Many utilities engage in hedging to protect customers from price spikes. But unless regulators are involved in crafting and monitoring these programs, they can turn into speculative ventures that...
THE PEOPLE HAVE spoken. They want choice in power supply in California and in other states. But people are also "load," at least in utility parlance. And some load in some areas can prove awfully difficult to serve. They're called "load pockets."
A load pocket is formed when a deficiency in transmission capacity to a market area cannot be priced away sufficiently to clear the market during peak-load periods. Consequently, the market area must rely on "must-run," local generation units during part of or all of the year. These must run plants will exert market power, regardless of whether they operate under a poolco model (suppliers bid into and customers purchase from a central pool) or a bilateral contracts model (customers and suppliers deal directly with each other).
Examples of significant load pockets include San Diego and Redding, Calif., Consolidated Edison's service area in New York, and Las Vegas (and probably several other places around the country). No matter who owns the plants, either individually or collectively, all or a portion of the load pocket plants must run during the peak-load periods. Whoever owns the plants will have market power.
This market power stems from a choice available to local (load-pocket) generators. They may choose to sell in either of two ways: (1) into a regional spot market, or power pool, or (2) locally, where competition is limited.
Under the California model, the pool price would become the minimum for a load pocket contained within the pool. However, the local generator could extract higher prices by selling its output within the load pocket, since all the needs of the load pocket cannot be served from the pool because of the transmission constraints.
Similarly, if the load pocket were located in a state where bilateral contracts were the rule, the parties to the bilateral contract would be forced to deal with one or more of the area generators to have sufficient capacity to meet load. Local area generators could hold out for the highest bidder. The issue could be even more complicated if customers used up the available transmission on a first-come, first-serve basis. Customers signing up for power after available transmission is taken would be forced to buy all their power from the local generators at market power prices set during load-pocket conditions.
Depending on the severity of the problem, it may prove difficult to predict when load-pocket conditions will occur. Identification may come concurrently, after the fact, or unexpectedly, such as during a forced outage on a transmission line.
The question is, how can consumers who are constrained within the load pocket receive the benefits of competition in spite of this market failure?
A Look at Options
One obvious solution, but not necessarily the cheapest, would have utilities building more transmission. This answer might work for stagnant growth areas or for areas with relatively short periods of constrained conditions. For other areas, however, this option would be prohibitively expensive and inefficient, compared to building more local area generation. The cost of new transmission could wipe out any potential savings