Deregulation didn’t end well the last time we tried it in California. We deregulated the energy markets in 1998 and by 2000 the US western states suffered one of the worst energy crises in history. Deregulation became a dirty word associated with Enron, corporate greed and blackouts. 

But much has changed since then. To understand why, let’s look back at what happened in 2000.

‍

The 2000 California Energy Crisis

Between 2000 and 2001 all three major utilities faced severe financial challenges with PG&E going bankrupt. Energy shortages led to widespread blackouts. Deregulated market failed to provide customers with reliable power:

‍

What caused this market failure? According to the EIA, it was a complex mix of:

• Increase in power demand (partially fueled by the dot-com boom of the late 1990s).
• Reliance on out-of-state hydropower and a drought that reduced its output.
• An increase in natural gas prices, a key input in electricity generation costs.
• Immature market mechanisms that left utilities unhedged: regulation capped prices to consumers but utilities weren’t allowed to enter into long-term purchasing contracts forcing them to buy at spot prices which shot through the roof at the peak of the crisis. The utilities got crushed in the middle.
• The resulting financial trouble utilities found themselves in led smaller power generators to stop selling to them (they were rightly concerned about non-payment).
• Market manipulation by companies like Enron poured fuel on the fire. To profit from price volatility, they took additional generation capacity offline and bought up limited transmission capacity between Northern and Southern California, a key balancing mechanism that helps stabilize the two grids.

Today California’s electricity markets are still shaped by the energy crisis 24 years ago. Broadly speaking, we have three highly-regulated utilities (PG&E, SCE and SDG&E) responsible for last-mile power delivery, a non-profit called CAISO responsible for transmission and grid stability and various independent generation companies. Consumers can only buy power from their local utility at prices set by regulators. There is no competition or consumer choice at the meter-level.

In many aspects, power markets are unique in that there is only one place to get your power: from the grid. There is no point in having multiple grids. Powerlines are a natural monopoly and should be owned or regulated by the government, just like our highways and sewer system.

But power generation is different. And generation today is not what it was 25 years ago.

‍

The case for deregulating power generation 

In the aftermath of the California Energy crisis, the Chair of the California Power Authority, David Freeman, said: 

“one fundamental lesson we must learn from this experience: electricity is really different from everything else. It cannot be stored, it cannot be seen, and we cannot do without it.”

Today, the power mix is changing. Power can be stored. The dramatic cost decreases of wind, solar and batteries are reshaping the grid. More and more energy will be generated and stored decentrally: at utility-scale installations, at businesses, warehouses, shopping malls, homes and in our EVs.

The grid is evolving from a one-way (generation to consumption) to a multi-directional system (decentralized with co-location of generation and storage). Power generation is not limited anymore to massive power plants prone to monopolization and manipulation. Every home and business can become a power company.

To drive down overall energy costs, we need to give every generator, no matter the size, full and open access to the wholesale electricity market so they can buy when the electricity prices are low and sell when they are high. Batteries make it possible to shift demand behind the meter, store solar generated-power and sell that capacity into the grid when it’s lucrative. To illustrate the potential, take a look at the price volatility of wholesale electricity prices in CAISO:

‍

This phenomenon of volatile energy prices is happening everywhere in the world: with ever-decreasing cost of solar and wind, price volatility increases and we need more storage to smoothen out the intermittency of renewables and provide grid stability services. An open market will speed up deployment of storage and paves the way to the lowest possible power cost for consumers.

Software can elegantly automate the bidding for asset owners (homes, businesses, schools, EV fleet owners etc) to maximize the value of their system based on their own consumption and what the market is willing to pay for the power they can feed back to the grid.

Since the 2000 Energy Crisis new technologies have dramatically changed how we generate and store electricity. To get to the cheapest and greenest grid we need to deregulate energy generation and give everyone - not just large generation assets but small businesses, homes and EV - access to an open, transparent market.

‍