Tag Archives: electricity prices

Why are real-time electricity retail rates no longer important in California?

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The California Public Utilities Commission (CPUC) has been looking at whether and how to apply real-time electricity prices in several utility rate applications. “Real time pricing” involves directly linking the bulk wholesale market price from an exchange such as the California Independent System Operator (CAISO) to the hourly retail price paid by customers. Other charges such as for distribution and public purpose programs are added to this cost to reach the full retail rate. In Texas, many retail customers have their rates tied directly or indirectly to the ERCOT system market that operates in a manner similar to CAISO’s. A number of economists have been pushing for this change as a key solution to managing California’s reliability issues. Unfortunately, the moment may have passed where this can have a meaningful impact.

In California, the bulk power market costs are less than 20% of the total residential rate. Even if we throw in the average capacity prices, it only reaches 25%. In addition, California has a few needle peaks a year compared to the much flatter, longer, more frequent near peak loads in the East due to the differences in humidity. The CAISO market can go years without real price deviations that are consequential on bills. For example, PG&E’s system average rate is almost 24 cents per kilowatt-hour (and residential is even higher). Yet, the average price in the CAISO market has remained at 3 to 4 cents per kilowatt-hour since 2001, and the cost of capacity has actually fallen to about 2 cents. Even a sustained period of high prices such as occurred last August will increase the average price by less than a penny–that’s less than 5% of the total rate. The story in 2005 was different, when this concept was first offered with an average rate of 13 cents per kilowatt-hour (and that was after the 4 cent adder from the energy crisis). In other words, the “variable” component just isn’t important enough to make a real difference.

Ahmad Faruqui who has been a long time advocate for dynamic retail pricing wrote in a LinkedIn comment:

“Airlines, hotels, car rentals, movie theaters, sporting events — all use time-varying rates. Even the simple parking meter has a TOU rate embedded in it.”

It’s true that these prices vary with time, and electricity prices are headed that way if not there already. Yet these industries don’t have prices that change instantly with changes in demand and resource availability–the prices are often set months ahead based on expectations of supply and demand, much as traditional electricity TOU rates are set already. Additionally, in all of these industries , the price variations are substantially less than 100%. But for electricity, when the dynamic price changes are important, they can be up to 1,000%. I doubt any of these industries would use pricing variations that large for practical reasons.

Rather than pointing out that this tool is available and some types of these being used elsewhere, we should be asking why the tool isn’t being used? What’s so different about electricity and are we making the right comparisons?

Instead, we might look at a different package to incorporate customer resources and load dynamism based on what has worked so far.

  • First is to have TOU pricing with predictable patterns. California largely already has this in place, and many customer groups have shown how they respond to this signal. In the Statewide Pilot on critical peak period price, the bulk of the load shifting occurred due to the implementation of a base TOU rate, and the CPP effect was relatively smaller.
  • Second, to enable more distributed energy resources (DER) is to have fixed price contracts akin to generation PPAs. Everyone understands the terms of the contracts then instead of the implicit arrangement of net energy metering (NEM) that is very unsatisfactory for everyone now. It also means that we have to get away from the mistaken belief that short-run prices or marginal costs represent “market value” for electricity assets.
  • Third for managing load we should have robust demand management/response programs that target the truly manageable loads, and we should compensate customers based on the full avoided costs created.

The two problems to be addressed head on by nuclear power advocates

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Nuclear power advocates bring up the technology as a supposedly necessary part of a zero-GHG portfolio to address climate change. They insist that the “next generation” technology will be a winner if it is allowed to be developed.

Nevertheless, nuclear has two significant problems beyond whatever is in the next generation technology:

  1. Construction cost overruns are the single biggest liability that has been killing the technology. While most large engineering projects have contingencies for 25-30% overruns, almost all nuclear plants have overruns that are multiples of the original cost estimates. This has been driving the most experienced engineering/construction firms into bankruptcies. Until that problem is resolved, all energy providers should be very leery of making commitments to a technology that takes at least 7 years to build.
  2. We still haven’t addressed waste disposal and storage over the course of decades, much less millennia. No other energy technology presents such a degree of catastrophic failure from a single source. Again, this liability needs to be addressed head on and not ignored or dismissed if the technology is to be pursued.

Why the CPUC’s RA Market Report gives the wrong reliability price metric

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In its annual report on resource adequacy (RA) transactions, the CPUC reports the wrong result for the market price to be used for valuing capacity from the RA market data. The Commission’s decision issued in the PCIA rulemaking on establishing the CCA’s “exit fee” uses this value in error. In the CAISO energy and ancillary services markets, the market clearing price used to set the value of the energy portfolio is determined by the highest accepted bid in a single hour, and then averaged across all hours. In contrast, the average reported RA price in The 2017 Resource Adequacy Report incorrectly reports the average of all transactions. This would be equivalent to the CAISO reporting the average of all accepted bids, including those at zero or even negative, as the market clearing price.

The appropriate RA price metric is the highest RA transaction price for each month. This price represents the market equilibrium point at which a consumer is willing to pay the highest price given how low a price a supplier is willing to provide that quantity of the resource. (The other transactions are called “inframarginal” and such transactions are common in many markets.) In a full auction market, all transactions would clear at this single price, which is why the CAISO reports a single market clearing price for all transactions in a single hour. That should also be the case for the RA market price, except the time unit is a month.

Due to a lack of an auction for the moment, it is possible to manipulate the highest apparent price through a bilateral transaction. Instead, the Commission could choose a price near the highest point, but with sufficient market depth to mitigate potential manipulation. Using the 90th percentile transaction is one metric commonly used based on a quick survey of market price reports.