What is wrong with the California Electricity Market?

Mahmut Karayel
24 Nov 2020

What is wrong with the California Electricity Market?

Even though the marginal cost of electricity generation has steadily decreased, this benefit did not reflect on the electricity bills of California residents. Eagerness of California to incent behind the meter solar generation and mandate RPS standards earlier than other states, increased the average cost of wholesale electricity. We expect that future regulatory adjustments will correct some of the causes of this unintended consequence.

Electricity generation is changing rapidly. California approved batteries as a valid source of generation. Cheap solar and wind are dominating diurnal pattern of electricity prices while increasing volatility.

System operators like CAISO in California and ERCOT in Texas are mandated to deliver reliable power to your outlet at an affordable cost. Cheap natural gas, decreasing cost of renewables, and efforts of system operators to encourage competition decreases the marginal wholesale price of electricity.

Retail prices, on the other hand, are much higher than wholesale prices. Some margin is expected because of transmission and distribution costs, the indirect costs of reliability, and administrative overhead of dealing with the consumer.

Marginal Electricity Prices (August 2020 average in cents/kWh)

Data by altadata.io, EIA

Wholesale Residential Retail Multiple
California 3.96 20.77 5.3x
Texas 3.55 11.74 3.3x

In California, residential retail price of electricity is more than five times the marginal wholesale price. What is different about California? Or as the Easterners would say, what is wrong with California?

To put it shortly, even though the marginal cost of wholesale electricity is low in California, the average cost is much higher compared to Texas. This is due to:

  • California was too early in setting high Renewable Production Standards (RPS). Although, we in California reached 33% renewable and going on to 44% in 2024, this came at a cost. Trying to meet RPS, starting in the 2000's, utilities in California contracted to purchase expensive renewable generation.
  • Behind the meter roof-top solar generation by individual households is much more common in California than in other states. This increases the average cost of wholesale energy: Households with solar, when they do not purchase from the utility, they do not contribute to the amortization of infrastructure costs. Further, net metering (selling back excess roof-top production to the grid at retail price) increases the average cost of electricity to the utility.
  • The timing of renewable electricity generation is determined by nature, which results in higher volatility of supply. Volatility of wholesale prices are double or triple the average wholesale price of electricity (data from altadata.io). To mitigate this uncertainty, utilities in California schedule 15% more energy than needed. This increases average wholesale prices even more.

CAISO LMP by months, hours

The figure above gives an indication of the variability of marginal wholesale prices in California. The variability is even muted in this graph because hourly average is taken over days of the month. There are many hours where the price is negative due to excess solar generation.

  • Another major cause of "cost without delivery of power" is that California is still paying for the decommissioned San Onofre nuclear generation station. The nature of nuclear is that you pay to build, and you pay again to "unbuild". The high ongoing decommissioning costs are being charged to the retail consumer. There is only one operational nuclear plant left in California now, the Diabolo Canyon power plant which is planned to be decommissioned in 2025.

Some of the unintended consequences of roof-top solar and Net Metering are expected to be adjusted through new regulations. Nevertheless, the generators and utilities will need to operate more efficiently to survive in a more digital, more volatile world. It is a worthwhile price to pay to survive climate change.

Suggested ALTADATA Data References

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