Almost two years ago, the Council initiated a study of the adequacy of the Northwest's power supply. This study was motivated by the observation that while the region had enjoyed several years of robust economic growth and, consequently growth in the demand for electricity, there had been very little in the way of new generation development. At the same time, efforts to improve the efficiency of electricity use in the region had been reduced dramatically because of the uncertainty of utility restructuring. This raised the concern that under conditions of high stress, the system might not be able to fully meet the region's power needs to serve load and to maintain the reserves essential to a reliable system. Conditions of high stress involve combinations of high weather-driven loads, poor hydropower conditions, and forced outages of thermal and hydropower generating units.
The study was completed late last winter. It concluded that:
- There is an increasing possibility of power supply problems over each of the next few winters (December, January, February), reaching a probability of 24 percent by 2003. This takes into account both regional resources and the availability of imports. The level and duration of the possible shortfalls could be relatively small – a few hundred megawatts for a few hours – or quite large – a few thousand megawatts for extended periods
- The region would need the equivalent of 3,000 megawatts of new capacity to reduce the probability to a more acceptable 5-percent level. That new capacity should take the form of new generation and economic load management, i.e., reductions or shifts in consumer loads that make economic sense for the consumer and the power system.
- It was unlikely that market prices would be sufficient to stimulate the development of sufficient new generation in that time frame. This meant that in the nearterm, an even higher priority needed to be placed on developing economic load management opportunities.
While this study generated a good deal of interest, it has been difficult for people to get too concerned about probabilities generated by arcane computer models. This summer, however, developments in the power system have captured the attention of the industry and the public. Those developments resulted in unprecedentedly high prices in Western power markets, including the Northwest. Average prices for power traded for the heavy load hours of June 28th at the MidColumbia trading hub reached almost $700 per megawatt-hour (MWhr). This is more than 10 times the previous high and is consistent with the prices seen at other trading hubs in the West. Moreover, even for off-peak periods and days for which prices were not at extreme levels, they were considerably higher than past summers.
These prices have caused some economic hardship in the Northwest. The hardships have been limited by the fact that spot market purchases represent a small portion of the total amount of power consumed in Northwest. Relatively few retail customers purchase directly from the market or are on market-indexed rates. However, several industrial customers who are on such rates found it uneconomical to continue operation at these power rates. In addition, several utilities are seeking increases in their retail rates to cover the increased cost of power purchases. Because of these impacts, Governors Locke of Washington and Racicot of Montana asked the Council to undertake a study to explain the reasons for the prices seen on the market and the actions that might be taken to mitigate these prices.
The Council believes that the market prices seen this summer are a tangible manifestation of the fundamental problems identified in the Council's power supply adequacy study of last winter. That is, the prices are an indicator of approaching scarcity. This summer, the system, which already is facing tight supplies, has been further stressed by combinations of unusually high loads, poor hydropower conditions, and forced outages of thermal units. There is little in the way of priceresponsiveness in demand to mitigate these prices. Those who had available supply were able to ask for and receive high prices. This combination of factors is precisely what leads to the power supply adequacy problems identified in the Council's earlier study. These factors apply not only to the Northwest but also to the entire Western Interconnected System. There were some additional factors acting this summer related to the design of the California market, but they should not obscure the basic underlying problem. Absent some action, the next similar event could result in not only high prices but also a failure of the system to meet loads.
In the following paragraphs we will summarize the evidence regarding the factors affecting Western market prices this summer, focusing in some detail on the last week in June, the period in which the highest prices were observed. We will then offer some recommendations for actions to mitigate future price excursions and potential power supply adequacy problems.
