Simulating electricity restructuring in California: Interactions with the regional market

This paper presents some simulations of the proposed California power exchange, or pool, as it might interact with the regional market in the western US. Pooling will increase interdependence with the regional market. We study this using a multi-area chronological production simulation model. We find that overall operating economies resulting from pooling are small. Physical changes in the dispatch of the electrical system, however, are rather large in comparison with the economic effects. The two driving forces for the physical changes are the reduced unit commitment resulting from pooling and transmission pricing policy. As a result of increased regional trade, transmission congestion increases. The costs of congestion appear small, however, since marginal costs in the regional are quite close to one another. Within the California pool, marginal cost pricing will produce economic rents for the generating companies. These rents are not particularly large, especially in light of the fixed operating and maintenance costs of the plants that must be covered by those rents. Finally we examine the potential for new entry into the market. Entry conditions in the near term does not appear particularly favorable. If the fixed costs of new supply are sufficiently low to allow entry, regional economics show no clear preference for siting within California versus more remote locations. The trade-off between moving gas versus transmitting power does not show a clear trend. These results are quite preliminary, but suggest that quantitative modeling of electricity restructuring can yield useful insights.