Given its widespread dependence on hydroelectric power, directly and indirectly, the western United States may need a combination of active hedging, demand-response and some version of the federally sponsored standard market design (SMD), according to a report, “The Western Energy Market: Inherent Risk and Market Solutions,” sponsored by a merchant energy association.

The 15-page report by independent consultants concludes the wholesale market tinkering and restructuring were not the cause of the West’s crisis in 2000-2001 centered in California.

“The shortage in overall electric energy supply was so severe that it could not be solved by additional generation from existing ‘swing’ gas generation alone,” wrote consultant Fred Pickel, who helped write sections of the report, which was sponsored by the Western Power Trading Forum. “New generation could not be added quickly enough or could the pipeline system handle the additional requirement at existing gas fired generation. So a significant reduction in demand was required throughout the West.”

The Magnolia Power Plant is a perfect example of how difficult it is to get a power plant off the ground in California. Even without local opposition and with complete backing from local government it took Magnolia two years to gain an approval from state officials. The 310 MW gas-fired combined-cycle power plant was approved earlier this month. It is being built at the location of an existing power plant owned by the City of Burbank Water and Power Department.

“What happened in the power crisis is that we were counting on 100% hydro, and we got 10%,” said Ron Davis, general manager of Burbank’s muni and a former industry executive in the Pacific Northwest with substantial hydro-electric experience. “Consider that 30% of our power is hydro in the West, and overall, we need about 50,000 MW for the western energy system serving California — 20,000 MW is hydro in nameplate capacity, but that shrunk to 2,000 MW in the drought of 2001. So we lost the equivalent of 18 nuke plants.

“Can you imagine back East if they lost 18 nuclear plants. They would be devastated. That is what happened to the western U.S. It is all blamed on marketers, but it is because we count hydro capacity as if it were all available, and it is not.”

Both Davis and the WPTF report agreed that the West also over relies on hydro from a planning standpoint by using hydro nameplate capacities, rather than capacities that are 30% or 40% of that to do reserve planning. Hydroelectric plants rarely produce over a season, year or multiple years at or near their nameplate capacity, Davis said in an interview last Monday with Power Market Today.

Despite these quirks out West that should be taken into consideration, a variation of the Federal Energy Regulatory Commission’s standard market design (SMD) could provide benefits to western energy markets, according to the WPTF report by Pickel and Jeff Roark, an independent consultant based in Atlanta. SMD might be “most fruitful in proving market guides for the proper locations” of new generation and transmission in the West, Roark wrote in the report.”

“The unique characteristics of the West don’t invalidate the market design any more than they invalidate physics or economics,” he wrote. “SMD may not adequately address the West’s unique reliability issues (hydro uncertainties, transmission grid congestion, etc.), but the West, and California in particular, have not adequately addressed these issues either. If SMD lacks realism in the West, it is the West’s job to bring realism to SMD.””

The report, sponsored by many of the trading forum’s Pacific Northwest members and aimed particularly at elected officials and regulators in that area, demonstrates the past power crisis “was physical in nature and not financial,” said San Jose, CA-based Gary Ackerman, WPTF’s executive director, who noted that despite objective indications that some market manipulation took place, “it really wasn’t the root cause of the price spikes” that occurred.

Further, Ackerman said the report by a former Mirant executive and a Cambridge, MA-based energy consulting firm, also indicated that what he called “the hydro-dominated energy system” in the West has acute differences from Eastern U.S. systems that federal regulators have been using as a template for all RTOs. “So this report, at least, makes a case for not trying to apply Eastern RTOs in the West; they won’t do a satisfactory job, and so the Federal Energy Regulatory Commission’s SMD (standard market design) as a standard is probably inappropriate for the West where there will be higher reserve margins and different ways of clearing transmission congestion.”

Burbank’s Davis thinks the western power system should use what he called “the old, regulated system of critical water planning,” counting on only about 10% of hydro’s peak capacity for planning purposes. “We used to take the worse water in 70 years and use it in our planning because to do otherwise is to set yourself up for trouble,” Davis said. “Now they use ‘average’ water years, but the trouble with that is water is never ‘normal.’

“We in the west need to get over the critical-versus-average water estimates. Our dependence on water is like 18 nukes or 20 coal units. Now that is critical.”

©Copyright 2003 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.