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California Realities and Federal Plans

A tale of two energy worlds.

Fortnightly Magazine - August 2009

to the movement of electrons over the transmission grid. Specifically, CAISO computer hardware and software now have the technologies capable of running the grid in accord with the new market design. The system software is supposed to analyze the best use of the grid and help create pricing consistency between what generators have scheduled a day in advance and what the system operator needs in real-time to meet demand. Taken together, the several different elements of the new market redesign, working in concert, manage the state’s electricity transmission system more efficiently and at less cost. In addition, simultaneous management of energy and transmission resources eases the market’s time-price differential and reduces the opportunities for gaming the system.

While California’s MRTU effort is notable and necessary, it isn’t novel or visionary. MRTU was approximately 10 years in the making, and was implemented more than 10 years after the centralized markets in the Mid-Atlantic adopted a similar market design. In so doing, California now joins the markets in New England, New York, the Mid-Atlantic, and the Midwest in implementing a more efficient, cohesive power market. Moreover, California’s effort is not done. It has not yet implemented virtual trading, which allows market participants to financially arbitrage prices between the day-ahead and real-time markets, which cause price convergence and generally produce more accurate pricing of energy. It also has instituted the lowest price caps of any organized market. This lower price cap runs the risk of creating mitigated prices that don’t fully reflect market signals for investment.

National Smart Grid

The Obama administration’s 2010 budget, which funds and expands upon the American Recovery and Reinvestment Act (ARRA), which the president signed into law on February 17, 2009, places tremendous emphasis on expanding and improving the power-system grid that distributes electric energy. Plans call for spending $32 billion to transform the nation’s energy transmission, distribution, and production systems by allowing for a smarter and better grid and focusing investment in renewable technology. The effort intends to transform how Americans get electricity, and it will include:

• Demand-side management of electric use that will include conservation programs and rebates;
• Dynamic retail pricing and metering that respond to demand patterns;
• The rise of wholesale power DR programs that will reduce usage in response to price signals, paying the reduction as a wholesale power price; and
• An overall philosophy of energy efficiency that is a hybrid of utility, state, federal and private consumer initiatives.

Included in the ARRA, with proposed funding in the budget, is a provision for spending more than $11 billion to expand and improve the electric power grid, through construction of more than 3,000 miles of new and modernized transmission lines and deploying 40 million “smart meters” to reduce electric power usage in homes. This includes pilot projects and federal matching funds for the Smart Grid Investment Program (established in the Energy, Independence and Security Act of 2007 ). The matching program would reimburse up to 20 percent for investments in smart-grid technologies.

This will be a major challenge for the organized wholesale electricity