Hydro Shortage Could Create Volatile Summer in CAISO Market

By Published On: June 1, 2007

With snowpack levels in California and Oregon well below normal this year creating a shortage of hydroelectricity capacity, the California Independent System Operator expects to have to rely on power resources with more price volatility this summer, grid officials predicted. In a May 30 market performance report briefing, Alan Isemonger, the grid operator’s manager of market information, warned CAISO’s board of governors that hydro generation this year has averaged just above 2,000 MW daily. That’s about half the level of a year ago. Hydro generators in California and the Northwest are conserving their available hydro capacity for the peak summer demand, he said. Hydro generation typically peaks during June after the snow melts. CAISO’s real-time dispatch prices and balancing energy markets have already experienced greater volatility this March than usual, Isemonger noted. Real-time dispatch prices exceeded $250/MWh on 131 occasions in March, compared to 50 times in February and 42 in March 2006. Balancing energy made up 3.1 percent of the total energy consumed in March in the grid operator’s control area. The spike in real-time balancing energy prices was primarily due to the Pacific DC Intertie being forced out-of-service from March 26-28 and unscheduled transmission flows. Unscheduled energy flows were particularly problematical in March when there was low hydro power capacity in the Northwest, Isemonger said. CAISO’s average total cost of ancillary services increased to $0.58 in March from $0.41 in February. At the same time total inter-zonal congestion costs soared to $8.1 million in March from $1.83 million in February, compared to $2.16 million in March 2006 and nearly double the $4.7 million average monthly cost for the prior 12 month period. The high inter-zonal congestion costs reflected differential pricing in California and the Northwest, Isemonger said. The congestion on the Pacific Intertie–accounting for 58 percent of the inter-zonal congestion costs–was driven by over-scheduling, scheduled maintenance on transmission lines, and transmission de-rates due to outages. The congestion on the Nevada-Oregon border, which bore 28 percent of the inter-zonal costs, was largely due to over-scheduling and derates on the Pacific Intertie. In other business, the CAISO approved North American Electric Reliability Corporation (NERC) standards and tariff language for filing with the Federal Energy Regulatory Commission to comply with the federal agency’s March 13 order establishing mandatory standards. The NERC standards are expected to increase grid reliability on both a national and western regional basis, grid managers said. The California grid operator is responsible for complying with and enforcing 56 of 83 national reliability standards mandated by FERC on June 4. The CAISO’s new reliability standards incorporate 547 requirements and 118 measures. The national standards overlap with existing reliability standards of the CAISO and other California entities, said Nancy Traweek, the grid operator’s director of Operations Support. CAISO invited utilities and other stakeholders this spring to participate in technical and legal working groups to draw up the pro forma reliability standards and bilateral agreements between the grid operator and each transmission operator. The CAISO will have authority for enforcing the agreement and responsibility for the compliance audit while transmission entities will be responsible for implementing and monitoring the standards. The tariff authorizes the CAISO to impose penalties on any transmission entity it identifies as not in compliance with the NERC standards. If non-compliance occurs and the audit cannot identify a particular entity in violation, CAISO will assess a penalty across the board to all entities. The grid operator board also approved a revised congestion revenue rights credit policy designed to protect the financial interests of market participants. It will facilitate the first congestion revenue rights auction in October. FERC must approve the policy prior to the auction. CAISO plans to issue a solicitation for congestion revenue rights in July to load-serving entities. To participate in the auction, each participant must have a minimum of $500,000 in available credit to cover their bids. “We chose $500,000 to ensure that adequately capitalized entities came to the table,” said Shucheng Liu, CAISO principal market developer. “We wanted to balance a reasonable amount but not set an excessive barrier to entry.” He stressed that congestion revenue rights are a financial instrument with potential financial risk. The rights are a central component of the CAISO’s Market Redesign and Technical Upgrade Program. CAISO also approved changes for certifying and terminating scheduling coordinators. The changes include increasing the application fee for scheduling coordinators to $5,000 from the $500 fee that the CAISO has charged for the past decade. The certification window also will double to 120 days from 60 days. The new policy authorizes the CAISO to terminate scheduling coordinators and applications that have been inactive for 12 months. They could re-apply for certification if they wish.

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