At the expense of making some readers feel uncomfortable, I think it is time to bring up an issue no one seems to want to talk about:
Power prices (known technically as locational marginal prices or LMPs) at the supply nodes have been below zero, as we all know. We also know that under these conditions power suppliers must pay to generate electricity. This phenomenon is unfortunately on the rise in the CAISO market and this year these negative price trends hit a new record. Negative power prices occur when a large and inflexible power generation portfolio is scheduled at a time when there is low electricity demand coupled with congestion.
Negative LMPs have been prevalent this spring during solar hours, even after the CAISO has curtailed 12,722,095 MWh of wind and solar in the 1st Quarter of 2024.
It has been long understood that an LMP-based energy market has multiple benefits including (1) providing a price signal for generation and transmission investment through congestion, which is embedded in the LMP price, and (2) providing a transparent calculation of the marginal cost of producing the next MWh of energy.
The price signal benefits over the last decade of LMP market operation in California have proven to be a fallacy. No transmission project has been approved based on market economics or mitigating congestion costs. All approved CAISO transmission projects were justified based on reliability and public policy. We can debate the causes all day long, but the facts are clear. Transmission upgrades have yet to be justified based on congestion or market economics even with large curtailments and significant congestion.
As to providing transparency on the marginal cost of wholesale energy, I am not sure it is applicable anymore, since during solar hours, all renewable generation without fuel costs has artificially suppressed the marginal cost as reflected in the negative LMPs. This means that the suppliers must pay to generate.
For instance, on March 19, 2024, HE 17, the SP15 demand was about 12,000 MW and 16,000 MW of supply post curtailment resulted in an SP15 hub price of – 6.7$/MWh and – 14.6 $/MWh at SP15 DLAP. This means that suppliers are paying to generate, and load is not paying anything to consume, but rather they are getting paid to consume energy.
Yes—it takes a while to wrap our brains around what this means! Well, don’t waste your time figuring this out, because the ratepayer pays the ever-increased retail energy rate no matter how low the LMPs go, and generators are getting paid their power purchase agreement (PA) contract price (unless the generator is merchant or indexed pricing).
We have proven that the LMP price signal for new generation and transmission investment simply does not work as was intended! All generation and transmission additions are state-mandated, or reliability based and LMP plays no, or an insignificant role, period.
So, why all this complexity? My view is that FERC imposed this market structure on California before the state’s Senate Bill 100 and the state renewables mandate. Should California revisit the market design? This is the elephant in the room.