To:KyrosL who wrote (333)
From: R Sandvig Sunday, Oct 6, 2002 4:30 PM
View Replies (2) | Respond to of 348
Thank you for the wonderful post. Compare Mark Golden's cogent and eloquent piece to the rant by Raymond Duray. In the mind of the liberal, political discourse has been reduced to name calling. How sad.
RS
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To:Larry S. who started this subject
From: KyrosL Sunday, Oct 6, 2002 3:37 PM
View Replies (3) | Respond to of 348
POWER POINTS: Peak Power Needs Its Own Market
By MARK GOLDEN
A Dow Jones Newswires Column
NEW YORK -- To understand the economics of meeting peak electricity needs is to understand the California energy crisis.
Quite simply, the crisis was the result of the state's fatal decision in 1996 to throw its entire power supply and demand into the expensive market for power needed when demand peaks.
The U.S. power industry has always had a standard of being 99.9% reliable. That sounds reassuring, but what it means is that we all go without power about 8.76 hours a year on average. That 8 hours and 45 minutes are mostly the accumulation of split-second blips in power supply that we don't even notice and the occasional lightning bolt taking out a neighborhood's power for a couple hours.
Every decade or so, rolling blackouts occur when a couple of major plants trip off line during a heat wave or when economic growth pushes power demand ahead of generating capacity. The policy consensus has been that the very high cost of adding a fourth 9, for 99.99% reliability, isn't worth it.
Not surprisingly, it's sort of expensive to have even that third 9. The power plants needed to defend the mark sit idle for 8,673 hours every year, just to be available in the 87 hours when heat waves and system problems require them to run.
In 2001, Reliant Resources Inc. (RRI) charged the state of California $1,900 a megawatt-hour for such power from its Ellwood plant, which Reliant bought from Edison International (EIX) unit Southern California Edison.
One Price Fits All
California Gov. Gray Davis took the $1,900 price as final proof the state was being gouged. That's not really the case. Such prices have always been paid, even in regulated markets. Edison, for example, had charged California consumers twice Reliant's price when it owned the Ellwood plant in 1995.
Those charges weren't noticed, however, because folding a little expensive peaking power into an enormous amount of $40/MWh baseload supply adds just a few dollars a month to everybody's electric bills.
But California, in its landmark 1996 electric deregulation law, threw almost all of the state's power needs - hundreds of millions of megawatts a year - into the peaker market. It did this by forcing the state's three main utilities to buy all of their power in state-run auctions one day or one hour in advance. In those auctions, all suppliers got paid the price of the most expensive megawatt taken each hour.
For the first two years of deregulation, Ellwood-type plants were rarely needed, so the entire market priced in the normal range of $20 to $50/MWh.
Between late May 2000 and June 2001, however, Ellwood and other peaking plants were needed a lot of the time, due to a lack of new baseload plants, heavy economic growth, warm weather and, later, a shortage of hydroelectric power due to a drought.
Baseload plants are more efficient. And since they run almost all the time, their capital costs are divided among more than 8,000 hours a year. But once peakers like Ellwood started getting taken on a regular basis, baseload power got paid peaker prices, and California spent at least $10 billion more than normal in a 13-month period.
What were much maligned generators supposed to do? Apparently, they should have told the California Power Exchange and the California Independent System Operator - which ran the state's wholesale power auctions - to break their rules and not pay everybody the highest price. Maybe they should have just torn up checks, as so many corporations do every time they decide they have made too much money.
Did generating companies purposely take power plants off line, as recently alleged by California's Public Utilities Commission? In that market? Of course not. Did traders use bidding strategies to optimize profits? Sure. That's what traders are paid to do, and the strategies were legal.
The Wrong Lesson
Davis decided prices had to be capped. The governor won the political fight with a Republican administration in Washington, D.C., and federal energy regulators soon thereafter imposed a $92/MWh price cap. The price cap is slated to rise to $250/MWh, but that's still obviously not enough.
Why? In the U.S. version of deregulation, owners of independent power plants aren't guaranteed to recover their investment. They must cover their capital in actual energy sales.
Investors in peaking capacity - who put up something like $400,000 for each megawatt installed - have very few hours of operation each year in which to recover their costs. Investors will only commit their capital if they are reasonably sure they will reap returns of 10% a year on average plus operating costs. A peaking plant meant to supply that last 0.9% of demand needs to get paid about $600 a megawatt-hour to make even a slim profit.
Nobody is building peaking plants in the West to serve a market in which they can't recoup their investment. Within a couple of years, the West will lose that third 9 and will be looking at 87 hours a year without power.
The U.S. has clearly learned from California's mistake of putting the entire electricity market into what should really be a peak power market. California itself took baseload purchases out of the peaker market at an incredibly high cost by signing the long-term contracts that utilities had been barred from signing for four years.
No other state will make California's mistake. But, due to politics, we also learned a wrong lesson from California: to put price caps on the peak market. That will only make peak supply vanish.
The lesson should have been that you can only have deregulated power markets if consumers - particularly industry and commerce - have to pay peak prices for peak usage. A "market" where demand doesn't really participate is not a market.
Next week, the way forward: How peak supply and peak demand can talk.
online.wsj.com.
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Wow! I didn't know that back in 1995, the peak power price out of the Elwood plant, run by those very ethical staid REGULATED California utilities was TWICE the price those terrible IPPs charged during the latest power crisis.
I wonder whether Gray Davis knows that. We know that the LA Times and a few others certainly don't.
Kyros |
