By Wayne Lusvardi, California Political Review
In Germany, merchant-energy companies are considering moving to other countries where they can make a profit. Such companies are private firms that operate electricity generators. They are separate from public utilities, such as the Southern California Edison Company, or publicly owned utilities, such as the Los Angeles Department of Water and Power.
The problem: green-energy mandates have rendered conventional electrical-power generation profitless.
So California seems to be going the way of the Fatherland, driving conventional merchant-generated power out of business.
This is not sheer speculation. The Sutter Energy Center, a 578-megawatt natural gas power plant near Yuba City, threatened to shut down in 2011 because revenues were so thin it could not obtain a Resource Capacity Mechanism contract from the California Independent System Operator that manages the state’s electric grid. This may be the harbinger of things to come for merchant-energy companies in California.
Joint unreliability framework
Due to the concerns about electric capacity reliability resulting from green-power mandates, California is putting into place what it calls a “joint reliability framework.” This calls for “dedicated solicitations” for guaranteed long-term negotiated power contracts for expensive green power, but open and competitive solicitations for new power generation.
In other words, existing merchant-power providers would be closed from such solicitations and forced into auctions. One of the largest private merchant-power companies in California, Calpine, is concerned that auctions would produce “perverse outcomes”: meaning bids that are less than the cost to produce the power.
The Western Power Trading Forum said, “The residual auctions may not yield prices sufficient to support the continued operation of resources that are supposedly needed on a forward basis. Further, the prices from the residual auctions may clear too low to attract demand response (DR) and energy efficiency (EE) resources.”
The California Energy News Data website said in an Aug. 2 opinion piece that it would “be surprised if the convoluted structure (of the joint reliability framework) actually works.” One of the reasons is that California proposes to hold separate auctions for local, system and flexible power. The problem with this is that no single market price will be able to emerge because there will be three prices instead. Which price dominates? What is the market price? No one will know.
Unprofitability will breed market manipulation
The Utility Reform is concerned about market manipulations of auctions. TURN believes the California Public Utilities Commission won’t be able to control the auctions. A power provider could refuse negotiated contracting and jump into an auction to bid prices up higher. And merchant power providers subject to having to sell their power at less than cost would be motivated to manipulate the market to avoid losses. Even the California Division of Ratepayer Advocates of the CPUC said it questions if the new pricing structures were even necessary.
Without price incentives, merchant energy companies may not respond to demands for energy. In Germany, electricity ratepayers will need to pay solar operators to not generate power to expand solar installations, because solar power only generates electricity during 3.5 peak hours per day and is unreliable. Germany is also considering providing subsidies to conventional power plants to ensure profitability.
The Southern California Edison Company apparently already sees the handwriting on the wall. SCE is a regulated public utility, not a merchant-energy company. SCE power rates are guaranteed by the CPUC to cover costs. But according to Forbes magazine, SCE has “gambled” by buying SoCore Energy, a distributed solar company serving mainly commercial and industrial facilities. If you can’t beat them, join them.
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