From the California newspapers, yesterday and today … the LA Times describes the conditions leading to the first Stage 2 alert (when reserves go below 5%); the San Francisco Chronicle attributes the stress, at least in part, to a breakdown in conservation.
Today’s LA Times story also points out the lower conservation than last June, and the importance of the 3,000 megawatts of additional (peaking) generation capacity in the state since May 2001. Not only does additional capacity stave off alerts and blackouts, it helps change the relationship between supply and demand in ways that keep prices lower and less volatile. The story in today’s San Francisco Chronicle actually does a nice job of pointing out that in these heat waves, the price cap in the California market can become binding, and has encouraged power providers outside of the state not to offer power in the state, because they can’t cover their costs at the capped price. Another simple, yet good, economic lesson: the people who benefit from price caps are the ones who can actually find a supply and purchase; the ones who are harmed by price caps are both the suppliers who have higher costs but would have supplied profitably at a market-clearing price, and the buyers who get foreclosed from buying because they can’t find suppliers who can afford to produce at the price cap. Do California politicians who favor price caps realize that this policy harms buyers, which translates into harms for some of their voters?
Today’s San Jose Mercury News story hits the same notes, including the unexpected outage of a plant in Southern California; the outage was due to a fan breaking, which is easier to distinguish from strategic witholding than the types of overuse outages that lots of peaking plants experienced in 2000 and 2001 (the distinction between engineering tolerance outages from overuse and “economic witholding” continues to be a major issue in the California electricity crisis post-mortem). Interestingly, the headline refers to the state’s request to reduce electricity use, but nowhere in the article is there a single reference to the fact that big users used to have good price signal incentives to cut peak use, when they had direct access contracts with generators and had more ability to use metering and something approximating real-time pricing. But last fall the California PUC abolished direct access, unabashedly stating that the state needed large users to buy their power from the state’s new power authority, because they had to earn revenue to pay for those high-price contracts signed in spring 2001. A few large users are on interruptible contracts, but that’s a drop in the bucket. So now the only ways to get large users to cut back during peaks is to issue public pleas for conservation. Gee, you know, I think price signals to the large users would do the job a heck of a lot better, with less hand-wringing.