The fledgling California Power Exchange on Thursday launched an hourly trading system, which is expected to reduce the risk of electricity price spikes that plagued the Midwest last month.
The new system will allow buyers and sellers of power--such as Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric, the state’s three biggest investor-owned utilities--to bid on an hourly basis. Traders will be able to respond to shifting demand caused by weather and other factors in 24 electricity auctions a day.
The Power Exchange handles the trading of electricity in the state’s deregulated energy market.
The so-called hour-ahead bidding system joins the state’s two existing electricity markets, in place since the state deregulated electricity March 31: the Power Exchange’s day-ahead system, and the Folsom-based Independent System Operators’ supplementary energy market.
Thursday’s launch follows a heat wave in the Midwest that taxed the region’s power grids to their limits and sent electricity prices skyrocketing, in some cases to as much as $7,000 per megawatt-hour.
Analysts say California’s new bidding system could stabilize wholesale prices. But they cautioned that power blackouts and price spikes remain a threat because of variable weather conditions and the fact that the power grid is aging.
“Pricing on an hourly basis will tighten things up a bit,” said Michael Worms, an analyst at Gerard Klauer Mattison in New York. “But stuff happens. Nothing is going to prevent a major event, an act of God or nature.”
In the day-ahead market, traders bid for electricity based on anticipated demand the day before the power is delivered to customers. The hour-ahead market enables traders to estimate demand more accurately because the electricity is purchased closer to the time it is delivered, said George Sladoje, the Power Exchange’s chief executive.
On Thursday, the average price for the first hour’s bidding was $35 per megawatt-hour, compared with $59.98 in day-ahead bidding for the same period on Wednesday, officials said.
Although the new bidding process shortens the time lag in the day-ahead market, the compressed system leaves little room for error, Sladoje said. “Honestly, with such time constraints, if there’s any significant problem, the market would be shut off.”