Streetwise Professor

August 18, 2020

California: Boom, Boom, Out Go the Lights

Filed under: Climate Change,Economics,Energy,Houston,Politics,Regulation — cpirrong @ 6:44 pm

Twenty years ago, California experienced its Electricity Crisis. Or, given current events (which will be the subject of what follows), may be known as the First Electricity Crisis. The problem in 2000-2001 was, in the main, a problem of insufficient generation, caused by a variety of factors. The ramifications of the supply shortage and resulting high prices for California utilities, ratepayers, and state finances were greatly exacerbated by a dysfunctional market design implemented only a few years before, in the mid-1990s. (When I gave talks about the subject, I used to quip: “California wanted to deregulate its power markets in the worst way. And it succeeded!”)

The lore of the crisis is that it was caused by Enron and other Houston bandits and their manipulative schemes. These schemes were not the cause of the crisis: they were the effect, and the effect of the dysfunctional market design, which created massive arbitrage opportunities which will always be exploited.

California is experiencing another crisis. It cannot yet rival the first, which went on week after week, whereas the current one has lasted about a week. But for the first time since Crisis I, the state is experiencing rolling blackouts due to a shortage in generating capacity.

The proximate cause of the problem is a massive heatwave which is causing high demand. A contributing proximate cause is low hydroelectric supply driven by a lower than average snowpack. But the underlying cause–and the cause that should get the attention of most Americans, including those who experience schadenfreude at the Insufferable State’s misery–is the Green Mania that has taken root in California which has made it impossible for the state to respond to demand spikes in the way power systems have done around the world for nigh onto a century.

In particular, California has adopted policies intended to increase substantially the share of power generated by renewables. This has indeed resulted in massive investments in renewables, especially solar power, which alone now accounts for around 12,338 MW.

But this capacity number is deceiving, because unlike a nuclear or coal or combined cycle natural gas plant, this is not available 24/7. It’s available, wouldn’t you know, when the sun shines. Thus, during the mid-morning to late afternoon hours, this capacity is heavily utilized, but during the evening, night, and early morning contributes nothing to generation. At those times, California draws upon the old reliables.

But that creates two problems, a short term one (which California is experiencing now) and a long term one (which contributed to the current situation and will make recurrences a near certainty).

The short term problem is that during hot weather, demand does not set with the sun. Indeed, as this chart from the California Independent System Operator shows, today (as on prior days) demand has continued to grow while solar generation ebbs. This figure illustrates “net demand” which is total demand net of renewables generation. Notice the large and steady increase in net demand during the late afternoon hours. This reflects a rise in consumption and not matched by a rise in solar generation before 1400, and a fall thereafter.

Go figure, right? Who knew that the hottest time of day wasn’t when the sun is at its height, or that people tend to come home (and crank up the AC) when the sun is going down?

Here’s the plot of renewables generation:

Note the plateau from around 1000-1400, and the decline from 1400 onwards–during which time load increased by about 10,000 MW.

So gas, nuclear, and (heaven forfend!) coal have to fill the growing gap between load and non-dispatchable renewable generation. They have to supply the net demand. Which brings us to the longer term problem.

The growth in solar generation means that conventional and nuclear plants aren’t generating much power, and prices are low, during the hours when solar generation is large. Thus, these plants earn relatively little revenue (and may even operate at negative margins) during these hours. This deterioration in the economics of operating conventional plants, combined with regulatory and political disdain for nuclear and coal has led to the exit of substantial capacity in California. A large nuke plant shut down in 2015, all 10 coal plants in the state have shut down (though three have converted to the environmental disaster that is biomass), as have many gas plants. In 2018 alone, there was a net loss of around 1500 MW of gas capacity, and from 2013 the net loss is about 5000 MW–over 10 percent of the 2013 level. (NB: the shortfall in capacity the last few days has been around 5000MW. Just sayin’.)

And note–demand has been rising over this period.

