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  • Corey Lee Wilson

The California Energy Problem is Structural, Not Political

The deregulation experiment in California that created energy markets isn’t working for reliability or for customers. Unless it is addressed, things will only get worse.

California recently faced a historic heat wave. People from San Diego to the Bay Area tried to stay cool, while the state faced record demands for electricity.

The California Independent System Operator, or CAISO, the grid operator in the state, heroically avoided blackouts when customers responded to an amber alert style warning to turn their thermostats to 78 degrees and avoid using major appliances. All of this came on the heels of Governor Gavin Newsom, D, asking customers to stop charging their electric cars as electricity demand was too high.

As the state continues to have hot summers, more alerts will come, and with them, the continued risk of rolling blackouts. Which begs the question:

Why does California face blackout risks every year, and what can be done to fix it?

Many on the Left will suggest the energy shortages are the function of climate change. It is simply hotter and dryer than it has ever been. Those on the Right will say California is struggling to meet electricity demands because of an overdependence on renewable energy like wind and solar power. This is particularly true in the 4 p.m. to 9 p.m. peak window when the sun doesn’t always shine and the wind doesn’t always blow.

While both of those explanations have some merit, the Golden State’s energy problem is more structural than these explanations allow. Rather, the issue stems from California’s decision in the 1990s to deregulate its energy system.

California was the first state in the country to separate the management of power supply — like nuclear reactors and natural gas generators — from the distribution of power (the poles and lines that deliver power to customers). In so doing, CAISO was created and with it, a bureaucracy with the stated goal of managing the transmission system, which is supported by a competitive energy market.

The competitive energy market in California uses a single clearing price. In layman’s terms, this means the most expensive electricity sold on the California energy market at a particular hour determines the price customers will pay for all power at that time, and all generators make that amount of money regardless of attributes of the energy produced. Electricity bills, as overseen by the California Public Utilities Commission, include this price, whatever it is.

The competitive energy market functions on principles of supply and demand. When demand increases, prices increase. So, when demand for power grows, like during a heat wave, this inevitably creates a massive spike in the cost of electricity in the California energy market.

This spike in costs means Californians pay that higher — at times exorbitant — rate for electricity.

This is not a glitch, this is how the deregulated system was designed to work. Proponents of this system believed that it would lower costs for customers, but they failed to consider that demand can exceed supply or that extreme weather events could make this a common occurrence.

Understand, this spike in electric prices is supposed to create a financial incentive for electricity generators in California to turn on power systems that haven’t been running, or to entice power plant owners in other states to sell power to California. This is a deeply flawed solution for several reasons.

The biggest problem, however, is that California power producers haven’t invested — and won’t invest — in building excess power capacity only needed a few days a year. It simply does not make economic sense for them to do so. This means that California must depend on generation from other states during these critical periods of high demand. But, when a heat wave hits the entire West Coast, neighboring states don’t have enough extra power available to sell into California. They need to serve their own citizens and customers.

This electricity shortage is in part why the California state legislature passed a bill extending the life of the Diablo Canyon Nuclear Generating Station, which was scheduled to close in 2025, to now close in 2030. This will help. But this two-unit nuclear station is simply not enough to meet the state’s energy needs as fewer natural gas units are available, and hydroelectric power facilities produce less and less electricity in a time of severe drought.

What does California need to do?

In short, build more power plants. This includes the continued development of renewable resources supported by more transmission infrastructure to bring that power to population centers. But it also means small modular nuclear reactors, more energy storage, and even more natural gas plants.

California also can lead the nation by reforming its energy market. The dependence on a single clearing price and a wholesale energy market designed to track the price of natural gas is outdated and harms the customers that the proponents of this approach said it was trying to help. In a period of high demand, it may not be fair to customers to pay the same price for wind as natural gas. Natural gas and nuclear power cost more to produce, so generators should be fairly compensated. Paying more for resources like natural gas and nuclear, which are available 24/7, will bring more power online that can address power shortages that cannot be adequately resolved with additional renewables. An alternative to consider might be having a blended price that more closely pays resources commensurate with their costs and the value they provide the grid at a moment in time.

This dynamic can be paired — once California has adequate power and better battery storage capacity for renewables — with a market mechanism that prioritizes reducing carbon.

Also, CAISO should look for opportunities to create additional revenue streams for generators that align with the state’s priorities. Cities could build reserve generation and when prices spike due to shortages, those communities could engage that reserve power and supply their customers. This would also take strain off the state’s power grid.

Clean energy continues to be on the rise, but with it comes massive challenges for power suppliers that are working to make the switch. Learn how market data and analytics are key to a successful transition.

California is also enjoying a budget surplus.

Why not spend some of that money on New Deal style infrastructure investments by building dams, power plants, and the electric infrastructure that will make California resilient, and a benefactor of the clean energy transition?

It is clear: the deregulation experiment in California that created energy markets is not working — for reliability or for customers — and, unless it is addressed, things will only get worse as climate change means hotter summers and colder winters. These strains on the energy grid will also hamper the state’s goal of transitioning to a fully electric vehicle fleet. Now is the time to act, and California’s leaders need to be innovative and implement some radically different policies to reduce the stress on the state’s power grid.

This Sept. 29, 2022 article is by Brad Viator at Utility Dive and graph courtesy of Ars Technica.

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