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East vs. West: Comparing Electric Markets in California and PJM

While neither is perfect, the former has done better than its critics would admit.
Fortnightly Magazine - July 15 2000

2000, bilateral prices in PJM were more strongly correlated with Pool prices than they have been in California (see Table 2).

Fuel Price Correlation . The relationship between oil and gas prices and electricity prices is interesting for both markets. Over the last 14 months, oil prices in California have been higher than in the Mid-Atlantic states. The marginal cost of operating a typical oil generator exceeded average electricity prices in both markets. For the period April 1999 through May 2000, California prices were $11.84 per megawatt-hour below diesel generation costs, while the difference in PJM was $7.91 per megawatt-hour. Although there is more oil-fired generation capacity in the Mid-Atlantic Area Council than in the Western Systems Coordinating Council, prices in both markets suggest that these generators would have been used infrequently. Indeed, simple empirical analysis (and Figures 2 and 3) fails to show a relationship between oil prices and electricity prices.

Spark Spread . Another way to view the data is to look at the average difference between electricity prices and the marginal cost of producing power with a gas generator, often referred to as the "spark spread." This figure is an important indicator of the performance of the two markets, as gas turbines are growing in relative importance and can be installed in a fairly short period of time. As Table 1 indicates, on-peak power prices in PJM have averaged $14.78 per megawatt-hour above typical marginal costs for gas-fired generation from April 1999 through March 2000, compared to a difference of $10.50 per megawatt-hour in Southern California. Figure 4 illustrates the comparison between the marginal cost of generating with a typical gas turbine and on-peak power prices in each of the markets. Volatility in the PJM system was centered principally in the summer air conditioning season, and was much greater during the summer of 1999 than 1998. California's prices also have exhibited volatility, but until April and May 2000, the peaks had not been nearly as high as those seen in PJM.

Congestion Management . Congestion differentials in the two systems reveal similarities and differences. Even though PJM's generation capacity is in broad balance with its load, the pool actively exports and imports electricity. As a consequence, PJM's important interconnections to other grids can be congested in either direction, as illustrated in Figure 5. On the other hand, California is a net importer of electricity. Thus, congestion there normally occurs in one direction, from the surplus-producing area to California. Figure 6 illustrates the congestion charges involved in moving power from Palo Verde (Arizona) to Southern California, and from the Nevada-Oregon Border to Southern California.

Nevertheless, there remains substantial uncertainty with respect to the frequency and level of congestion in both systems. That is because the principal causes of congestion...extreme weather and unexpected generation and transmission outages...are not predictable. In the California system, for example, the path from the Pacific Northwest (NOB to SP15 in Figure 6) is normally congested from May to July (the period of high water flows and hydropower imports), but the dollar measure of congestion seems almost