Posted 12:20 PM by Robert

That Nasty California Electricity Price Spike

A considerable number of people continue to prejudge and misjudge the causes of the California electricity price spike. Fraud, market power and manipulation and other nefarious conspiratorial and near-conspiratorial causes are routinely assigned or suggested or insinuated by some politicians and media - especially the mainstream liberal media.

However, the most recent assessments still seem to point to quite different causes, as noted by a recent highly cogent updating paper by Susan Pope, which can be found on the web site of the Harvard Electricity Policy Group.

From Dr. Pope's paper:

December 9, 2002

When prices for a product like electricity spike to previously unknown levels, people want to know why. However, in the rush to find a reason it is easy to make mistakes and jump to conclusions before all of the facts are known. A balanced understanding of the causes of high electricity prices in California and the West1 starting in the summer of 2000, and continuing until the beginning of the summer of 2001 requires a systematic look at the facts. This requires time, and the information that is now available contradicts many early conclusions regarding the causes of the high prices.

When electricity prices rose in California and the West during the period from May 2000 to June 2001, some analysts blamed the rise on the exercise of market power. For example, Robert McCullough concluded in an article that appeared in Public Utilities Fortnightly that the high prices in the summer of 2000 could not be explained by changes in the fundamental factors that affect electricity prices, such as load levels, the availability of hydroelectric generation, fuel prices, or the demand/supply balance. McCullough argued that certain non-utility generating plants in California were not producing their full output during the crisis, seemingly providing support for his contention that it was the exercise of market power, and not market fundamentals, that was largely responsible for the high prices. A more complete examination of the data challenges these conclusions, providing a picture more like that of a perfect storm, in which a number of unfavorable demand/supply events improbably coincided, leading to increases in electricity prices that are understandable in hindsight.

- Electricity prices were high in the West during 2000 and 2001 at least in part because of a shift in the demand/supply balance, leading to a supply shortage more extreme than in any year in recent history, including the drought year of 1994.

- In all but two months between January 2000 and June 2001 electricity consumption was higher than in the same month of any prior year (1993-1999).

- Decreased hydroelectric generation was a significant factor in the supply shortage. The data clearly show that this decline began in June 2000, when hydro generation was almost 20 percent lower than in prior years (1995-1999).

- There was a large decline in the output of nuclear plants, particularly in the period from January 2001 through May 2001 when the 1,080 MW San Onofre Nuclear Generating Station Unit 3 was out of service.

- The overall supply shortage was dramatic and sustained. From May 2000 to June 2001, the electricity demand that had to be met month after month by generating resources other than hydro, coal and nuclear plants was typically 3,000 GWh more than in prior years (1993-1999) and rose to a high of 8,784 GWh (60 percent) in May 2001. This sustained shortfall in hydro, coal and nuclear electricity supply was predominantly met by running existing gas-fired generators at much higher levels than in the past. In May 2001 alone, the 8,784 GWh shortfall in hydro, nuclear and coal output amounted to a need to operate the equivalent of 48 more 250 MW gas-fired units (at full capacity) than would have been required to meet electricity demand in previous years.

- The data confirm that the electricity output and hours on-line of gas and oil-fired generators, including those owned by non-utility generators, were significantly higher from May 2000 to June 2001 than they had been in any previous year (1994-1999). From January 2001 through May 2001, for example, the output of non-utility generating units was 57 percent higher than during January-May of the drought year of 1994.

- As the supply shortage led to dramatically increased demand for gas-fired generation, electricity prices rose through a combination of dramatically higher gas prices, higher prices for NOx emission allowances (required for some gasfired generation) and the inevitable use of less efficient gas-fired generating plants.

...

Dr. Pope is with the firm LECG, LLC located in Cambridge, MA, where she is a member of a team of consultants that specializes in the economic and public policy analysis of electricity market design. Dr. Pope has a Ph.D. in Business Economics from Harvard University.