Wholesale electricity prices soared during California’s September heat wave.
Hot, hot, hot! What a way to start September, with record high temperatures across California, and what a test for the state’s electricity market. More California households have air conditioning than ever before, and it pushed electricity demand to an all-time record.
For today’s post, I want to look at what happened to wholesale electricity prices. Like many of you, I kept checking the CAISO price map throughout the heat wave, but now that temperatures – and prices – are back down, I wanted to look more carefully at what happened.
There will be time later to analyze the why, but the intention here is to begin unpacking the what. How high did prices get? How did prices vary across days? How did prices vary across hours?
September to Remember
Now in retrospect, the first 8 months of 2022 look pretty tame. The figure below plots average daily prices during peak hours. Each observation is a day, and I focus on prices from the day ahead market because those data were most easily available.
For the first 8 months of the year, California prices during peak hours averaged less than $100 per MWh.
Then it got hot. The September heat wave was historic, both in intensity and in length. Air conditioning pushed electricity demand to a new all-time record on September 6th (over 52,000MW!). Thus far during September, the average day-ahead electricity price during peak hours has been over $450 per MWh. Electricity prices have been well above normal levels for the entire month, but September 6, 7, and 8 experienced the highest prices.
The figure above focuses on 4pm to 8pm. Why these hours? Because these early evening hours are now unmistakably the peak during late summer in California. The figure below plots average prices by hour-of-day. During the first nine days of September, day ahead prices peaked between 4pm and 8pm.
This makes sense. On these hot days, air conditioning continues to be used heavily in the afternoon and evening, even as solar generation fades. With good reason, CAISO tends to target 4pm as the starting point for Flex Alerts.
Soaring Price Statewide
During the heat wave, day ahead prices were similar in different parts of the California market. The figures above show prices for Northern California (NP15), but the patterns are very similar for Central California (ZP26) and Southern California (SP15).
Of course, it isn’t always the case that prices are the same in these different price zones. When transmission constraints within California bind, it is common to see large divergences. But – for this heat wave – the challenge was really the overall balance between supply and demand state-wide, as well as the ability to import electricity from out of state.
Tuesday, September 6th at 5:48 PM, the California Office of Emergency Services sent an emergency text message to 27 million Californians urging them to reduce their electricity consumption. The text seems to have worked, with electricity demand dropping by 1,200MW between 5:50 and 5:55PM.
The text came as a complete surprise, so the impact would not be evident in day ahead prices. But, what is clear from day ahead prices is that Tuesday evening was a real challenge from an electricity market perspective. Both Tuesday (9/6) and Wednesday (9/7) wholesale prices reached $1200 per MWh, some of the highest prices in recent memory.
Quite a Test
All in all, this was quite a test for California’s electricity market. Facing extreme temperatures and an all-time record level of electricity demand, the market continued to work and the lights stayed on without the need for rotating outages.
Were prices high? Yes, absolutely. But this is exactly what is supposed to happen during periods of market scarcity. High prices create a strong incentive for generators to increase supply, and for consumers to decrease demand.
I only wish demand could have done even more. The impressive rally in response to the amber alert underscores the untapped potential of this side of the market. I don’t think anyone thinks the state should get into the habit of sending out this type of emergency text messages all the time, but it was striking to see what is possible with so many people acting together.
Between the CAISO flex alerts, the growing number of critical peak pricing programs, and demand response companies like OhmConnect, there are many smart people working to introduce more dynamic incentives for electricity consumers. It’s important that California continue to bring innovative demand flexibility to the market because this will not be the last heat wave nor the last stretch of extreme prices.
Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.
Suggested citation: Davis, Lucas, “How High Did California’s Electricity Prices Get?”, Energy Institute Blog, UC Berkeley, September 12, 2022, https://energyathaas.wordpress.com/2022/09/12/how-high-did-californias-electricity-prices-get/
Lucas Davis is the Jeffrey A. Jacobs Distinguished Professor in Business and Technology at the Haas School of Business at the University of California, Berkeley. He is a Faculty Affiliate at the Energy Institute at Haas, a coeditor at the American Economic Journal: Economic Policy, and a Research Associate at the National Bureau of Economic Research. He received a BA from Amherst College and a PhD in Economics from the University of Wisconsin. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy.