Power-Market Flaws Hid California Crisis That Ended In Blackouts
Power-Market Flaws Hid California Crisis That Ended In Blackouts
(Bloomberg) -- California officials have confirmed what most people already suspected about the blackouts that plunged nearly 2 million people into darkness in August: Climate change played a role. So did the state’s poor planning in its aggressive push away from fossil fuels.
But for the first time on Tuesday they acknowledged that flaws in the state’s power markets also contributed to the rolling outages -- the first since the Enron-era energy crisis of 2001.
In California’s day-ahead market, where utilities routinely bid for the power they need to serve their customers, activity suggested that demand was much lower than it actually was, according to a state probe. Utilities under-scheduled their power needs ahead of the first blackout by nearly 3.4 gigawatts, enough to power 2.5 million homes.
Whether this was due to serious forecasting errors or an extreme miscalculation on the utilities’ part remains unclear, but the vast under-estimation bled into the so-called convergence bidding market, where trading activity worked to mask the imbalance.
Finally, an unspecified “market enhancement” that had been rolled out before the outages further obscured the balance of supply and demand.
The combination led the grid operator to export more electricity than it should have at peak times, further limiting power supplies during periods of exceptionally high demand.
The report’s findings are the most detailed account yet of what caused the outages, which laid bare the shortcomings of California’s aggressive embrace of renewable energy and exposed the fragility of a system powering the world’s fifth-largest economy. Among other causes, the report highlighted “climate change-induced extreme heat” that drove electricity demand to unforeseen levels, and the state’s own clean-energy targets which haven’t kept pace with energy-resource planning.
The report also raises questions about how well the state’s power markets are functioning nearly 20 years after the Enron scandal, in which traders manipulating energy markets caused a series of rolling blackouts.
More than 100 trading houses -- from banking giant Goldman Sachs Group Inc. to utility PG&E Corp. -- participate in California’s power markets, wagering on whether demand will be higher or lower than the grid operator’s estimates every day.
The convergence bidding market is a relatively small one, allowing traders to bet on the difference -- or the spread -- between the day-ahead price for power and the price of the power when it’s actually delivered. Those financial bids are supposed to signal to the grid operator when there are extreme supply and demand imbalances.
In the days after the blackouts, the California Independent System Operator, which runs most of the state’s grid, halted the market, saying it was “detrimentally” affecting grid reliability. The move caught traders by surprise and raised questions over whether speculators would be blamed for the outages.
Now it appears that convergence bids around the time of the outages indicated that power supplies were greater than they actually were while activity in the day-ahead market suggested demand was lower.
Since then, the grid operator has put in place some additional measures to compensate for either under-scheduled load or exports that may not be supported by in-state resources, he said.
“At this point, we are less concerned about the convergence bidding going forward,” said Mark Rothleder, CAISO vice president of market policy and performance, during a media briefing. “It’s an effective tool and it should be used to moderate those prices between day-ahead and real-time markets.”
Ordered by Governor Gavin Newsom, the report was prepared by the grid operator along with the state’s utilities commission and energy commission.
Many of the underlying causes have been building for years. California has been pushing hard to shift to renewable power, which last year supplied nearly a third of its electricity. But it still relies on natural gas plants -- especially at sundown -- and many have closed in recent years due to environmental regulations and weak profits.
Still, natural gas plants didn’t fare well in the heat, according to the report. The state’s gas fleet collectively lost 1.4 gigawatts to 2 gigawatts of electricity on the days of the blackouts, leaving California dependent on power from its neighbors
The report calls for expediting regulatory processes to procure additional energy resources and ensuring power projects under construction are completed on time. It also recommends changes to the day-ahead market to ensure that it accurately reflects supply and demand.
California’s ability to keep the lights on while it pushes to rely increasingly on clean power will be a test case for efforts to cut greenhouse gas emissions around the globe. And the reliability of the state’s grid will become even more critical as California seeks to use electric heat in homes and phase out gasoline-powered cars. Last month, Newsom set a target to ban new gas cars by 2035.
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