Streetwise Professor
Twenty years ago, California experienced its Electricity Crisis. Or, given current events (which will be the subject of what follows), may be known as the First Electricity Crisis. The problem in 2000-2001 was, in the main, a problem of insufficient generation, caused by a variety of factors. The ramifications of the supply shortage and resulting high prices for California utilities, ratepayers, and state finances were greatly exacerbated by a dysfunctional market design implemented only a few years before, in the mid-1990s. (When I gave talks about the subject, I used to quip: “California wanted to deregulate its power markets in the worst way. And it succeeded!”)
The lore of the crisis is that it was caused by Enron and other Houston bandits and their manipulative schemes. These schemes were not the cause of the crisis: they were the effect, and the effect of the dysfunctional market design, which created massive arbitrage opportunities which will always be exploited.
California is experiencing another crisis. It cannot yet rival the first, which went on week after week, whereas the current one has lasted about a week. But for the first time since Crisis I, the state is experiencing rolling blackouts due to a shortage in generating capacity.
The proximate cause of the problem is a massive heatwave which is causing high demand. A contributing proximate cause is low hydroelectric supply driven by a lower than average snowpack. But the underlying cause–and the cause that should get the attention of most Americans, including those who experience schadenfreude at the Insufferable State’s misery–is the Green Mania that has taken root in California which has made it impossible for the state to respond to demand spikes in the way power systems have done around the world for nigh onto a century.
In particular, California has adopted policies intended to increase substantially the share of power generated by renewables. This has indeed resulted in massive investments in renewables, especially solar power, which alone now accounts for around 12,338 MW.
But this capacity number is deceiving, because unlike a nuclear or coal or combined cycle natural gas plant, this is not available 24/7. It’s available, wouldn’t you know, when the sun shines. Thus, during the mid-morning to late afternoon hours, this capacity is heavily utilized, but during the evening, night, and early morning contributes nothing to generation. At those times, California draws upon the old reliables.
But that creates two problems, a short term one (which California is experiencing now) and a long term one (which contributed to the current situation and will make recurrences a near certainty).
The short term problem is that during hot weather, demand does not set with the sun. Indeed, as this chart from the California Independent System Operator shows, today (as on prior days) demand has continued to grow while solar generation ebbs. This figure illustrates “net demand” which is total demand net of renewables generation. Notice the large and steady increase in net demand during the late afternoon hours. This reflects a rise in consumption and not matched by a rise in solar generation before 1400, and a fall thereafter.
Go figure, right? Who knew that the hottest time of day wasn’t when the sun is at its height, or that people tend to come home (and crank up the AC) when the sun is going down?
Here’s the plot of renewables generation:
Note the plateau from around 1000-1400, and the decline from 1400 onwards–during which time load increased by about 10,000 MW.
So gas, nuclear, and (heaven forfend!) coal have to fill the growing gap between load and non-dispatchable renewable generation. They have to supply the net demand. Which brings us to the longer term problem.
The growth in solar generation means that conventional and nuclear plants aren’t generating much power, and prices are low, during the hours when solar generation is large. Thus, these plants earn relatively little revenue (and may even operate at negative margins) during these hours. This deterioration in the economics of operating conventional plants, combined with regulatory and political disdain for nuclear and coal has led to the exit of substantial capacity in California. A large nuke plant shut down in 2015, all 10 coal plants in the state have shut down (though three have converted to the environmental disaster that is biomass), as have many gas plants. In 2018 alone, there was a net loss of around 1500 MW of gas capacity, and from 2013 the net loss is about 5000 MW–over 10 percent of the 2013 level. (NB: the shortfall in capacity the last few days has been around 5000MW. Just sayin’.)
And note–demand has been rising over this period.
Notionally, the loss in nuclear and conventional capacity has been roughly matched by the increase in solar capacity. But again–that solar capacity is not available under conditions like the state has experienced over recent days, with hot weather contributing to high and rising demand in the late afternoon when solar output is declining. That is, these forms of capacity are very imperfect substitutes. They are most imperfect in the afternoons on very hot days. Like the last week.
In a nutshell, at the same time it massively incentivized investment in renewables, California has not incentivized the necessary investment in (or retention of capacity in) conventional generation. That mismatch in incentives, and the behavior that results from those incentives, means that from time to time California will have inadequate generation. That is, California has not incentivized the proper mix of generation.
So how do you incentivize the retention of/investment in conventional capacity that will remain idle or highly underutilized most of the time, in order to accommodate the desire to increase renewables generation? There are basically two ways.
The first way is to have really, really high prices during times like this. Generators will make little money (or lose money) most of the time, and pay for themselves by making YUGE amounts of money during a few days or hours. This is the theory behind “energy only” markets (like ERCOT).
The problem is that it is not credible for regulators to commit to allowing stratospheric prices occur. There will be screams of price gouging, monopoly, etc., and massive political pressures to claw back the high revenues. This happened after Crisis I, as more than a decade of litigation, and the payment of billions by generators, shows. Once burned, twice shy: generators will be leery indeed about relying on government promises. (A David Allan Coe song comes to mind, but I’ll leave that to your imagination, memory, or Googling skills.)
Relatedly, who pays the high prices? Having retail customers see the actual price creates some operational problems, but the main problem is again political. So the high prices have to be recovered through regulated retail pricing mechanisms that give rise to the credible commitment problem: how can generators be sure that regulators will actually permit them to reap the high prices during tight times that are necessary to make it worthwhile to maintain the capacity?
That is, for a variety of reasons energy only pricing faces a time consistency problem, and as a result there will be underinvestment in generation, especially when renewables are heavily supported/subsidized, thereby reducing the number of hours that generators can pay for themselves.
The other way is the Klassic Kludge: Kapacity markets. Regulators attempt to forecast into the future how much capacity will be needed, and mandate investment in that amount of capacity. Those with load serving obligations must pay to buy the capacity, usually through an auction mechanism. The idea being that the market clearing price in this market will incentivize investment in the capacity level mandated by the regulators.
A Kalifornia Kapacity Kludge was proposed a few years back, but the Federal Energy Regulatory Commission shot it down.
All meaning that California leapt headlong into the Brave New Green World without the market mechanisms (either relatively pure, like an energy only market with unfettered prices, or a kludge like a capacity market) necessary to bridge the gap between demand and renewables supply.
So what happens? This happens:
California’s political dysfunction makes it a near certainty that it will not implement reasonable market solutions that will provide the right incentives, even conditional on its support for renewables. Indeed, it is almost certain that it will do something that will make things worse.
Milton Friedman once said that inflation is always and everywhere a monetary phenomenon. Given that the major power crises in recent years–in California, in Australia, and a near miss in Texas last year–have involved renewables in one way or another, I have an analog to Friedman’s statement: in the future, always and everywhere power crises will be a renewables phenomenon.
And this is why Americans should pay heed. Whatever ventriloquist has his hand up the back of Biden’s shirt has him promising a massive transition towards renewable electricity generation, beyond the already swollen levels (swollen by years and billions of subsidies). A vision, which realized, would result in California’ s problems being all of our problem.
So look at California like Scrooge did the Ghost of Christmas Future. And be afraid. Be very afraid.
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