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Sustainability Supplement: The California Electricity Crisis of 2000-2001 - Could it happen in Sweden?

Blog Post created by communitypost on 15-Sep-2017

The Sustainability Supplement is a series of research articles prepared by InnoEnergy Master’s School students throughout several European locations. The series provides opinions and commentary on various topics including energy resources, energy efficiency, sustainability and other topics of interest. Any opinions expressed in these articles are those of the writer and do not necessarily reflect opinions of the CommUnity by InnoEnergy or the CommUnity Post. 


Introduction

The California electricity crisis of 2000-2001, also known as the Western U.S. Energy Crisis of 2000 and 2001, was a situation where California, a major state in the U.S., experienced soaring wholesale electricity prices as shown in Figure 1, especially in the winter months of 2000-2001. This resulted in multiple large scale blackouts, along with huge financial and political crises. An analysis of the crisis is carried out in the subsequent sections.

Figure 1. Wholesale Electricity Prices of California, before, during and after the crisis of 2000-2001 (Joskow & Kahn, 2001)

Wholesale electricity market

Electricity as a purely homogeneous commodity has its own peculiarities. Not only does it have a highly inelastic demand, but also inelastic supply, due to very costly storage options and limitations of generation units, as presented in Figure 3. These make the prices of electricity very volatile (Borenstein, 2002). Additionally, it needs to be supplied through networks, which are operated by separate entities.  Conventional power production has a heavy dependence on other industries and corresponding costs greatly affect the final cost of the electricity produced. Hence a unique market is essential for proper functioning of electricity as a commodity.  

Figure 2 represents a modern-day wholesale electricity market supply chain. The power supply chain begins with the generation of power, or importing power from neighbouring countries or states, whichever applicable. Thereby the power enters the wholesale market, where it is traded between the electricity producers (generating stations and importers of electricity) and electricity suppliers or wholesalers (who subsequently sell electricity to the end customer) in the retail market.  Additional presence of brokers and traders in the market favours market liquidity (Commision de Régulation de l'Energie, République Française, n.d.). The electricity trading usually takes place in stock exchanges. Recently, some large customers have begun buying directly from generators to reduce costs.  

There are two distinct types of purchased electricity: spot or cash products, to be purchased for delivery on the same or following day and forward products, to be purchased for delivery during a given period in the future. Each country or state has a different legislature with different timelines for such products. But the basic framework is accepted as the most suitable wholesale electricity market structure to maintain security of supply and stability in the electricity system.

The purchased electricity by the suppliers is finally sold, around 80% for end consumption in the retail market, some for export and the remainder is lost in transmission and distribution. The retail market is either fixed priced or dynamic, based on the local legislation of each state or country.

Figure 2. Wholesale Electricity Market Chain (Ofgem, 2015)

Causes of the California Crisis 2000-2001

By 1996, the California electricity market was deregulated, with Power Exchange (PX) and the California Independent System Operator (CAISO) controlling the wholesale market. In the wholesale market, the power was purchased from as low as ten minutes to up to a day in advance (Sweeney, 2002).  However, the Californian government fixed the retail price. This completely shielded the retail customers from the volatility of the wholesale electricity market, handicapping the electricity market to adjust to changing economic circumstances.

It is known that an increase in price would result in new supplies.  However, as inherent with electricity generating systems, in the short run, rising wholesale prices needed to be met by importing additional electricity since constructing new plants takes time. With problems in licensing, etc., there were further delays (Sweeney, 2002). The time delay between a price signal and the market response played an important part, especially in the electricity market dynamics.  

