It’s a surprising scenario: Businesses that thrive on a free-market system are questioning the value of energy competition and are calling upon the government to remedy the problem.
Skepticism about electricity deregulation understandably is reaching new heights in California these days. California’s escalated power prices last summer were a result of increased demand, high natural gas prices and a tight electricity supply. A dry winter in the Pacific Northwest and hot temperatures, combined with high demand, in Western states like Arizona, reduced California’s electricity imports, amplifying already thin electricity reserves.
Projections call for an even tighter energy supply here in 2001, and that could force some 2,500 businesses to remain in contracts that require them to cut power during periods of peak demand , right in the middle of their workday.
These certainly weren’t the outcomes anyone predicted when California opened its electricity market to competition in 1998. If there’s a lesson to be learned from the California experience, it’s that businesses must help shape the free energy market. After all, this isn’t an issue of simply keeping the lights on. It’s also about keeping revenues coming in, particularly at high-tech firms that fuel the state’s digital economy.
Solution Lays In Retail Market
In my view, the solution to the energy crisis rests with a fully functional retail market that brings innovation and flexibility to customers. California is the only state in the nation where wholesale energy prices are actually higher than retail prices. That in itself demonstrates that the market is still maturing. In this regard, retail electricity sellers can help stabilize energy costs by serving as a buffer between wholesalers and consumers.
But a competitive retail energy market brings other benefits as well.
For starters, competition gives businesses pricing options based on their desired level of risk. This puts firms in control of their energy costs by allowing them to choose from traditional fixed pricing programs that lock in a set rate for power or market-driven pricing that enables them to purchase energy by the hour.
Deregulation also has spawned creative load curtailment programs. The California Independent System Operator has introduced new programs enticing businesses to curb , or in some cases completely shut down , energy usage.
Pricing Programs
Energy service providers also have introduced pricing programs that help the ISO manage load while rewarding those businesses that can cut power usage during peak hours.
These types of programs are critical for a state like California that has a huge power appetite. Until new power plants are built , and even when they are in place , we must judiciously manage energy use to avert rolling blackouts and avoid price spikes.
When energy usage reaches capacity, interruptible power programs can be the difference between keeping the power on or off. But like pricing options, load curtailment must be flexible. After all, a one-size-fits-all program may be too rigid for some firms, while not letting others participate to their full potential.
Curtailment programs that are the product of electricity competition take into consideration the degree to which businesses are able to interrupt their power. Some programs employ Internet technology to provide real-time snapshots of power usage so that the California ISO can confirm that energy loads have been shed.
Why Now?
Why is all of this important now?
Just ask the ISO. In mid-November, when California’s energy demand is supposed to be manageable, the state quietly slipped into Stage 1 and Stage 2 alerts. The same occurred this month. A combination of near-record cold temperatures and planned unit outages left the state with slim reserves.
The alerts drove prices upward, again, and we haven’t even hit the coldest part of the year. Prices for electricity and natural gas remain high and should stay that way through spring.
In addition, the legislative session is just around the corner and energy is one of the major issues on the agenda. It’s critical that businesses have a voice in decisions that could have far-reaching impacts.
Perhaps most importantly, Californians are entering a period of greater risk as it relates to energy use and cost. In order to reap the benefits of competition during these uncertain times, businesses must participate in competition. And that requires a greater understanding , not only of the problem but also of the solutions for effectively managing your energy load today, tomorrow and in years to come.
Nichols is managing director of New West Energy.
