Volatility in the California power market: source, methodology and recommendations

Extreme short-term price volatility in competitive electricity markets crea tes the need for price risk management for electric utilities. Recent metho ds in California provide examples of lessons that can be applied to other m arkets worldwide. Value-at-Risk (VAR), a method for quantifying risk exposu re in the financial industry, is introduced as a technique that is applicab le to quantifying price risk exposure in power systems. The methodology for applying VAR using changes in prices from corresponding hours on previous days is presented. Prices for electricity for the summer of 2000 are examin ed against previous periods to understand how the hourly VAR entity is expo sed when the power system is obligated to serve a load and does not have a contract for supply. The VAR methodology introduced is then applied to a sa mple company in California that is serving a 100 MW load. Proposed remedies for the problems observed in the competitive California electric power ind ustry are introduced.