Essentially, with no price signals of the wholesale market going into the retail market, the demand of electricity in California increased by 4% from 1999 to 2000, slightly more than expected (Sweeney, 2002).  A lack of rainfall in the Pacific Northwest and an increased demand for electricity in the Southwest caused the available imports to California to be reduced by an average of more than 2,000 MW from 1999 to 2000. Thus, the hydroelectric, nuclear and the modern gas-fired facilities had to work at full capacity, besides requiring the service of older, less efficient gas-fired plants. This in turn, along with poor natural gas infrastructure, caused a spike in the natural gas prices, increasing production costs further. In the summer of 2000, many power-generating systems had been operating at full capacity.  Thus, they needed to be shut down for repairs during the winter, complicating situations further.

The crisis

As of June 2000, these combined problems resulted in the first spikes in the California’s wholesale electricity prices as shown in Figure 1.  By November, prices had increased to between $250 and $450 per MWh resulting in soaring wholesale prices, energy emergencies, and a small number of rolling blackouts within the first half of 2001. California though was not the only state to experience such price spikes; however, with better policies, the situation could have been much less adverse. Different measures could have been taken to prevent the crisis (Sweeney, 2002).


Figure 3. Supply and Demand Curve of Electricity in relation to the California Crisis 2000-2001 (Sweeney, 2002)

 

If the wholesale prices had been allowed to serve as price signals to consumers in California, accounting for 40% of the western electricity use, even with lower elasticity of demand, such soaring prices could have encouraged rapid and broad-scale energy conservation, decreasing wholesale prices as shown in Figure 6.  It is known that, when the demand of electricity is well within the capacity of generation, significant changes in demand have little influence on wholesale price (Sweeney, 2002).  However, once demand exceeds capacity, sharp price rises can be observed, with the least efficient plants coming online. For California, the wholesale prices had to increase by a large amount to balance supply and demand. A slightly larger increase in supply found no equilibrium, resulting in rolling blackouts—real shortages in the system (Sweeney, 2002).   

The noticeable factors causing the California electricity crisis are the retail price cap and ‘soft cap’ for wholesale price. However, the ‘soft cap’ degraded as a plaything for the generators and marketers, exporting electricity from California and reimporting that electricity at a higher price justified by cost, or by strategic shutdown on power plants (Borger, 2005). It is worth mentioning at this point, the role of the American energy, commodity and services company ENRON. Multiple evidences have confirmed the role of ENRON in the crisis by the “strategic shutdown of power plants”, and hence in a way, engineering the crisis (Borger, 2005) (Egan, 2005). They essentially made deals to control the market outside of California, encouraging plants to shut down for unnecessary maintenance, and limiting the amount of power that was sold to California for imports. This resulted in a much deeper crisis, which could have been avoided to a large extent, even with the poor market setup that existed in California at that point of time.

During the period, the local utilities had to purchase the electricity from other states even when the purchase price exceeded the capped retail price, at which point most retailers would stop selling electricity. Nevertheless, California’s electric utilities, PG&E and Southern California Edison (SCE) were not allowed to stop because of the local regulations. Thus, the utilities had no choice but to keep purchasing electricity from outside at higher prices (Sweeney, 2002). This incurred a negative feedback loop and finally depleted and exhausted the utilities, and the repercussion was severe.

The dual crisis of 2000–2001— an electrical supply crisis and a financial crisis — multiplied the problem. By June 2001, with the new generating plants coming on-line, the California electricity crisis was over: wholesale prices fell to less than $50/MWh. A drastic reduction in electricity use, some of which can be attributed to price increases at the retail level and some to demand side management or other energy conservation programs, played a significant role in getting over the crisis.

Can this happen in Sweden?

The Swedish Electricity Market

The Swedish electricity market follows the similar wholesale market structure described above. The interplay of the independent players, namely the Electricity Producers, Network Owners, the System Operators the Electricity Traders in the form of suppliers and/ or balance providers and the customers themselves determines the market conditions. The electricity is traded primarily in the power exchange Nord Pool (Svenska Kraftnat, 2001).

Sweden primarily gets its energy from renewables, hydropower and biomass. Also, nuclear accounts for 30 to 50% of the country’s total primary energy supply (TPES). It is important to notice that all the oil, gas and coal used in Sweden are imported. Electricity generation is almost CO2-free as hydropower and nuclear typically account for 90% of the generation (Glossary of Statistical Terms, 2013).

