MeanGene Rants 6
March 2002
Many people
have wondered just what in the hell happened in California in the last year in
the energy market, and why? A look at the "rules of the game" is very
interesting.
Cool
Stuff
·
Recharge
your laptop with your feet. http://www.theregister.co.uk/content/54/24090.html
·
The
Greenest Car: http://www.cnn.com/2002/TECH/science/02/05/green.vehicles/index.html
·
How
Hybrids Work http://www.howstuffworks.com/hybrid-car.htm
·
Still
the coolest - the solar chimney http://www.meangene.com/energy/solarChimney.html
People
are very fuzzy on what happened in California during its electricity crisis,
and why. Most people know four "facts".
·
California's
electricity market was deregulated.
·
California
didn't have enough electrical generation capacity to meet the demand.
·
California
stopped building power plants in the 1990's.
·
Prices
went up because the energy companies were greedy.
Surprisingly,
none of the above is true. What is true?
(quoted
here from Amory Lovins, CEO of the Rocky Mountain Institute http://www.rmi.org/images/other/E-CwealthClub.pdf)
California's
electricity consumption did not soar, in Silicon Valley or anywhere else, due
to the Internet or anything else. It simply didn't happen.
California
did not stop building power plants in the 1990s. Reserves did tighten, but
stayed adequate.
Probably
California has not even been short of generating capacity during any of its
power emergencies. The same system that suffered rolling blackouts in January
under a 29GW load, produced 53GW the summer before.
The
supply expansions now under way may well already be in overshoot (building more
than is needed) even before the savings also underway have really ripened.
So what
went wrong? The politicians who created this market and defined its rules did a
horrible job. The article listed above is a great read. I recommend it highly.
Here is the basic summary.
In
short, the rules of the game suffered in a few key ways.
The
market was half-deregulated. The price to purchase wholesale electricity was
determined on a free spot-market. The price to sell electricity to consumers
and industry was capped.
The
market to purchase was restricted so that no long-term contracts could be made.
(Interestingly enough, when CA Gov. Grey Davis took over to fix things the
first thing he did was to sign a 10 year contract at prices which, a year
later, are far above market prices.)
The
market did not have enough producers. The few big producers who were there
could individually affect the price in the market by deciding to not produce at
full capacity. (Which is exactly what they did.)
Simultaneous
deregulation of the gas markets were done with rules that designed away any
incentive for anyone to store natural gas for winter use in Southern
California. Prior to the new rules of the game, gas had been stored up every
year for winter use.
One year
ago we had a Perfect Storm of factors colliding together to make electricity
really expensive. But the storm wasn't caused by freak weather, physical
accidents or unlikely coincidences. It was caused by a couple markets created
with very bad rules or complete ignorance of the fact that companies will (and
should) behave like companies and do the best they can within the rules of the
game.
A minor
part of this sad story that is not well-known at all is the tale of Green
Mountain Energy.
The one
part of the promise of California's deregulation that appeared to be working
was the growing market for electricity produced from alternate sources. Green
Mountain Energy was one such producer. Their rates were a little bit higher
than average but they attracted a lot of customers with the message that their
electricity was cleaner. Their rates were also much more stable since the
"God Utility" never changes his price. Green Mountain expanded their
production in the short time they were in business in California by building
new solar and wind plants.
Unfortunately
for them, the rules of the game said that the price paid for electrical
generation was tied to the market price of natural gas, not to a market price
for electricity. This should have been a boon for Green Mountain as the price
of natural gas went up substantially during the crisis. But the rules said that
Green Mountain got paid not by consumers but by PG&E who transmitted the
power. Well, PG&E simply refused to pay anything to Green Mountain. Green
Mountain shut down and left the state. Today Californians are again forced to
buy electricity from PG&E.
California
politicians will vote any day now to end deregulation, which is ironic, because
they never voted to start it in the first place.
Finally Mean Gene must point out that one of our faithful readers
is gainfully employed in studying the financial transactions and the game
theory of the California electricity market, and we hope he will offer his
insights.
Next
time - what should the rules of the game be? It's not so easy.