California wholesale electricity costs increased 25% in 2017 on higher natural gas prices and tight system conditions, the California Independent System Operator's Department of Market Monitoring said Thursday.
Tight supply and demand are expected to continue in 2018 and beyond, making the market less competitive, the DMM said in its annual report. The DMM recommended improved procurement and market power mitigation measures, but acknowledged these changes could be a heavy lift.
"Because of the potential severity of the impact of market power, DMM is making this recommendation at this time so that the ISO, stakeholders and regulatory entities can give this issue and potential options to address it thorough consideration," the report said.
The increase in wholesale electricity costs was driven primarily by a 27% increase in gas prices in 2017 compared with 2016, the DMM noted. After adjusting for higher gas costs and changes in greenhouse gas prices, wholesale electricity costs increased by about 4% compared with 2016, the department said. DAY-AHEAD PRICES HIT HISTORIC HIGHS LAST YEAR
But the market is showing some concerning trends, including the wider swings in prices, the DMM said.
For the first time, negative system marginal prices were relatively frequent in the day-ahead market, falling below zero in over 110 hours in 2017 during midday hours in the first two quarters when solar and hydro output was high, the DMM said in the report.
"The frequency of these low energy prices is offset by a greater frequency of very high energy prices later in the year," Amelia Blanke, manager of market monitoring and reporting at the DMM, said during a web conference to discuss the department's report.
Day-ahead prices reached historic highs, hitting $770/MWh on September 1, the DMM said. "These high day-ahead prices reflect a tightening of supply conditions during peak ramping hours that DMM expects will continue in 2018 and the coming years," it said in the report.
Another pattern in 2016 and 2017 is that prices are significantly higher in the second half of the year, when hydro resources are more depleted.
"What we see here is a relatively low energy cost in the first half of the year and a relatively high energy cost as system conditions tighten toward the end of the year," Blanke said.
Blanke noted that Cal-ISO's summer outlook found a 50% chance of a Stage 2 emergency for at least one hour in 2018, likely in September. A Stage 2 emergency may require the grid operator to intervene in the market and order plants online. RECORD 3,000 MW OF GAS-FIRED CAPACITY RETIRED IN 2017
The DMM noted in its report that about 3,000 MW of summer peak gas-fired capacity retired in 2017, the largest number of retirements in one year in Cal-ISO's history. And another 600 MW of gas plants are to be retired in 2018, the DMM added.
And while 770 MW of summer peak generating capacity was added in 2017, all of this capacity was renewable and most of it was solar, the DMM said in its report. The growing fleet of solar increases the need for flexible and fast-ramping capacity that can be dispatched by to help integrate variable energy, the DMM said. Amid ongoing tight conditions and plant retirements, the DMM found that the ISO system showed signs of becoming less competitive and recommended that the ISO take additional steps to mitigate market power.
"DMM recognizes that this recommendation involves major market design and policy issues, including the possible development of new market design options to mitigate potential system market power," it said in its report. "DMM also recognizes that the competitiveness of the ISO's markets is heavily affected by the procurement decisions of the state's load-serving entities and policies of their local regulatory authorities." -- Kate Winston
