prices dropped in 2001 due to increased supply, decreased demand. SCE and PG&E effectively bankrupt. Replaced deregulated wholesale with state procurement and regulated prices