Notionally, the loss in nuclear and conventional capacity has been roughly matched by the increase in solar capacity. But again–that solar capacity is not available under conditions like the state has experienced over recent days, with hot weather contributing to high and rising demand in the late afternoon when solar output is declining. That is, these forms of capacity are very imperfect substitutes. They are most imperfect in the afternoons on very hot days. Like the last week.

In a nutshell, at the same time it massively incentivized investment in renewables, California has not incentivized the necessary investment in (or retention of capacity in) conventional generation. That mismatch in incentives, and the behavior that results from those incentives, means that from time to time California will have inadequate generation. That is, California has not incentivized the proper mix of generation.

So how do you incentivize the retention of/investment in conventional capacity that will remain idle or highly underutilized most of the time, in order to accommodate the desire to increase renewables generation? There are basically two ways.

The first way is to have really, really high prices during times like this. Generators will make little money (or lose money) most of the time, and pay for themselves by making YUGE amounts of money during a few days or hours. This is the theory behind “energy only” markets (like ERCOT).

The problem is that it is not credible for regulators to commit to allowing stratospheric prices occur. There will be screams of price gouging, monopoly, etc., and massive political pressures to claw back the high revenues. This happened after Crisis I, as more than a decade of litigation, and the payment of billions by generators, shows. Once burned, twice shy: generators will be leery indeed about relying on government promises. (A David Allan Coe song comes to mind, but I’ll leave that to your imagination, memory, or Googling skills.)

Relatedly, who pays the high prices? Having retail customers see the actual price creates some operational problems, but the main problem is again political. So the high prices have to be recovered through regulated retail pricing mechanisms that give rise to the credible commitment problem: how can generators be sure that regulators will actually permit them to reap the high prices during tight times that are necessary to make it worthwhile to maintain the capacity?

That is, for a variety of reasons energy only pricing faces a time consistency problem, and as a result there will be underinvestment in generation, especially when renewables are heavily supported/subsidized, thereby reducing the number of hours that generators can pay for themselves.

The other way is the Klassic Kludge: Kapacity markets. Regulators attempt to forecast into the future how much capacity will be needed, and mandate investment in that amount of capacity. Those with load serving obligations must pay to buy the capacity, usually through an auction mechanism. The idea being that the market clearing price in this market will incentivize investment in the capacity level mandated by the regulators.

A Kalifornia Kapacity Kludge was proposed a few years back, but the Federal Energy Regulatory Commission shot it down.

All meaning that California leapt headlong into the Brave New Green World without the market mechanisms (either relatively pure, like an energy only market with unfettered prices, or a kludge like a capacity market) necessary to bridge the gap between demand and renewables supply.

So what happens? This happens:

California’s political dysfunction makes it a near certainty that it will not implement reasonable market solutions that will provide the right incentives, even conditional on its support for renewables. Indeed, it is almost certain that it will do something that will make things worse.

Milton Friedman once said that inflation is always and everywhere a monetary phenomenon. Given that the major power crises in recent years–in California, in Australia, and a near miss in Texas last year–have involved renewables in one way or another, I have an analog to Friedman’s statement: in the future, always and everywhere power crises will be a renewables phenomenon.

And this is why Americans should pay heed. Whatever ventriloquist has his hand up the back of Biden’s shirt has him promising a massive transition towards renewable electricity generation, beyond the already swollen levels (swollen by years and billions of subsidies). A vision, which realized, would result in California’ s problems being all of our problem.

So look at California like Scrooge did the Ghost of Christmas Future. And be afraid. Be very afraid.

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  1. It requires no sophistication whatever to have predicted these problems – the wisdom you learned at your father’s knee is quite enough. It follows that all this must be viewed as deliberate malfeasance.

    So arrest the bastards and hang ’em. Or even better, put ’em in the electric chair.