Sweden takes a free-market approach in their energy policy, trying to promote as much as possible competition in efficient supply within a policy framework which promotes renewable integration. As a result, the only big state-owned energy company is Vattenfall, which is a major player on the electricity market (Glossary of Statistical Terms, 2013).

Considering the electricity market, it is fully liberalized giving the customers the possibility to select their own supplier of energy. This results in customers shifting retail electricity suppliers based on price, reliability, etc., which can be seen even within the household customers as in Figure 4.

Figure 4. Household customers' switches of electricity suppliers in relation to certain price differences in Sweden (SCB (Statistics Sweden), 2015)

The three biggest companies operating in the electricity market are Vattenfall, Fortum and E.O.N Sverige. The transmission system operator (TSO) is the Svenska Kraftnἄt which owns the national transmission grid and grants authorizations for third parties to access it while EMI oversees market operation. (Glossary of Statistical Terms, 2013).

EMI regulates the network tariffs of electricity and gas by price controls happening every four years. The controls determine the maximum revenue that network owners can collect from the customer charging (Glossary of Statistical Terms, 2013).

Current situation (Existing regulations)

The Swedish electricity market needs to be considered as an integral part of not only the Nordic area (Sweden, Norway, Denmark and Finland), but also the Baltic countries, into which it is highly integrated. The electricity traded in this market is controlled by the Nord Pool power exchange, so that the system price equals the wholesale trading price in all participating countries as long as the transmission capacity is sufficient (Eirik S. Amundsen, 2006).

Unlike the Californian retail electricity market of 2000-2001, the Swedish retail electricity market is also liberalized, as can be easily deduced from Figure 4 . In contrast to the California scenario, a more frequent use of end-users’ prices contracts are introduced in the Nordic countries, resulting in a noticeable reduction of electricity consumption (Eirik S. Amundsen, 2006).

Another distinctive feature of the Swedish electricity market is the full integration of its market into a single Nordic market. Thanks to the large share of hydropower in some countries like Sweden and the uneven distribution of hydropower resource in different countries, inter-connector capacities are quite large. Since the border tariffs were abolished and the transmission prices are distance independent, the relevant market is significantly large and the market power of the major generators is restrained.

Moreover, although sometimes small price differences might occur between different countries, the Swedish electricity price should be equal to its neighbours’ since its market has been fully integrated either with the Finnish and the Norwegian market essentially at all times (Eirik S. Amundsen, 2006). The integration avoids the huge price difference between two areas as in California with its neighbouring states, and helps the market maintain stability. Moreover, the Swedish law ensures a backup of 2,000 MW at all times (Svenska Kraftnat, 2001), ensuring further stability during any unplanned event.

This gives the Swedish market in the present state a much more stable structure than what California had in 2000-2001.

Future scenario

Some future scenarios need to be analysed in order to assess the chances of the occurrence of a similar crisis in Sweden, similar to the one of California 2000-2001.

Nuclear phase-out

One of the leading causes of the electricity crisis in California was the demand of electricity which could not be met from either the systems present or from import. For the case considered, Sweden is a known leader in nuclear power production, and highly dependent on the energy production that nuclear power provides, producing 35-40%, and at some points up to 50% of its power (Wikipedia, 2017). Up to 15 % of the total demand is covered only by the largest power plant, Ringhals (Wikipedia, 2017), so it would be interesting to think what closing its nuclear power plants would do to the Swedish economy.

