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Backstop procurement costs also soared: annual report

High natural gas prices are largely to blame for driving up wholesale electric costs in the California Independent System Operator by 24% in 2018, according to the Cal-ISO Department of Market Monitoring.

The total estimated wholesale cost of serving load in 2018 was about $10.8 billion, or $50/MWh, up from $40/MWh in 2017, the DMM said in its annual report. Last year's report said 2017 prices represented a 25% increase from costs of $34/MWh in 2016, a boost that was also due to gas prices.

Average gas prices at SoCal city-gate increased 43% in 2018 compared to 2017, and this was one of the main drivers of increased wholesale energy costs, DMM said in its report (ZZ19-4) filed Thursday with the Federal Energy Regulatory Commission.

Prices at SoCal city-gate were extremely high on some days in July and August of 2018, due to pipeline maintenance, restricted storage activity at Aliso Canyon, anticipation of low-flow penalties on the gas pipeline system and increased gas demand amid high temperatures, the DMM said.

Day-ahead market prices set records during these summer heat waves. "On July 24, average energy prices in the day-ahead market were greater than $600/MWh during a four-hour period with prices peaking at nearly $1,000/MWh," the report said.

"The day-ahead energy market, which accounts for most of the total wholesale market, remained competitive during most hours in 2018," the report said. "However, analysis also indicates that prices may have been significantly in excess of competitive levels in some peak summer hours," DMM added.

GAS PRICE IMPACTS

SoCal city-gate prices impact overall system electricity prices for several reasons, the report said. There are large numbers of natural gas resources in the south and there is often greater congestion in the south that creates load pockets, the DMM explained.

Higher uplift payments, congestion costs and backup procurement costs also contributed to wholesale price increases, the DMM said. "Costs for capacity procured under the ISO's two backstop capacity procurement mechanisms (reliability must-run contracts and the capacity procurement mechanism) increased from $24 million to $156 million, or from $0.10/MWh to $0.73/MWh of system load," the report said.

The ISO's reliance on backstop procurement reveals gaps in the state's resource adequacy process and problems with the ISO's backstop procurement mechanisms that the ISO and state regulators are working to address, the DMM said.

DMM RECOMMENDATIONS

The market monitor also outlined a number of recommendations for the ISO. For instance, it supports a recent ISO proposal to link bid cap increases to same-day gas market trade prices. "This approach will ensure greater market efficiency, reliability and more accurate mitigation than the static approach approved by the ISO board in 2018," the monitor said.

The DMM also suggested the ISO tweak the way it uses maximum gas constraints because they can increase market costs without providing the intended benefits. These constraints aim to address Aliso Canyon limitations by restricting the use of gas-fired plants on the SoCal Gas system.

"When the gas constraints bind during the peak ramping hours, there appears to be surplus gas from hours prior in the day when gas usage is well below the constraint set by the ISO," the DMM said. "This causes the constraint to unnecessarily restrict use of gas units during the evening hours when the need for upward ramping capacity is highest," the DMM added.

-- Kate Winston, kate.winston@spglobal.com

-- Edited by Joe Fisher, newsdesk@spglobal.com