1March 24, 2000 California PX Demand Responsiveness Workshop

Christensen Associates

Lessons from CaliforniaThe Role of Demand Response

Energy Markets in TurmoilInstitute for Regulatory Policy Studies

May 17, 2001

Steven BraithwaitChristensen Associates

Institute for Regulatory Policy Studies Workshop 2May 17, 2001

Christensen Associates

Christensen Associates

• Economic and engineering consulting for electric power industry

• 20 years of experience in designing and evaluating pricing strategies – – TOU – Real-time pricing (NiMo, Georgia Power, KCP&L)– Market-based interruptible load programs

• Unbundling; pricing transmission and ancillary services

Institute for Regulatory Policy Studies Workshop 3May 17, 2001

Christensen Associates

The California Energy Crisis

• High wholesale prices

• Rolling blackouts

• Financial/debt crisis – bankruptcy

• State take-over of power purchases

• Charges of market manipulation

Institute for Regulatory Policy Studies Workshop 4May 17, 2001

Christensen Associates

California Background -- Supply

• No new capacity in ’90s

• Utilities sold ½ of generation (fossil) to Duke, Dynegy, AES, Mirant, Reliant, etc.

• No long-term power contracts

• California imports 20 – 25% of power requirements (NW hydro; SW fossil)

• Tight capacity margin

Institute for Regulatory Policy Studies Workshop 5May 17, 2001

Christensen Associates

California Background -- Demand

• Modest growth in early 90s

• Rapid growth since 1995 in Calif. and in the Southwest & Northwest

• Rate freeze, with 10% discount until 2002 (or when “stranded costs” recovered)

• SDG&E rate freeze lifted in 1999

Institute for Regulatory Policy Studies Workshop 6May 17, 2001

Christensen Associates

Background – Wholesale Markets

• All power bought and sold in spot market

• PX day-ahead energy; ISO real-time energy, reserves & ancillary services

• ISO price cap ($750/MWh 500 250)

• 30% + of energy left unscheduled for ISO real-time market on high-price days

Institute for Regulatory Policy Studies Workshop 7May 17, 2001

Christensen Associates

PX Prices and ISO Load(May – September 1999)

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15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000MW

$/M

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Institute for Regulatory Policy Studies Workshop 8May 17, 2001

Christensen Associates

PX Prices and Total ISO Load (May 15 - August 31, 2000)

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20000 25000 30000 35000 40000 45000MW

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Institute for Regulatory Policy Studies Workshop 9May 17, 2001

Christensen Associates

Utilities “Buy High” and “Sell Low”(May – August, 2000)

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Average Revenue Wholesale Costs (expected)

Wholesale Costs(actual)

$/M

Wh $65

$50

$126

Institute for Regulatory Policy Studies Workshop 10May 17, 2001

Christensen Associates

Financial Impacts of California CrisisSummer 2000

• Wholesale costs – $13.5 billion (May – Sept.)

• Expected costs under rate freeze -- $5 billion

• Utility debt -- $8 billion (now $13 billion+)

• Customer cost of outages(e.g., $400 million for 4 days of rolling blackouts in early 2001)

Institute for Regulatory Policy Studies Workshop 11May 17, 2001

Christensen Associates

What Went Wrong in Summer 2000?

• “Perfect storm” hit an already tight market

– Unexpected outages– Low imports (low hydro, high demand outside)– High natural gas prices

• Market design problems

– No hedging (financial effect)– Price caps (affected multiple markets)– Strategic bidding/withholding?

• No demand response (except San Diego)

Institute for Regulatory Policy Studies Workshop 12May 17, 2001

Christensen Associates

What Continues to go Wrong?

• Financial/debt crisis continues

– Utility debt from 2000 still exists– Generators not paid; some independents shutting down

• Continuing high natural gas prices

• Political/regulatory gridlock -- retail energy prices still below wholesale costs

• Insufficient capacity for summer

• No demand response (new buy-back and RTP programs planned for the summer)

Institute for Regulatory Policy Studies Workshop 13May 17, 2001

Christensen Associates

Disconnected Markets – Fixed price no demand response

$/MWh

GWh

Retail Price

Pnormal

Qnormal

Lnormal

Pspike

Qspike

Lhot

WP

Institute for Regulatory Policy Studies Workshop 14May 17, 2001

Christensen Associates

The Markets Connected Demand Response Yields Lower Wholesale Prices

$/MWh

GWh

Qnormal

Retail Price

Pnormal

Qspike

Lnormal

Dnormal

E

Pspike

Lhot

WP

B

Qhot

PhotE´

Dhot

A

Institute for Regulatory Policy Studies Workshop 15May 17, 2001

Christensen Associates

Benefits of Demand Response Programs

• Prices signal customers the cost of power

• Customer demand response helps balance supply and demand

• Reduces wholesale prices, by factor of 10+(e.g., load by 2.5% WP by 25%)

• Reduces market power of suppliers

Institute for Regulatory Policy Studies Workshop 16May 17, 2001

Christensen Associates

Types of Demand Response Programs

• Demand-side bidding

• “Buy-back,” or pay-for-performance interruptible

– Suppliers buy load relative to baseline at price tied to market price

• Real-time (hourly) pricing

– Full-time– Whenever prices exceed specified level

Institute for Regulatory Policy Studies Workshop 17May 17, 2001

Christensen Associates

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Load on highest price day

Highest HA prices

Example of Demand Response – Georgia Power RTP(Demand response = 250 MW; 60% of reference load)

Institute for Regulatory Policy Studies Workshop 18May 17, 2001

Christensen Associates

Estimated Effect of Demand Response(Braithwait-Faruqui; March 15 PUF)

If RTP offered to California large C&I customers:

• Load reduction in high-price hour – 2.4%

• Reduction in wholesale price – 24%

• Drop in summer wholesale costs -- $700 M

Institute for Regulatory Policy Studies Workshop 19May 17, 2001

Christensen Associates

For Additional Information:

• Customer Response to Market Prices – How Much Can You Expect When You Need it Most?, Steven Braithwait and Michael O’Sheasy, EPRI Pricing Conference, July 2000.

• Residential TOU Response in the Presence of Interactive Communication Equipment, Steven Braithwait, in Pricing in Competitive Electricity Markets, Ahmad Faruqui, Ed.

• Demand Response – The Ignored Solution to California’s Energy Crisis, Steven Braithwait and Ahmad Faruqui, in Public Utilities Fortnightly, March 15, 2001.

• Contact:Steve Braithwait (steve@lrca.com)Christensen Associates608-231-2266