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California 2014 Power Market 'Competitive' Despite Skewed Hydro, Gas Mix

The wholesale electricity market last year in California stayed competitive despite record low hydroelectric supplies and rising natural gas prices, according to a report released Monday by the market monitoring unit at the California Independent System Operator (CAISO).

Moderate load demands and an influx of new solar power supplies helped offset the hydro-gas factors, according to the CAISO annual report, which said a surge in renewables is expected to continue. Of the 1,900 MW of new generation available for summer peak loads in the state last year, only 25 MW were from gas-fired generation, the report said.

According to the state grid operator's tally, wholesale power costs increased by 13% last year in the state, "primarily driven by a 17% increase in gas prices. After controlling for gas and greenhouse gas (GHG) price changes [in credits], wholesale electric costs increased by only about 3%," the report said.

A CAISO spokesperson explained to NGI that the grid operator's normalization is a hypothetical "estimate" of what the wholesale costs would have been with the same natural gas costs and greenhouse gas costs as in 2010 and 2013, respectively.

"Once you 'normalize' or in other words remove the effects of the increase in natural gas prices and the decrease in GHG costs, we identify how the remaining factors affected wholesale costs, and what we found is that they moved up 3%," the spokesperson said.

He also said GHG costs are associated with the daily cost of the state's cap-and-trade program as reported by ICE and Argus, and then averaged by CAISO to create a daily GHG cost index for the grid operator's statistical purposes.

With an added 1,700 MW of solar-generated power capacity for peak summer loads, market prices were kept relatively low and competitive. "Overall prices in the CAISO energy markets in 2014 were highly competitive averaging close to what the [CAISO market monitoring unit] estimates would result under highly efficient and competitive conditions," a CAISO spokesperson said.

Last year's increase in natural gas prices and lack of hydro-generated supplies resulted in wholesale power costs increasing to $52/MWh from the $46/MWh in 2013, CAISO said. Hydro production last year was about 70% of its previous year's production and 60% of the 2012 hydro levels.

The report said the state's resource adequacy program emphasizing energy efficiency and renewable resources "continued to work well as a short-term capacity procurement mechanism." The state grid operator and California Public Utilities Commission have collaborated to have California's major utilities seek more "flexible capacity" to cover periods when intermittent sources such as wind and solar drop off. Natural gas peaking plants are usually a prime source for this sort of power.

"Energy from new renewable resources is expected to continue at a high rate to meet California clean energy goals, which will increase the need for flexible and fast ramping capacity that can be dispatched by the CAISO to smooth out the variable output from wind and solar power plants," the report said.

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