Analyzing California's power crisis

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.