MorganEnergy

EU Energy Policy has a long post summarizing the results of the CESSA research program looking into security of supply. Most of it can be boiled down to “markets are good, and bigger markets are better than small ones.” How that will go down in the wake of the financial market meltdown is unclear. In particular the report warns governments against removing price signals by capping prices so as to avoid upsetting consumers by exposing them to short term price spikes. There are, of course, other ways to protect consumers from price spikes, but that would involve *gasp* derivatives!

A casual glance at this report from Platts could make you very worried about the state of the California electricity market. Hitting the price cap 465 times in June? Why, where are 720 hours in the whole month!

Fortunately that’s not quite what they mean. To start with these are prices from the Real Time market. They are almost certainly 5 minute prices, not hourly prices. The hourly price is an average of the 5 minute prices. In addition a quick check of CalISO‘s web site shows that what they actually reported was 465 prices over $250/MWh, not 465 prices hitting the $399.99/MWh price cap. According to the OASIS data, hourly real time prices in both the NP15 and SP15 zones exceeded $250/MWh only 30 times in June.

Then again, that’s once a day, which is quite a lot. It is probably about time for some politician to complain that the market is failing because it is not encouraging new build.

In response to continued price spikes in its balancing market, ERCOT will be adjusting the way in which congestion rules are applied. An emergency meeting of the ERCOT board held on Friday voted to accept recommendations made by the Public Utility Commission’s independent market monitor, Dan Jones, that it hopes will reduce the severity of price spikes in the system. Although prices in the balancing market are typically in the region of $100/MWh, recent spikes have been as high as $4,500/MWh.

The Houston Chronicle cites congestion on a few key transmission lines and some unexpected outages as causes of the spikes. However, as the market prices have been well in excess of the market’s bid cap of $2,250/MWh it appears likely that some sort of market rule is being applied to create these high prices. Changing the algorithm will presumably reduce the incidence of spikes. The Chronicle quotes Jones as saying, “We were using a tool to fix certain problems that was not particularly effective.”

Meanwhile the high market prices are continuing to pose problems for retail companies. As the Chronicle article explains, ERCOT requires retailers to post collateral equal to three times the value of their wholesale power purchases. The price spikes have caused three small supply companies to default on this requirement and go out of business, while a fourth has applied for bankruptcy protection.

The regulatory authorities in Texas continue to be worried about high power prices. Yesterday the Public Utilities Commission issued a press release announcing a conservation alert system that would help consumers know when it was necessary to turn down the air conditioning and take other power-saving measures. This is in response to “potential record high electricity demand for June.” Although the PUC expects supplies to be adequate to avoid blackouts, conservation by consumers could help prevent massive price spikes like those experienced in recent weeks.

As to the causes of the problem, the Dallas Morning News pins the blame on “hot weather and power line congestion.” A further clue can perhaps be gleaned from The Independent which reports:

Thousands of wind turbines in the US are sitting idle or failing to meet their full generating capacity because of a shortage of power lines able to transmit their electricity to the rest of the grid.

While building new power lines may well be a viable solution to the problem, they are not going to get built in time to save Texans from an uncomfortably expensive summer.

Prices in the Texas electricity market have been causing concern of late. According to this article in the Wall Street Journal, prices in the spot market exceeded $2,000/MWh at times on seven out of the past ten days, and on May 23rd briefly went above $4,000/MWh. Most of the supply in Texas is under long term contracts, so there should be no danger of a California-like collapse. However, the going is still tough for some retailers. Texas has fairly low entry requirements to the retail market, and already two small supply companies, National Power Co. Inc. and Pre-Buy Electric LLC, have defaulted on some contracts leading to 15,000 customers being transferred to other retailers under “supplier of last resort” agreements. Other supply companies are thought to be vulnerable. The situation is sufficiently serious for the Texas Public Utility Commission to hold an emergency meeting yesterday to find out what could be done to help vulnerable customers.

As yet no explanation has been provided for the price spikes. As the WSJ article notes, demand is nowhere near what is expected at the summer peak. Prices of this level could therefore be expected to continue, and even increase, for months to come.