This post is part of a multi-part series on capacity markets.
In 2000 and 2001 the Western United States went through an
energy crisis. I was a student in a
California public school at the time, and I remember getting to go outside and
mess around because there was a rolling brownout during class. The crisis cost Californians millions and led
to the wacky recall of Governor Gray Davis though, for students at the time, it
was awesome.
While most citizens blamed Enron and moved on, the Western
U.S. Energy Crisis had a lasting impact on electricity market policies. In its simplest form, the traditional
electricity business model is to have one utility own all the power plants,
transmission lines, and distribution lines and then sell power to end consumers. Under this system, an electricity market is
unnecessary. The basic idea of electricity deregulation is that while transmission and distribution wires are a natural monopoly and should not be duplicated, electricity generation is not a natural monopoly. Therefore, it makes sense to have one company (a utility) own the wires while other companies compete to make the cheapest power plants and sell power to the grid. From this notion comes electricity markets.
In 1998, prior to the crisis, California transitioned to a
system in which independent power producers (Dynergy, Mirant, Reliant, etc)
sold electricity to distribution companies (PG&E, SCE, SDG&E, etc) on a
day-ahead basis. Pre-1998, the utilities owned both the power plants and the transmission and distribution. The day-ahead power auction became coordinated through a central exchange, the California Power Exchange. This system was generally
described as “deregulation” or “partial deregulation” and was expected to
reduce the cost of electricity to end consumers.
California
at the time was part of the Western Systems Coordinating Council (WSCC), now the
Western Electricity Coordinating Council (WECC), which
covers the Western Interconnection. An interconnection represents a region in which all electric utilities are
electrically tied together during normal system conditions and operate at a
synchronized frequency (here is a map of interconnections in North America).
Electricity
demand in the WSCC had been growing rapidly, led by growth in California and
the southwestern United States.
Consumption by state, 1997-1998
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| Source: Fisher, J. and Duane, T. "Trends in Electricity Consumption, Peak Demand, and Generating Capacity in California and the Western Grid, 1977-2000," Program on Workable Energy Regulation, University of California Energy Institute, Berkeley, CA, March 2002.
|
Meanwhile the
region had faced years of low investment in electricity generating
capacity. Factors for low investment included the economic recession in the early 1990s which decreased demand as well as concern on the part of utilities that upcoming deregulation might limit their ability to recover the cost of building
new facilities.
New utility capacity by state, 1977-1997
 |
| Source: Fisher, J. and Duane, T. "Trends in Electricity Consumption, Peak Demand, and Generating Capacity in California and the Western Grid, 1977-2000," Program on Workable Energy Regulation, University of California Energy Institute, Berkeley, CA, March 2002.
|
Events came to a head in shortly after California partially deregulated the electricity sector in 1998. In early 2000, wholesale electricity prices in the day-ahead market shot upward, reaching over 20x typical levels. At the same time, the Pacific Northwest experienced its most significant drought in decades, causing a decrease in the hydroelectric power that could be exported from Washington and Oregon to California.
Water Discharge at the Dalles Dam, Columbia River
This chart shows the water discharge at The Dalles Dam on the Columbia River, a measurement that serves as a bellwether for hydroelectric output in the Pacific Northwest. It shows clearly that output spiked in April 2000 in parallel with spiking electricity prices in California. However, due to the drought, hydroelectric output at this level was unsustainable and The Dalles had its lowest output in decades during the 2000-2001 period, the height of the Western Electricity Crisis.
One clear result of the Western Electricity Crisis has been a
policy shift away electricity markets based largely on short-term sport market
prices toward electricity markets which incorporate long-term capacity
planning. The WECC needed more electricity generation due to increased
demand in the late 1990s, but utilities did not want to built generation out of
fear of market deregulation. Had regulators not intervened, the market
would have corrected itself eventually. High electricity prices of the
crisis would have been a strong incentive for companies to build additional
power plants and sell power at high rates. Unfortunately, power plants
take time to site and build, and in the meantime high prices caused large-scale
blackouts across the state.
As a result of the Western Electricity Crisis, most restructured electricity markets throughout North America feature some type of market for capacity. These markets facilitate payments to power producers in order to
ensure that enough generating capacity will be available in future years to
meet expected load. Capacity markets represent central planning in that
the free market does not decide how much generating capacity will get built–a
regulator's load forecast does. Regulators also demarcate the zones in
which growth constraints are different (such as Manhattan Island vs. upstate
New York), creating different prices for capacity within those zones. Such
a system makes sense given the time it takes to build power plants, and the
costs of volatile prices to both consumers and power producers who are
attempting to finance large investments.
I wrote previously that ocean acidification is one of the climate change risks that scares me most. Recently, I came across this article that describes how carbon dioxide concentrations in the ocean are causing oyster hatcheries to collapse. Higher CO2 levels in water prevent oyster larvae from effectively forming shells, killing them within days.
