The benefits of DR remain difficult to quantify. Building a comprehensive business case requires a shift in how policy makers think about DR in order to understand its real possibilities.
Squeezing Scarcity From Abundance
California's pursuit of a centralized administrative solution in reliability hinders everyday operational issues.
In March and April of this year, three California government agencies, the California Public Utilities Commission (PUC), the California Energy Commission (CEC), and the California Independent System Operator (Cal-ISO), expressed concerns about possible blackouts in Southern California this summer 1—almost inconceivable by any traditional utility planning standards for a region with capacity margins above 30 percent for summer 2005. 2
Part of the problem reflects an error in planning-the continued treatment of California as a single region for planning purposes-but the larger issue is ideological. California's continued pursuit of a centralized administrative solution to reliability has left it ill-equipped to address everyday operational issues. In this case, a fairly simple exercise in prudent utility practice has been allocated among too many parties, and no one is actually in charge of a solution. It remains to be seen whether Gov. Schwarzenegger's plan to consolidate some functions of California's agencies within a new state Department of Energy will further complicate reliability planning or make it simpler.
The irony of the belief in better reliability through markets is that Cal-ISO's short-term purchases of system reserves could very well raise prices and reduce reliability.
The cost of substituting ideology for practical solutions often lands on consumers. Emergency declarations by Cal-ISO are costly for both the ISO and the neighboring systems across the Western Electricity Coordinating Council (WECC). Markets for reserves may work best if California would stop "driving ahead of its headlights" in procuring reserves.
When the ISO forecasts forced outages higher than its 7 percent operating-reserve criterion, either the outages must be addressed or the criterion increased. The lesson of the California crisis of 2000/2001 is that bad market design creates an incentive for higher outage rates.
A Very Short Primer on Electricity Reliability Planning
Since electricity cannot be stored, we must always have a surplus of available capacity. The planning standards generally used in the industry are simple and robust.
The first step is the load forecast. A capacity forecast is conservative by its very nature, assuming the highest possible requirements. In practice it assumes hot weather in the south and cold weather in the north. California's unique terminology for this practice is called the "1-in-10 Forecast" standard. 3 It is standard practice to maintain a planning reserve above the worst-case load forecast. In California, this is equal to using the "1-in-10 Forecast" as a minimum level of capacity and then adding additional reserves to cover other risks.
The second source of risk in electricity planning is equipment failure. Again, the general rule is to use a worst-case forecast (drought for hydro, temperature derating for thermal units), and then set an operating reserve margin sufficient to maintain service after unforeseen outages.
These standards have been in place for 40 years. 4,5 Planning reserves usually fall in the range of 10 to 15 percent. This splits into a 7 percent operational reserve