When Gov. Gray Davis signed the energy relief bill Sept. 6, San Diego got immediate rate relief. The summer’s energy crisis is over.
Not so fast, warn industry leaders. Although rates are going down for the customers of San Diego Gas & Electric Co., many of the root causes of the rate increases are still there. And California’s actions over the next few months will determine what happens once the rate caps are lifted in 2003.
Karen Griffin, electricity analyst for the California Energy Commission, said the outlook was largely optimistic. Four new power plants are being built, with a total capacity of 2,928 megawatts.
Three of these are expected to be online by the summer of next year , just in time for next summer’s squeeze, she said. The fourth will be operational by July 2002, and will provide an additional 880 megawatts of power.
A fifth power plant recently received its permit to begin construction. It will provide 720 megawatts of power, with a projected completion date of January 2003, Griffin said.
An additional 12 power plants are going through the permitting process, including one at Otay Mesa. These dozen plants have a combined capacity of 7,535 megawatts, she said.
There are an additional 20 more power plants in line, she said.
Griffin cautioned that a plant may or may not be built if investors are still going through the permitting process. However, judging by the power plants that are already being built, these will be enough to more than meet the present and future needs of California consumers, she said.
This will help push prices down, Griffin said.
Other work needs to be done, however. There is a fundamental problem with the way the market is structured, contributing to higher electricity prices during the summer, she said.
At any other time of year, there is more generation than demand, and electricity trades at 3 cents a kilowatt. That means generators make no profit when calculating in the debt on the massive power plant, she said.
Companies recoup their earlier losses by bidding higher when demand rises, and prices climb precipitously, Griffin said.
Also, additional generators are brought online during times of peak demand. But these are older and inefficient, costing more to run, and they operate only a few months every year. That makes more electricity available, but it pushes prices even higher, Griffin said.
Both consumers and producers of energy would benefit if demand could be smoothed out over the course of the year. For example, instead of investing funds in energy-efficiency programs that provide additional insulation, reducing the use of energy for winter heating, a company could invest in more efficient air conditioning, which reduces the use of energy for summer cooling, when costs are higher, she said.
“At peak demand, prices are extremely sensitive,” she said, “and demand reductions can happen in time for 2001 and 2002.”
Griffin said energy consumers are a very important factor in keeping electricity cheap and available.
“In terms of how we’re going to get through the next three years, we need you guys to make it happen. You’re the only way we’re going to make it,” she said.
Dorothy Rothrock, energy policy director for the California Manufacturers & Technology Association, echoed that theme. This summer’s crisis was a “financial and political catastrophe” that could happen again.
“For the next couple of years, it’s really going to be tough. Even if we do everything we’ve got to,” she said. “All we need is too little hydro, maybe a nuclear plant going down, it will be more than tough; it’ll be a catastrophe.”
To help California avoid that fate, large electricity consumers need to seek out solutions. Business customers can look into “load shedding,” or agreeing to voluntary power shut-offs when electricity is scarce, in return for lower rates from the utility.
Another solution business customers have is to build their own on-site power generation, she said.
Gary Ackerman, executive director of the Western Power Traders Forum, was more pessimistic. He described the rate reduction signed by the governor last week as being hastily cobbled together in the legislature, and therefore, poorly thought out.
“The intensity of a price spike, and the quality of a legislative response, are inversely proportional,” he said. “This summer gave way to a legislative response which is ineffective, inappropriate, and will basically cost consumers more money.”
SDG & E;’s bills will remain artificially low under the new measure, but once it expires in 2003, ratepayers could be looking at a 12-month long balloon payment, Ackerman said.
Ackerman said that deregulation was not to blame for San Diego’s energy crisis. Actually, deregulation makes it possible for electricity consumers to do something they were never able to do before , to go to a third party and get price protection through “hedging,” or long-term contracts for electricity, he said.
This summer’s price spike happened in part because SDG & E; failed to seek out price protection for its customers through “hedging,” or long-term contracts, Ackerman said.
Another cause of the price spike is that energy restructuring began while the industry was facing supply shortages , a mistake in retrospect, he said.