Report: CAISO Market-Fundamental Anomalies Shift to New Realities

May 3, 2024



Republished from California Energy Markets

The California Independent System Operator had an unusual year in 2023, with conditions and market fundamentals shifting as load keeps growing and state mandates for load-serving entities to procure more renewables continue to be hampered by increased costs and significant interconnection delays.

The state has reached "a pivotal moment in the energy transition," Ascend Analytics CEO Gary Dorris said during an April 30 webinar on his firm's CAISO Forecast 5.1 preview, subtitled "The Calm Before the Storm."

Most notably among these fundamental shifts are increased disparities in north-south market conditions that are expected to continue into the near future based on price volatility at South of Path 15.

Since 2023, there have been "massive jumps in negative prices in the day ahead market" at SP15 including into the shoulder season, Brent Nelson, managing director of markets and strategy for Ascend, said. There has been "escalation in how negative they go" and negative day-ahead pricing "continues to spread and continues to grow," he said. Prices have plunged to negative $60/MWh, he said, but did not indicate a specific day or time.

North of Path 15 he said, is "doing better" than SP15, Nelson said; however, the divergence in prices accelerated in the past year to the point that there is now a $20 spread between prices.

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There will be a permanent price differential between the regions because of the difference in renewable-generation development costs, Nelson said. This difference is most evident when comparing coastal and inland locations.

The cost of land is lower inland, and infrastructure such as storage and transmission is easier to build in those areas. Southern California is reaching solar saturation, while volatile conditions are most notable in coastal areas, according to Nelson.

Several key anomalies occurred in 2023, including mild weather, plentiful hydroelectric generation and lower-than-expected natural gas prices, Nelson said. After several years of rising load, CAISO had one of the lowest peak demands—both peak demand and average demand—in the past 15 years, due in no small part to an absence of major heat waves in 2023. The refill of Aliso Canyon natural gas storage and the aftereffects of the 2023 atmospheric rivers were among the other unusual factors.

Now, Nelson said, there are significant structural driving forces pushing loads, and related issues are bubbling under the surface. He used an altered movie poster from the film "Jaws" to illustrate the point. These include an increased need for renewable-energy capacity to replace Diablo Canyon generation, elevated Mid-Columbia prices that are keeping hydroelectric generation in the Pacific Northwest, and a supply-demand imbalance that Nelson said was triggered by "continued escalations at the political level" that sent renewable-energy credit and resource-adequacy prices soaring. "RA prices the next year or two are so high, no one can buy anything because nothing is available," he said, adding that "REC prices are also going wild."

The value of RECs now "is in the sundown period," Nelson said. He said entities need to "look beyond [the idea that] all RECs are created equal, because they are not." He also said emissions attributes also have to be considered, with entities needing to "serve the hard parts [of the slice of day] if we're going to decarbonize."

These conditions have caused California to do "non-California things," such as extending the operating life of the Diablo Canyon nuclear facility and postponing the retirements of once-through-cooling natural gas-fired plants, as well as prompting community choice aggregators that were once "not willing to touch gas with a 10-foot pole" to contract for natural gas generation.

Moving to a slice-of-day RA framework, Nelson said, is "no silver bullet" and not aligned with how CCAs are procuring energy, especially now that they are "needing to cover a lot more hours." It has also caused LSEs to pay penalties for not having RA.

"No one wants to take the blame . . . They are willing to pay whatever they have to pay in order to not be short on capacity," Nelson said.

Slice of day also doesn't properly value energy storage, which is "not well captured in the RA structure," he said.

The traditional on- and off-peak pricing structure is losing relevance because it is "obscuring a mixture of zero and negative prices during sunup and the highest prices of the day during sunset," Nelson said. Off-peak prices have increased above on-peak prices because solar continues to depress prices and limited clean-energy options exist in off-peak periods.

Nelson said he expects shortage conditions will keep RA prices elevated through 2030 and the spread in prices will continue.

Currently, the value of RECs ranges from $60 to $80. Nelson said these prices will "crash down to earth eventually."

In continuing the discussion of siting new projects, Nelson noted there were some "strange price dynamics" in a few "nodes and pockets in CAISO." One seen recently was extreme negative pricing—roughly negative $150/MWh—near Kettleman City. Nelson said it seems that old solar power-purchase agreements that don't curtail the power being sent to the grid are causing small oversupplied areas. These could be prime areas for infill battery storage projects.

Nelson also mentioned the pressing need for interconnection queue reforms. CAISO Cluster 15 currently has 347 GW of interconnection requests waiting in the queue. There are some transmission choke points that he said "are difficult to mitigate," yet there are opportunities for wind or battery developers in so-called bonus zones—pockets where developers could serve Los Angeles or San Diego load without paying Los Angeles or San Diego land prices.

The Federal Energy Regulatory Commission on March 29 approved CAISO's request to pause new grid-interconnection requests for 2024 due to a massive backlog of proposed projects (California Energy Markets No. 1782).

Ascend has issued a CAISO market-fundamentals forecast since 2020. The CAISO 5.1 forecast is its first in the "5.xx" series. "The numbering signifies modeling improvements that Ascend incorporates into its forecasts—the bulk of the improvements in this iteration are embedded within our real-time price forecasting," Ascend spokesperson Hannah Hall said.

The firm will issue its CAISO price forecast along with a final presentation and written report in June on its website.

Read Linda Paulson’s online article here: Report: CAISO Market-Fundamental Anomalies Shift to New Realities | Regional Roundup |