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"I am pleased by the sharp decrease in intrazonal congestion costs,"
said President and CEO Yakout Mansour. "This indicates to me that the
additions and upgrades to the transmission grid built by transmission
owners in coordination with the ISO are paying off as wise investments."
The cost to manage locally overcrowded lines (intrazonal congestion)
decreased from $426 million in 2004 to $203 million in 2005.
Natural gas fuels more than 40 percent of the power plant capacity in
California. Prices for gas have been on the rise for several years and
peaked at more than $12.00 per million mmbtu at the end of 2005 in the
wake of hurricanes Rita and Katrina. Currently, gas prices are in the
$6.00 per mmbtu range.
Due primarily to higher natural gas prices, total estimated wholesale
energy costs increased slightly in 2005 to $13.6 billion, compared to
$13.1 billion in 2004. However, with the fuel cost increase taken out of
the equation, the average annual wholesale cost of providing energy
(cost per MWh) continued to decline in 2005.
For example, with gas prices normalized, the average MWh in 1998 cost
$75.78, compared to $45.26 in 2005. That's the good news. However, the
report points out that the low spot market prices may not provide enough
revenue to spur investment in new generating units. Long-term contracts,
typically outside the ISO purview, are needed to guarantee a return on
investment sufficient to encourage power plant development.
"When adjusted for increases in natural gas prices, our report shows
a significant downward trend in other costs associated with generating
and transmitting electricity in California," said the ISO Director of
Market Monitoring, Keith Casey. "This indicates that competitive energy
markets can provide lower costs. And it makes the case for replacing old
power plants with new ones that are more fuel-efficient."
In spite of continuing investment in generation, a combination of
healthy economic growth and the retirement of older, inefficient power
plants means construction of new facilities is important. "Proactive
investment in new power plants and transmission infrastructure is
critical to meeting California's growing demand for electricity in a
cost effective and reliable manner," said Casey. "Fuel diversity is also
important. Too much reliance on power plants fueled by natural gas can
create significant cost exposure to higher natural gas prices. Renewable
energy sources can play an import role in reducing this risk."
One important measure of market competitiveness involves comparing
the actual market price to an estimation of what the cost-based price
would have been. A 12-month rolling average of this comparison is called
the Market Competitive Index (MCI.) A MCI of between $5.00 and $10.00
per MWh is reflective of a workably competitive market. The MCI for 2005
was well within that range.
Source: California ISO and Business Wire
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