    Comment by dearieme — August 19, 2020 @ 4:41 am

  2. @dearieme:
    The bastards are one step ahead of you – there’s no electricity available for your chair! 😛

    Comment by HibernoFrog — August 19, 2020 @ 10:34 am

  3. @dearieme–It’s not deliberate malfeasance. It’s ideological fealty. A monomaniacal focus on a single objective–renewable energy–combined with a complete disregard for the systemic consequences of it.

    Comment by cpirrong — August 19, 2020 @ 1:12 pm

  4. Little Walter is an appropriate artist for this post. Many CA residents are singing his “Keys to the Highway”, “…I’m gonna leave here running, ’cause walkin’s most too slow…” Great song.

    Comment by Richard Whitney — August 19, 2020 @ 6:19 pm

  5. Ach don’t fret, there are plenty of clever Californians who will eventually figure this stuff out. Renewables make absolute sense given their climate – these coupled with gas, maybe nukes, plus new storage tech, energy efficient cooling tech & houses etc, should do the trick. If the lights do go out for whatever reason, it won’t be the first time and it will certainly focus minds and drive investment Dollars.

    As for Cali’s other problem – water – well, good luck figuring that out. At least there aren’t any daft ideological differences with this (or are there? Swimming pools vs sprinklers??).

    I wouldn’t be so critical of renewable subsidies, after all your chums the Koch bros have benefitted from these, if Moore is to be believed. It all goes to show that the American right’s ideological opposition to pretty much anything is relatively easily assuaged, courtesy of the US taxpayer.

    Comment by David Mercer — August 20, 2020 @ 10:52 am

  6. @David–Or are you Joe Biden? Because your diminished mental capacity is evident. “Coupled with gas, maybe nukes.” Er, the whole point of the post is that they have waged a war on gas and nukes, and as a result the capacity of these sources of electricity have declined dramatically. The last nuclear plant in California is scheduled for retirement. Gas plant retirements greatly exceed new builds. “New storage tech, energy efficient cooling tech & houses”–you left out unicorns and fairies. And no, investment dollars will not flow precisely because of the dysfunctions of California politics and regulation.

    Renewable subsidies are idiocy. Which is probably why you think they’re great.

    And “[my] chums the Koch bros”. Are you out of your fucking mind? (Rhetorical question.) I have jack shit to do with the Kochs (singular now, since one died–please try to keep up). I never had, and never will, have anything to do with them/him.

    Comment by cpirrong — August 20, 2020 @ 11:45 am

  7. In 2019, California natural gas generation capacity was 40,382 MW, versus 43,571 MW 10 years earlier – hardly “declined dramatically”…. there is no war on gas in California….. hyperbole much (but honestly would you be surprised?)

    Comment by [email protected] — August 20, 2020 @ 1:24 pm

  8. and of course, no mention that coal power plants make no economic sense with natgas prices so low…. how about letting the invisible hand of the market play its role?

    Further, you may want to have mentioned that there were CCGT outages exacerbating the problem… so to lay the blame solely on renewables is misleading.

    Comment by br blbo — August 20, 2020 @ 1:36 pm

  9. Clever Californians Craig, as in people who will figure out that you can’t do all this stuff without nukes or gas, the ones who have read the books and the manual (“What manual??” I hear you all shout).

    Saddened to hear you’re down to one Koch. No honestly, it breaks my heart. Condolences to all concerned. Still, I reckon he took the money; I doubt Moore would have got that fact wrong. I wasn’t intimating that they were your chums, more the Royal – sorry – royal you. That said, your apparent lack of connections with the establishment does concern me, given the regard your blog is held in these circles. You really must try harder.

    And yes, subsidies are fine, to a point, a point we’ve probably long passed with renewables.

    Comment by David Mercer — August 20, 2020 @ 4:24 pm

  10. The problem with this analysis is that it makes great sense–something that apparently does not matter in California (or a bunch of other places these days). Your second paragraph caught my eye and probably nobody else’s. The narrative that Enron, Reliant,Direct, etc. etc. caused Crisis I is thoroughly ingrained and now legendary but is totally false as you casually mentioned. I was at the California Power Exchange at the time and the pressure to condemn the merchant generators by Sacramento was huge. Yet the governing establishment was not supportive of longer term transactions or any other type of instrument which would make hedging possible.

