Yes Energy News and Insights

The CAISO Dilemma

It’s no secret that California has a power problem.  Heading into the summer, the California Independent System Operator (CAISO) was the US region deemed most likely to experience power shortages (DiSavino 2021).  Nodal locational marginal prices (LMPs) are on the rise, and capacity levels are falling.

These challenges have residents worried about outages and unhappy about rising utility bills.  Independent System Operators are tasked with ensuring reliable and accessible power in their region, and CAISO is on the hook.  On the market side, in these periods of volatility, participants have the opportunity to drastically increase profits, mitigate risk, or - in a worst-case scenario - meet their financial ruin.

Capacity constraints in 2020, driven by extreme heat, led to California’s first rolling blackouts in 19 years, causing outages for more than half a million customers.  This summer, the region has received warnings of potential rotating outages (DiSavino 2021).  But why is CAISO experiencing so many difficulties?  There are a variety of contributing factors. 

  • Temperatures are on the rise, and that means increased load.

  • California has ambitious renewable energy goals.

    • There is an increasing prevalence of intermittent generation resources.  Unfortunately, these renewables are often offline in the evening, when demand peaks on hot summer days (Sangree 2021).

    • Natural gas, oil, and nuclear generating units are being retired.  However, the situation is so dire some plants that were set for retirement are being kept running (Sangree 2021). 

  • Drought is leading to hydro being forced offline, further decreasing capacity (Mullin 2021).

  • Congestion and outages are on the rise 

As mentioned previously, in times of high volatility, while some market participants have the opportunity to increase profits significantly, others are losing out.  Regulators, market participants, and citizens alike are on edge after the outages in ERCOT this year led to enormous defaults, loss of human life, and a PR disaster.  The event reinforced the knowledge that outages at that scale, and prices that high, have the potential to lead to disaster.  With so many variables contributing to increasing LMPs and capacity shortages, how are CAISO, utilities, IPPs, or financial traders supposed to solve the problem and ensure that they have a strategy to protect their organization going forward? 

The answer lies in leveraging powerful nodal market data.  Armed with extensive market data,  you and your business can begin to inform your strategy and operational plan.  Visualizing the markets and exploring grid components on a granular level to investigate factors driving price increases is a great place to start.   (Learn more about the importance of building a solid data foundation in power markets here).  Once you understand how CAISO’s components are driving prices, it’s time to build on that initial investigation with big data analytics.  Cloud or Lake platforms allow you to quickly and easily examine year’s worth of pricing, constraint, congestion, outage, and generation data.  Crunching data sets like these will allow you to determine which variables are driving prices most and can inform your strategy to ensure you are making the best business decisions possible.  Diving deep into the data will allow you to unveil trends your competitors may not have been aware of, giving you a competitive advantage in the market.  

To learn more about the variables contributing to rising LMPs and the CAISO capacity shortage, read our e-book Solving for the CAISO Problem(s).

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