Even keel electrical supply and pricing is possible

What can Washington state do to avoid problems similar to those Texas experienced with its energy supply during February 2021? How should our grid and utility regulations be designed to maintain economic and reliable service, especially as the use of intermittent solar and wind generation, and electric vehicles, all increase?

Let’s start with what our state can do to avoid the high electric prices Texas experienced.

Two key lessons the public can learn from the Texas situation are: Electric prices can go up 100-fold within minutes if a short-term mismatch between electric supply and demand happens. Second, extreme prices can persist long enough for total costs to be very significant.

Electric price spikes usually aren’t as prolonged, or as visible, as they were in Texas. Under Texas’ regulations, consumers were allowed to take the risk of accepting live wholesale prices. Some Texas retail customers saw $10,000 monthly utility bills.

Similar supply/demand mismatches, and their resulting wholesale price spikes, can happen anywhere, including Washington. Demand can be higher than expected because of a heat wave or prolonged cold weather. Supply can be lower than expected for several reasons, e.g., accidents can affect generation or transmission.

In Washington, customers will not receive huge individual bills, because our utility rates don’t allow wholesale prices to be passed through directly. However, Washington customers do pay for wholesale price spikes. We just don’t pay all at once. In most places, regulations are set up to force utilities to absorb extreme wholesale prices in the short term and to pass the costs on to retail customers over years, or decades, via higher rates.

Washington utilities raised rates following the California energy crisis of 2001, which affected most of the western U.S. grid. There were several causes of the California supply shortfall, including weather, poorly implemented state regulations, bad utility management, and outright fraud by several companies, notably Enron.

The supply/demand mismatch that caused the high prices also had a demand side. The reasons demand did not fall when prices increased are the same as they were in Texas: Customers had no way to know that electric supply was down, and had no way to react even if they had known.

In commodity markets other than electricity, extreme price spikes do not happen. In markets for, say, metals and farm products, a mismatch between supply and demand can be addressed by releasing inventory from previously stored stockpiles. Also, customers do know that prices are up and react to higher prices by reducing demand.

The following actions can be taken to reduce and address electric supply shortfalls, and to create a feedback loop that will give customers more control over demand:

Actions that reduce electric supply shortfalls and create a feedback loop that gives customers more control over demand include:

• Improving Washington’s access to additional electric supplies which can be brought on line quickly to address a supply shortfall.

• Creating dispatchable inventory. Washington has a much greater ability than most states to release more water from hydroelectric dams. Utility-scale batteries, and electric vehicles that can be discharged with customer permission on utility requests, are potential sources of inventory.

• Creating live two-way communication between utilities and customers, so that customers can see dramatic price changes. Create systems and regulations that enable customers to automatically and voluntarily reduce demand.