California’s Problem With Electricity - Barış Sanlı

New technologies recreate the markets. Electricity markets are in the midst of a big We already said bye to the 100-year-old light bulbs. Then there are electric cars, massive renewable inflows, storage, prosumer… It seems as if we never run out of new concepts in the electricity business. But are the markets correctly pricing the value and effect of these technologies?

As new Technologies penetrate the existing system, the whole operation of the system is disturbed. For example, autonomous cars will change tax, insurance, traffic, licensing, and others. There is no way you can put the genie in the bottle in such transformations. So, especially in electricity, disruptive change has to deal with sluggish development in knowledge, mechanisms, and rules.

The acquiring of new knowledge, skills, and experience accelerates with crises. Hence crises are a creative process. Disruptive changes push the rules, mechanisms, and understandings through crises. From my perspective, California’s problem is not about renewables but the naïve assumptions for the limits of renewable energy.

We know that you can not cold start a coal plant to full capacity in 5 minutes, neither 5 hours. So our rules and optimizations are designed around these technical limits. You can not rely on hydros for 24/7 generation. The markets should price these limits correctly.

Two years ago, FERC rejected California’s proposal for capacity markets. The initiation for the process starts with a gas power plant’s request for cost recovery. Wind and solar generation supported by out of market mechanisms have destroyed the value-price relation in the markets. Capacity markets, on the other hand, are very political. It is as if you are trying to put a price on avoiding future blackouts. If you price it correctly, no blackouts should happen.

The first California crisis was also due to the naïve belief that markets will work as-is. Stephen Littlechild from the UK has inspired early developments in California. The problem then was four folds: bad design, lack of reliability framework, natural gas and emission markets, monitoring. It ended badly. Now the green revolution of California is facing similar problems. It may derail targets in California and may affect renewable sentiment around the world.

To avoid it, we have to look problem carefully. First of all, reliability should be priced correctly. The demand side and other consumer-side tools are not coming as expected. The problem should be solved on the supply side. And on the supply side, the key element for the operation of the system is reliability. Pricing should reflect the emergency and value.

Texas’s and operating reserve demand curve is an attractive choice. The problem is the political nature of high prices. In California’s example, the state is facing drought and needs the fossil capacities to make up for hydro. But these plants had to earn enough money to provide reliability figures like 1 hour of blackout for every Ten years. Especially the systems with large hydros are vulnerable to drought and extreme drought periods. These events may happen more frequently in the future. So hydros turn into another vulnerable resource. And then, there is the virtual inertia problem with inverter-based systems. The problem is huge.

Why energy transitions take 50 or more years? Not because capitalists block the development of new resources and technologies. New technologies change the techno-economic systems built in years. These systems are a crystallized accumulation of past experience, problems, and knowledge.

A good starting point should be pricing reliability more accurately. To weather the high prices, paper products for hedging or establishing a reliability fund to insure against these events can be important.

California was very ambitious before the first energy crisis, but the ambitions worldwide have been hit due to crises. Now we have this second crisis falsely related to renewable energy. We should not let the green ambitions to be wounded again. We should design the markets to match our ambitions.

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