Review of CAISO Wholesale Electricity Market Trends

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Review of CAISO Wholesale Electricity Market
Trends
Anjali Sheffrin, PhD.

• APEX Sydney Conference
• California Electricity Wholesale Market Trends
• October 13, 2008

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California operates within the Western Electric
Coordinating Council

• Californias current peak load is about 60,000
  MW, with CAISO peak of 50,270 MW
• Western Electric Coordinating Council is an
  interconnected region and has a peak of about
  160,000 MW

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The California market has been stable and
competitive for 6 years.

• Market prices within competitive ranges for the
  past 6 years.
• Significant market improvements include
• Significant forward energy contracting
• Local and regional requirements as part of annual
  resource adequacy
• New generation investment keeping up with demand
• Increased generation availability
• Current market design deficiencies
• No centralized day-ahead energy market no price
  transparency
• No nodal pricing real-time congestion cost
  socialized
• No meaningful participation by final demand
• Locational Marginal Price market design will
  address the first two deficiencies and provide a
  better market framework for demand participation.

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Forward energy contracts and a resource adequacy
framework keys to maintaining competitive
outcomes.

• Forward Energy Contracting
• California Energy Crisis of 2000/2001 primarily
  due to lack of hedging spot market exposure.
• Since the crisis, fixed-priced forward energy
  contracting by load serving entities has reduced
  their spot market exposure.
• Annual Resource Adequacy (RA) Framework
• Implemented by the California Public Utilities
  Commission in June 2006.
• Provides formal mechanism for ensuring sufficient
  capacity is available (year ahead on locational
  basis, month ahead on system basis) to meet
  monthly peaks.
• California Public Utilities Commission (CPUC)
  evaluating alternatives for a long-term RA
  framework.

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Wholesale markets were stable and competitive.
Average Monthly Spot Markups and 12-Month
Competitiveness Index, 2003-07

• Average monthly price-to-cost markup for spot
  bilateral purchases has stayed below 10/MWh for
  most of the last two years
• 12-Month Competitiveness Index for spot bilateral
  purchases was below 4/MWh in each month of 2007

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Grid improvements and local area requirements
under Resource Adequacy have reduced cost of
managing real-time congestion costs.

• Reliability Management Costs Variable cost of
  CAISO out-of-market generation dispatches to
  manage local reliability constraints decreased
  due to adoption of local generation requirements
  under Resource Adequacy.

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Long term bilateral contracts have driven new
generation investment but not in locations
required
New generation in Southern California largely
offset by retirements and load growth.
Major gains in Central Northern California.
System-wide
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Contract provision to replace power has delivered
significant declines in forced outage rates for
generation fleet.

• Generation forced outage rate in 2007 was the
  lowest in seven years.
• Contributing factors for decline include
• Availability incentives of serving energy
  contracts.
• 15,000 MW of new generation and retirement of
  older plants.
• Greater coordination and planning of generation
  maintenance plans.

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Market Redesign and Technology Upgrade (MRTU) has
been delayed one year

• MRTU solution is locational marginal pricing.
• Aligns market rules and prices with grid
  operating requirements (reliability) and produces
  transparent prices that inform investment
  decisions.
• Complements long-term procurement and
  transmission planning processes resulting in
  locational efficiency and timely investment.
• Feb 1, 2009 start up.
• Delay due to delay of software delivery,
  functionality, integration and adequate time for
  testing by market participants.
• Other markets ERCOT, MISO,PJM have faced similar
  delays.

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Major topics among USA and Canadian ISO/RTOs

• Generation queues increased dramatically -
  especially with renewable technologies
• Incentives to promote transmission investment
• Consolidation into central planning
• Market based incentives adder to rate of return
• Resource adequacy evolution Some are starting
  from resource requirements with a gradual
  evolution to central markets
• Mandatory reliability standards and compliance
• General standards for electricity markets
  including increased participation of demand
  response
• Changes in how credit worthiness is assessed and
  how unsecured credit is assigned

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1. Active projects in the queue today exceed the
CAISO all-time system peak of 50,270

• MW.188 interconnection requests active today
• Total 62,608 MW
• 131 renewable projects total 42,526 MW
• Interconnection requests for renewable projects
  are growing year to year
• January 2006 5,700 MW
• January 2007 11,000 MW
• January 2008 42,526 MW
• Renewable generation is typically located in
  areas with inadequate transmission
  infrastructure.

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2. The reform proposal seeks to resolve flaws in
an innovative manner.

• Solution
• Study projects in groups
• Allocate network upgrades prorate
• Feed projects with Interconnection Agreements
  into the CAISO transmission planning process
• Increase financial commitments and consequences
  for delay or withdrawal
• Accelerate site control requirements
• Require binding financial commitments for signing
  interconnection agreements
• Centralize transmission planning
• Rate of return adders for transmission investment

• Problem
• Inefficient serial study approach
• Weed out non -viable projects
• Fragmented transmission planning

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3. Evolution of resource adequacy towards central
capacity markets designs at different points in
U.S. Markets

• NYISO Monthly central markets
• PJM Long term forward central market
• NE-ISO Long term forward central market
• CAISO Resource adequacy requirements toward
  standard tradable product
• MISO - Defining resource adequacy requirement
• ERCOT Energy only market with high bid caps

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4. FERC adopted mandatory Critical Infrastructure
Protection Standards (CIP)

• Eight reliability standards for Critical
  Infrastructure Protection (Order No. 706,
  RM06-22)
• Operators of the bulk electric system to protect
  critical cyber assets.
• Cyber Assets are programmable electronic
  devices and communications networks including
  hardware, software and data.
• Final standards developed pursuant to the NERC
  standards development process.
• Violations will be subject to fines.

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5. FERC has standardization of ISO/RTOs along
general principles

• Adopted criteria for
• Responsiveness to stakeholders
• Demand response
• (i) accept bids from demand response resources
  in their markets for ancillary services on a
  basis comparable to any other resource
• (ii) permit aggregators to submit bids for demand
  response on behalf of retail customers and
• (iii) adopt scarcity pricing to raise bid caps
  during periods of operating reserve shortage.
• Market monitoring Guarantee independency of ISO
  market monitors
• Long-term contracting Provide a bulletin board
  for market participants to post offers to buy or
  sell electricity in long-term contracts.

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6. ISO/RTOs reviewing their unsecured credit
limits (UCL)
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Summary Conclusions

• California market has been stable and
  competitive.
• Increased standardization has occurred
• Mandatory reliability standards with fines for
  noncompliance
• Generals principals for market designs