Excessive Price Volatility in the California Ancillary Services Markets: Causes, Effects, and Solutions

TitleExcessive Price Volatility in the California Ancillary Services Markets: Causes, Effects, and Solutions
Publication TypeReport
Year of Publication2000
AuthorsSiddiqui, Afzal S., Chris Marnay, and Mark Khavkin
Pagination23
Date Published05/2000
PublisherLBNL
CityBerkeley
Keywordselectricity markets and policy group, energy analysis and environmental impacts department, transmission system reliability publications
Abstract

On 31 March 1998, restructuring of the California electricity industry brought the forces of the free market into a sector of the economy that had long been regulated. While the new market structure is similar to that of many other restructured markets in several respects, the competitive procurement of ancillary services by the California Independent System Operator (CAISO) is an almost unique feature. These markets are shown to exhibit extreme price volatility that has resulted in high procurement costs for California electricity consumers. An analysis of the amount of generation offered in the AS markets relative to the known purchase requirement of CAISO shows that withholding of capacity in certain hours has probably occurred and this suggests that generators have exercised market power. During the first of operation, one response to these problems by the CAISO Board of Governors, with the approval of the Federal Energy Regulatory Commission (FERC), has been the imposition of a fixed price cap, the level of which has been adjusted between $250/MW and $750/MW. Subsequent to the period of study, CAISO has implemented several reforms intended to curb market power. Mechanisms used in other restructured electricity markets could have been considered, such as threats of regulatory action and use of hedge contracts.

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