New York, California mull new price caps

New York and California will consider imposing new electricity price caps this week to cool spiraling power prices. Under the proposed New York plan, generator bids into the day-ahead and real-time market would be capped at $1,000/Mh-hr. California Independent System Operator will consider a measure to reduce to the maximum price to $250/Mw-hr from the current $750/Mw-hr. Opponents say insufficient generation capacity is the problem.

Ann de Rouffignac
OGJ Online

Most of New York state probably will get through the summer and stay cool, but electricity black outs are a real possibility for New York City.

Already an early spate of extreme heat in May sent spot electricity prices to $3,900/Mw-hr in New York compared with the usual $30/Mw-hr for normal weather. While no outages occurred, the huge price spikes goaded regulators like the New York Public Service Commission and the New York State Consumer Protection Board to call for price caps on energy markets during the summer months.

The New York electricity market was first opened for competition only last year. So the idea of artificial constraints on the market price particularly irritated generators worrying about false market signals those caps would create.

Generators that sell power into the New York market, including PG&E National Energy Group, Sithe Energies Inc., and Orion Power Holdings Inc., filed appeals to the New York Independent System Operator's (NYISO) management committee's price cap proposal on June 15. The entire board of the NYISO will consider both sides' arguments Thursday.

While a decision is expected the next day, a spokesman for the NYISO says the board could decide to postpone it. Similarly, the California Independent System Operator Wednesday will consider a measure to reduce the maximum price to $250/Mw-hr from today's $750/Mw-hr.

Under the proposed plan New York plan, generator bids into the day-ahead and real-time market would be capped at $1,000/Mh-hr. Both external and internal bids for capacity would be capped.

Generators immediately responded with a barrage of criticism of the plan, arguing the caps would distort market signals.

Neon Signs
"For energy companies considering doing business in New York, price caps are like neon signs at the border that signal generators, 'Take your capacity elsewhere'," says Carol Murphy, executive director of the Independent Power Producers of New York Inc., a trade association of power generators in New York.

While the NYISO claims that sufficient capacity is available for the summer peak, such huge price spikes usually indicate supply shortages rather than adequate supply, unless the market structure is skewed by too few players who can "game the market", or withhold some capacity to manipulate price during periods of high demand.

The NYISO estimates that peak electric demand is about 30,200 Mw. The organization conducted an installed capacity auction to secure generation that satisfies the 35,636 Mw reserve set by the New York State Reliability Council. But the operating reserve margin is another thing, says Ken Klapp, spokesman for the NYISO. He says there is always a risk some of that installed capacity that was secured to supply the state may not be operating.

"With electric demand increasing at 1.7 percent annually, it's going to be tight this summer," says Klapp. "If loads are higher than we anticipated, and if we don't have the operating reserve to supply it, we could have problems."

While it might appear that the state will muddle through the summer, New York City is particularly vulnerable.

Because of transmission constraints, at least 80% of the electricity supply for the city must be generated within the city, says Ashok Gupta, senior energy economist with the New York-based Natural Resources Defense Council.

New York City's demand for energy is about 11,000 Mw and growing each year by about 200 Mw, he says. With no new generation planned for this summer, there is serious potential for black outs in the event of any unusual weather or unplanned outage, he says.

Ironically, price caps will do nothing for electricity supply shortages.

Some new generation will come on line by 2003 and 2004 but that will not help this summer and the next two summers.

"There is no doubt about it there is serious threat of black outs in terms of weather and what we have available in capacity," says Gupta. "The only way we can dampen the price spikes and get through the summer without outages is with aggressive energy efficiency or by praying for good weather."

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