    Comment by George Sladoje — August 20, 2020 @ 5:25 pm

  11. Might the long(er) pole in the (in)tent be CA’s Nabobs of the(ir) Green New Deal be to manufacture misery in order to swoop in to “save the day(light)”? CA’s Apparatchiks seem to be setting their 1000 year Reich-stag(e) to be the cause of, and solution to, their self-imposed energy “crisis”. Long in the manufacture of this energy crisis, by escalating a misery index and relying on the collective short term memories of the plebeian class, the political elite will use its bully pulpit to impose their next phase to take total control of all energy sources. To achieve their “let them eat (expensive) ice cream” dystopia, all they need do is instill fear into the masses, “nationalize” energy for “the good of the unwashed”, impose draconian penalties on and sue “non-believers” to suppress any opposition, and financially ruin the already semi-regulated (read “inefficient”) power industry so they can “do it better”. To paraphrase today’s Machiavelli, Rahm Emanuel, “Never let an existential crisis go to waste.” Seems Arnold isn’t the only unwitting victim of Total Recall.

    Comment by Steve B — August 21, 2020 @ 9:28 am

  12. California’s Energy Nightmare on Power Hour:

    Comment by Gerry — August 21, 2020 @ 9:34 am

  13. ‘Whatever ventriloquist has his hand up the back of Biden’s shirt …’

    You’re not usually so restrained. I believe the correct noun here is ‘fundament’.

    Anyway the problem seems to be that there ain’t no ventriloquist. Joe’s straight to camera pieces are 100% his own work. ‘You know the thing!’

    Hard to believe that people could prioritise a fashionable idea over cheap, reliable power, but there it is. They’re more worried about getting a ‘How dare you!’ shaming from Greta than having the lights go out Pyongyang style. As someone else in the business of retailing Dumb Ideas once said, when the arse fell out of his bandwaggon: ‘Died of a Theory’.

    Comment by Ex-Global Super-Regulator on Lunch Break — August 21, 2020 @ 6:13 pm

  14. And thanks for the Little Walter clip – great stuff. You lying dog-faced pony-soldier!

    Comment by Ex-Global Super-Regulator on Lunch Break — August 21, 2020 @ 6:15 pm

  15. If nuclear is considered safe enough to blast into space on rockets, power ice breakers in the fragile ecosystem (TM) of the Arctic and drive submarines with several hundred men in them I want one in my back yard. It would be interesting to see my neighbours’ objections objections melt away like desert now when offered free CHP..

    Comment by philip — August 22, 2020 @ 3:22 pm

  16. There is a ‘non-market’ solution as well. Instruct public utilities to build 50 nuclear power plants … problem solved.

    Comment by SteveK9 — August 23, 2020 @ 10:14 am

  17. “…generators will be leery indeed about relying on government promises.”

    Anything to do with the Cherokee? 🙂

    When I was a kid, I used to watch Western soaps with cowboys and Indians. One scene stuck with me and I have followed its sage counsel my whole life. There’s a pow-wow of Indians sitting in a circle debating the merits of a proposal from the boys in Washington (for a truce or treaty or whatever). One of the younger braves, bold and aggressive, speaks up against the elders (who are inclined to reconcile themselves with reality and sue for peace), declaiming – loudly – “White man speak with forked tongue”

    Never a truer word spoken (or declaimed 🙂 ).

    Comment by Simple Simon — August 23, 2020 @ 10:31 am

  18. In California, the guys wearing masks maybe fighting fires, the virus or the cops.

    -courtesy, VDH

    Comment by The Pilot — August 25, 2020 @ 8:58 am

  19. Is now the time to buy PG&E stock?

    OK. Pile on.

    Comment by Joe Walker — August 25, 2020 @ 4:54 pm

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