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Analyzing California's Power Crisis

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  • Ahmad Faruqui, Hung-po Chao, Vic Niemeyer, Jeremy Platt and Karl Stahlkopf

Abstract

California's power crisis has implications for power markets world wide, because of the severity and unpredictability of its impacts. This paper discusses the causes of the crisis and derives lessons for energy policy makers. The crisis was triggered by a fundamental imbalance between the growing demand for power and stagnant power supply. California's market design greatly magnified the problem, by disconnecting the retail and wholesale markets for electricity, and by requiring the investor-owned utilities to buy their power on a spot market. Low hydro conditions, hot weather, and rising natural gas prices put the market over the edge. A major lesson that has been learned is to introduce demand elasticity in restructured market designs, and permit buyers of power to hedge against price volatility by engaging in forward contracts.

Suggested Citation

  • Ahmad Faruqui, Hung-po Chao, Vic Niemeyer, Jeremy Platt and Karl Stahlkopf, 2001. "Analyzing California's Power Crisis," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 29-52.
    • Handle: RePEc:aen:journl:2001v22-04-a02
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    Cited by:

    1. C-K Woo & I Horowitz & B Horii & R I Karimov, 2004. "The efficient frontier for spot and forward purchases: an application to electricity," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 55(11), pages 1130-1136, November.
    2. Molyneaux, Lynette & Wagner, Liam & Froome, Craig & Foster, John, 2012. "Resilience and electricity systems: A comparative analysis," Energy Policy, Elsevier, vol. 47(C), pages 188-201.
    3. Druce, Donald J., 2007. "Modelling the transition from cost-based to bid-based pricing in a deregulated electricity-market," Applied Energy, Elsevier, vol. 84(12), pages 1210-1225, December.
    4. Ludovic Gaudard & Franco Romerio, 2020. "A Conceptual Framework to Classify and Manage Risk, Uncertainty and Ambiguity: An Application to Energy Policy," Energies, MDPI, vol. 13(6), pages 1-22, March.
    5. Woo, C.-K. & Lloyd, Debra & Clayton, William, 2006. "Did a local distribution company procure prudently during the California electricity crisis?," Energy Policy, Elsevier, vol. 34(16), pages 2552-2565, November.
    6. Bahçe, Serdal & Taymaz, Erol, 2008. "The impact of electricity market liberalization in Turkey: "Free consumer" and distributional monopoly cases," Energy Economics, Elsevier, vol. 30(4), pages 1603-1624, July.
    7. Amundsen, Eirik S. & Bergman, Lars, 2006. "Why has the Nordic electricity market worked so well?," Utilities Policy, Elsevier, vol. 14(3), pages 148-157, September.
    8. Papadopoulos, A. M. & Oxizidis, S. & Kyriakis, N., 2003. "Perspectives of solar cooling in view of the developments in the air-conditioning sector," Renewable and Sustainable Energy Reviews, Elsevier, vol. 7(5), pages 419-438, October.
    9. Fredrik Carlsson & Peter Martinsson, 2007. "Willingness to Pay among Swedish Households to Avoid Power Outages: A Random Parameter Tobit Model Approach," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 75-90.
    10. Baskette, C. & Horii, B. & Kollman, E. & Price, S., 2006. "Avoided cost estimation and post-reform funding allocation for California's energy efficiency programs," Energy, Elsevier, vol. 31(6), pages 1084-1099.
    11. Zaijing Gong & Dapeng Liang, 2017. "A resilience framework for safety management of fossil fuel power plant," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 89(3), pages 1081-1095, December.
    12. Kobos, Peter H. & Erickson, Jon D. & Drennen, Thomas E., 2006. "Technological learning and renewable energy costs: implications for US renewable energy policy," Energy Policy, Elsevier, vol. 34(13), pages 1645-1658, September.
    13. Faruqui, A. & Hajos, A. & Hledik, R.M. & Newell, S.A., 2010. "Fostering economic demand response in the Midwest ISO," Energy, Elsevier, vol. 35(4), pages 1544-1552.
    14. Woo, C.K. & Olson, A. & Horowitz, I., 2006. "Market efficiency, cross hedging and price forecasts: California's natural-gas markets," Energy, Elsevier, vol. 31(8), pages 1290-1304.
    15. Dias, José G. & Ramos, Sofia B., 2014. "Heterogeneous price dynamics in U.S. regional electricity markets," Energy Economics, Elsevier, vol. 46(C), pages 453-463.
    16. Brown, Richard E. & Koomey, Jonathan G., 2003. "Electricity use in California: past trends and present usage patterns," Energy Policy, Elsevier, vol. 31(9), pages 849-864, July.
    17. Woo, C.K. & King, M. & Tishler, A. & Chow, L.C.H., 2006. "Costs of electricity deregulation," Energy, Elsevier, vol. 31(6), pages 747-768.
    18. Woo, Chi-Keung & Olson, Arne & Horowitz, Ira & Luk, Stephen, 2006. "Bi-directional causality in California's electricity and natural-gas markets," Energy Policy, Elsevier, vol. 34(15), pages 2060-2070, October.

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    JEL classification:

    • F0 - International Economics - - General

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