US market weathers heat waves
Heat waves in parts of the USA in June and July put both the markets and its participants to the test. Have lessons been learned from last year`s Midwest turmoil, or are price spikes here to stay?
Unseasonably hot weather across parts of the USA put a strain on power grids and sent electricity prices soaring in early June. Utilities in several states across the northeast were forced to take action to prevent widespread blackouts, while prices in the mid-Atlantic and northeast regions rose to more than 30 times their usual level.
Similar weather patterns were repeated in east coast areas in early July, when equipment failure caused by a surge in demand left hundreds of thousands of customers without power in New York City. Consolidated Edison urged its customers to use appliances conservatively, and stated that it had never experienced such high loads.
Searing temperatures and the resulting high demand sent daily power prices soaring in many areas in June. In the Midwest and south of the USA, prices rose to $350/MWh, up from the normal $20-40/MWh range. In the northeast, hourly prices climbed to more than $1000/MWh from the normal $30-$50/MWh range. Prices for next-day delivery rose to $300/MWh on the trading hubs of the Tennessee Valley Authority and Cincinnati-based Cinergy.
The June price spikes in the northeast were caused by a combination of unexpectedly high demand and the fact that several generating units were off-line for pre-summer maintenance. This was compounded by a transformer problem at the 1094 MW Susquehanna 2 nuclear unit in Berwick, PA, which caused the unit to trip. PJM, the grid operator for the Pennsylvania-New Jersey-Mary-land system, issued a maximum generation notice, while ISO New England looked for emergency power supplies from neighbouring New York, the mid-Atlantic states and Canada.
These events in June and July are reminiscent of those in the Midwest USA last year, and have led to concerns that the US power system is still not safe from such market chaos. These recent events thus presented a test for the market and its participants – have any lessons been learned from last year`s market turmoil?
During the week of June 22-26, 1998, wholesale electricity prices in the Midwest markets reached a short-lived but nevertheless extraordinarily high peak of $7000/MWh. The result was severe losses for most utilities and bankruptcy for others. In its September 1998 report of its investigation of these events, the Federal Energy Regulatory Commission (FERC) concluded that a combination of factors had caused the price increase.
These factors were: an above average amount of generating capacity was off-line due to planned and unplanned outages; unseasonably hot temperatures that were higher than forecasted continuing over a sustained period and a broad region; transmission constraints reduced the utilities` ability to move power to where it was needed; market information systems did not communicate clear and reliable price signals to participants; and defaults on power sales contracts lowered market confidence.
Of course the big question is could these price spike occur again? Prices in competitive wholesale markets are prone to spikes due to the limited capacity in an electric system for storage compared to, say, the natural gas system. Nevertheless, FERC described the combination of the above factors as an “extraordinary event” of one day in ten years probability. It also cited the inexperience of players in dealing with such a situation, particularly in a market undergoing change from regulation to competition, as a major contributing factor.
As far as the outlook for this summer is concerned, the 1999 Summer Assesment published by the North American Electric Reliability Council (NERC) indicates that although generating capacity will be adequate in most areas, resources are expected to be tight in the Midwest, southeast, Texas and the southwest. These areas will have relatively low capacity margins, so that higher-than-projected demand during hot weather, or unexpected outages, will strain resources.
NERC highlights Texas (ERCOT region) as being a potential problem area this summer. Projections show only slightly lower levels of demand than the record peak demands set during last summer, the hottest summer on record. The state`s capacity margins are also significantly reduced. NERC also warns that although improvements have been made to transmission systems, key transmission interfaces will continue to be heavily loaded.
However, the report states that the areas of concern last summer, including the Illinois-Wisconsin-Missouri area and New England, show a marked improvement over last year`s conditions with the return to service of key nuclear units. NERC also says that although resources will be tight in the Midwest (ECAR region), there is a greater likelihood of importing power from neighbouring regions than there was last year.
FERC`s 1998 report says that an operational situation leading to price spikes of the magnitude seen in 1998 is unlikely to occur again. However, FERC believes that some of the causal factors are likely to be present for the next few years, and although the newly deregulated markets will mature and the experience of players will grow, moderate price spike occurrences should be expected. FERC`s outlook is mirrored by sentiment in the market, where players seem to be taking a more cautious approach.