The country has had a long history with nuclear power, having installed its first reactors in the 70’s. There are 9 reactors operational at present in 3 nuclear power plants as can be seen in Figure 7 (Wikipedia, 2017). The issue of shutting down all nuclear reactors has come up several times in the past few decades, generally due to national and international incidents such as the Three Mile Incident in Pennsylvania (World Nuclear Association, 2001) or the Chernobyl Disaster. These ultimately led to the Swedish Government decision of shutting down all nuclear power plants by 2010, which was however, overturned in 2009 due to political pressure as well as impossibility to achieve for economic and environmental reasons. The present threat to nuclear power in Sweden are the high taxes, which are increasingly making the generation uneconomical (Partanen, 2016), resulting in threats to shut off production in 2020 by generating units. The cost of generating nuclear power is in the same ballpark as the electricity price (€20 per MWh), or even slightly higher (Partanen, 2016). Additionally, there is a tax on nuclear power as high as €7 per megawatt hour which makes nuclear unattractive for future investments.

One interesting twist, though, is Sweden’s announcement to abolish the tax on nuclear power by 2019 (Wikipedia, 2017) (World Nuclear News, 2016). This would remove one of the issues standing in the way of nuclear power continuing to play a part in future energy production. Vattenfall was a considerable advocate of the tax removal, having reportedly threatened to close 6 of its 7 owned reactors otherwise (Milne, 2016).

In the case of a full nuclear power shutdown, the main question to ask is whether Sweden would be able to cope with the energy loss. According to a study published in May 2016 (F. Wagner, 2016), more than 22,000 MW of wind and 8,600 MW of gas turbines would be required to cover the energy obtained from 9,000 MW of nuclear energy capacity. It was also estimated that these extra system investments would reach a total cost twice the one of simply maintaining the existing reactors. Other study conclusions were:

  • Replacement would unavoidably require fossil fuels, as wind and solar cannot cover the demand with their inherent variability. (F. Wagner, 2016) (AFP/The Local, 2016);
  • CO2 emissions would increase by 50%, and since Sweden has a very high Carbon Tax, the net cost of generation would increase, resulting in increasing the electricity prices across all stages.
  • Increase in wind power will lead to considerable increase in electricity cost, due to need for extensive backup.

 

Aside from the study mentioned, other possible impacts that closing nuclear power plants in Sweden could cause include Norway being deprived of the hydro back-up (World Nuclear Association, 2017). In winter and periods when demand rises, Sweden would be increasingly dependent on imported power from countries such as Finland (World Nuclear Association, 2017). This would potentially create an unstable market condition for Sweden, which if ignored for long can result in a situation similar to California due to negligence.

There is very little possibility of suddenly switching off nuclear power plants. However, as discussed above, it will impact highly the electricity prices. In the short run, there might be chances of price spikes due to some shortages, despite the highly stable interconnected grids and backups. But in the long run, this will cause the prices to increase mainly due to very high carbon tax in Sweden, resulting from coal and oil power plants, that are the quickest to replace nuclear power, unlike renewables (Conca, 2015).

Transition to renewables

With the Swedish Prime Minister setting the goal of running Sweden on 100% renewable energy by 2040, an analysis of its implications, both on the stability of the grid and the price of electricity, has become indispensable. However, there are many natural and strategic factors which will strongly aid Sweden in achieving its target without a disruption of the market.

Unlike nuclear power generation, renewable resources like solar and wind are now very competitive compared even to traditional fossil based generation, thanks to favourable regulations. Given the immense wind potential coupled with the large unpopulated land areas in Sweden, wind energy is touted to replace nuclear. However, the sporadic nature of wind, if not evened out by a steady back-up source, would increase the price volatility further. Therefore, price fluctuation is not an independent problem. Rather, it would be because of the instability in the grid, caused by the mismanagement of the scheduling of backup resources during drops and spikes in wind power.

Moreover, it was mentioned in an article published on June 10, 2016, that Sweden was planning on building 10 more nuclear reactors in the near future. Despite global decisions to reach 100% renewable energy production, opinions were expressed that 2040 is a goal to be reached, but it does not mean that nuclear power production will not be needed anymore. Moreover, scepticism was expressed about switching to full renewable energy production very fast due to natural resources unpredictability (Milne, 2016).

