Surprise, surprise, surprise!

I’m sitting in the waiting room as our son goes “under the knife” … Well, that isn’t what one should call arthroscopic surgery these days. It is amazing what can be done with minimal invasion to repair a torn labrum (shoulder ligament). While I wait for a groggy 19-year old to emerge, I am basking in the glow of a surprising comeback win for my Washington Nationals in the Wild Card game of the Baseball Playoffs. After years of disappointment from otherwise successful Nats teams, this surprise was sweet indeed. Next stop: Dodger Stadium against the machine in Chavez Ravine! While the Wild Card win was unexpected, beating the beastly Dodgers would be a huge surprise. We shall see…

How would you like your power packaged?

A few days ago, I was preparing for the opening panel at this fall’s WSPP meeting in Las Vegas.  My fellow panel members and I were discussing what is topical other than the rapidly changing generation mix in the West, and the lack of established regional institutions to help manage the metamorphosis. One colleague, Chris Mumm from Portland General Electric, showed us a graph of how trading at the traditional hubs around California has decreased over the last few years as solar penetration has increased. Intuitively, this made some sense as additions were mostly within California displacing some imports.

As we all know, solar and wind can be somewhat episodic and not able to fit a 16-hour block product. Because of this variability, other resources are required to balance the system. The need can be met by battery storage, but not always. The ability to balance the system in the face of all these variable renewable resources, however, probably does not hinge on the traditional 5x16 product that has dominated power trading for two decades. What kind of product is needed under such circumstances and can it be standard enough to be liquidly traded to assure competitive outcomes?

One answer could be a true network market connecting the Pacific NW with the CAISO. Bidding can correspond with pricing on a “contract for differences” basis as employed in the established RTOs. But it may be a long time before we have such capability. This sort of discussion is just now beginning. In addition to the WSPP meeting, it should be part of the discussion at the WPTF PacNW Roundtable on November 14 in Seattle.

Canary in the Coal Mine?

I’ve long been concerned that historically low interest rates – in place now for over a decade – will eventually explode in our faces. I tend to be a fan of the Hayek School of economic thought as opposed to the Keynesian School ( I think Hayek would agree with me that too much easy money floating around creating investments that aren’t needed after such a flow of easy credit. Have these “white elephants” shown up yet in our industry? Hard to say, because economic slowdowns can be sudden and only when they hit are excessive or expensive inventory revealed. While the inventory of renewable resources is demanded by public policy, the current “easy money” environment combined with “just do it” portfolio standards makes me a bit nervous.

The notion of a slowdown and a subsequent reckoning has been in the back of my mind for some time now. It is becoming louder as I hear discussion of the need for even lower interest rates in the U.S. and around the globe to keep the economic party going. The trouble with this formula is that the rates were so low for so long, only climbing a bit recently. The result is that the “jolt” one could get from an interest rate cut would seem minimal. Taking historically low rates and ticking them down more after such a prolonged expansion doesn’t get the juices flowing. The whispers around market thinkers in such publications as The Economist and market outlets like Bloomberg is that Central Banks around the globe may be out of economic ammunition.

I doubt that many renewable resources will be deemed “out of market”, owing to their low marginal costs compared to traditional resources. But what of their debt level? What happens if they need to procure capacity – known as Resource Adequacy (RA) – to back up their variability? The resources that provide that product are retiring at a fast pace and they have a large debt to service. These retirements could create scarcity that results in high contract prices. This scenario could find its way into our Western markets under certain circumstances. Let’s not dwell on the fact that a liquid regional market (with network dispatch) and a regional capacity mechanism could help in such circumstances.

Meanwhile, back in the real world…

All this speculation about trading and macroeconomic musings occurs against the backdrop of discussions about the immediate future of energy resources. The CAISO told its Board that, for the next few years, planned resources for California may be short. How short? So short that it recommended delays in the retirement of once through cooling (OTC) resources. To get a California entity to say that out loud suggests a difficult situation to say the least.

At the same time, a broad group of parties proposed a central buyer for procurement of residual RA needs. This mechanism will enable load serving entities can bilaterally procure but also obtain RA through the central buyer. The settlement proposal was the result of one of the most collegial discussions on energy I’ve witnessed in nearly 20 years between parties representing different interests. It may be a uniquely California product, but it represents some excellent thoughts on how to procure RA in a way that is flexible yet provides a mechanism that enforces reliability standards. We’ll see how the CPUC responds to the settlement proposal. My hope is that the earnestness of the settlement effort in California – a jurisdiction that has had its share of intemperate energy debate – can spur a rational discussion of how to meet regional needs going forward. Surprises happen all the time. Why can’t they happen in the power markets of the West?