The main challenge identified by Vattenfall for a complete renewable scenario is to be able to meet the demand on the coldest of winters on an especially calm day (low wind speed). The demand during a very cold winter day is around 27 GW (compared to 10 GW in summer). With a hydropower capacity of 16GW and similar capacity from solar and wind power (projected in 2050), and backup from biomass, the situation looks under control. However, considering the intermittent nature of wind, the reliable capacity this renewable system can offer is estimated to be 20 GW (Kihlström, 2016). Thus, there is a shortfall of more than 5 GW in this scenario (Figure 5). This can create a situation that might result in increase of electricity prices.

Figure 5. Reliable generation capacity in Sweden in 2050 compared to 2015 (Kihlström, 2016)

 

However, unlike California, the time scale represents long run. Hence there is ample time to prepare mitigation strategies. Some, as proposed by Vattenfall for a 100% Renewable Scenario are:

  • Expanding transmission capacity:

Hydropower plants are located in the north while the nuclear power plants which, in the case of phasing out, are concentrated in the south. Thus, for hydropower to provide the additional flexibility, transmission grid from northern Sweden must be strengthened. Also, increased reliance on imports calls for a higher transmission capacity to countries outside the Nordic region.

  • Increased reliance on biomass generation:

30TWh of energy from biomass will be required from biomass by 2050. Although this is twice the present generation, the Swedish Bioenergy Association believes it is possible.

  • Managing demand:

Demand response is a key element in future energy management as seen from the crisis analysis and the implementation of smart grid technologies and demand side management techniques will be in a much more advanced stage by 2050. In fact, Sweden already has a couple of measures in place to deal with energy shortages in the Nordic region. The primary measure is by rationing (forced reduction of energy volume) of the industrial sector which represents 40% of the electricity demand (NordBER, 2015). A Chalmers University study shows that the peak load could be reduced by 3 GW by remotely controlling the heaters in the country’s detached houses (Kihlström, 2016).

Conclusion

It can be said with confidence in the current scenario that a Californian crisis will not play out in the Swedish electricity market. The Swedish market at present resembles a very stable situation with various safeguarding measures passed by law and/ or through agreements. Moreover, the connection of Swedish electricity market to the Nord Pool, a single market without any price caps, regulated to keep a check on the revenues of each player, makes the situation further stable. Sweden aims to reach the goal of full renewable energy production by 2040, thereby slowly phasing out nuclear. However, at present they continue to heavily rely on nuclear, and law ensures that there is no sudden shut off for generation facilities. Moreover, the largest power producer, Vattenfall is completely state owned, thereby reducing the significant impact of strategic market manipulation by switching off power plants by utilities.

The nuclear energy production was analysed and switching it off proved to increase the electricity prices as a whole, both in the short and long run. However, through sufficient measures, the chances of a spike like California are very low. On the other hand, integration of renewables is a lengthy process. Said process needs to be coupled with sufficient backup through biomass, and efforts to strengthen grid capacity for using hydropower will ensure grid stability despite to account for the intermittence of renewable resources, which will prevent sudden acute power shortages.

In the extreme case that the power reserves are fully utilized, the TSO, Svenska Kraftnἄt, will recommend the public to cut down on their consumption via radio or TV and as a last resort order grid companies to limit transmission of electricity to the user in order to balance the system (Svenska Kraftnat, 2001).

 

 Archishman Bose 

Swati Nair

Victor Blanaru

Jialei Xin

Diana Ionescu

In collaboration with The CommUnity Post

 


References

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Annex 1: Electricity Supply and Demand Curves

Figure 6. Possible Supply and Demand Curve of California Electricity without the price cap on the retail market (Sweeney, 2002)


Annex 2: Location of Nuclear Power Plants in Sweden

Figure 7. Sweden nuclear power plants (World Nuclear Association, 2016)

Outcomes