CPUC Avoided Cost Workshop by rt3463df

VIEWS: 5 PAGES: 8

									Market Multiplier




                    1
Comments
 “Does the price effect of demand exist?”
 “Why include when CA is working hard to
  establish resource adequacy?”
 “Price elasticity of demand only affects
  income distribution”




                                             2
Market Price Multiplier
 Effect of a demand reduction on market price
     DSM shifts demand curve to the left
     Implies lower prices given fixed supply curve
     During periods of surplus this effect is small
 Inclusion allocates price benefit to energy
  efficiency programs (consumer surplus)




                                                       3
                                                  Theory
    Effect of a Demand Reduction on
    Market Price

    Price ($/MWH)           Supply


  Large
price drop                                 High demand w/o
                                                 DSM
                                          High demand w/
                                               DSM
  Small
price drop
                           Low demand w/o DSM
                     Low demand w/ DSM
        0                            Demand (MWH)4
Prior Multiplier Values and Sources

    Source                On-peak              Off-peak
                      (12:00-18:00, working    (other hours)
                            weekdays)

 ALJ’s 10/25/00    4.0X for 2001-2002              2.0X
    Ruling         3.5X for 2003-2005          for all years
                   3.0X for 2006-2025
 CALMAC 2000       5.0X market power present      Not
    report         2.5X market power absent     available


E3’s 2001 report   4.1X                           1.8X
                                                          5
      Market Elasticity Estimates
                Market Multiplier               Multiplier Trended to 1.0 in
              (On Peak RNS = 5%)                 Resource Balance Year
                    On-Peak Off-Peak
                                              Year             System-Wide Projected
          January      100%     100%                                Multipliers
          February     100%     100%
                                              2004                     1.08
          March        100%     100%
          April        100%     100%          2005                     1.06
          May          108%     100%
          June         109%     100%          2006                     1.04
          July         107%     100%
                                              2007                     1.02
          August       107%     100%
          September    109%     100%          2008                     1.00
          October      105%     100%
          November     100%     100%
          December     100%     100%

•On-Peak: 8 am to 6 pm, Working Weekdays, May to October
•Off-Peak: All Other Hours
                                                                                       6
•“RNS” = “Residual net short”, as % of retail sales, transacted at market
Recommendations: Price effect of
demand.
 “Does the price effect of demand exist?”
    The price effect of demand has been estimated in
     numerous forums, based on historical hourly price
     data.
    The effect in the Draft Report is much smaller than
     prior applications because E3 only applies it to RNS.
 “Why include when CA is working hard to establish
  resource adequacy?”
      As CA gains resource adequacy, the relevant portion
       of the supply curve would be mildly upward sloping,
       and the effect would be lessened – but that does not
       merit its exclusion.
                                                              7
Recommendation: Income Distribution
 “Price elasticity of demand only affects income
  distribution”
      AB970 requires that the avoided cost include the
       system value or reduced load on reducing market
       clearing prices and volatility.
      The question is whether system value is:
          Consumer focused (consumer surplus), or

          Joint consumer and producer focused

      Past use of the multiplier has focused on consumer
       surplus, hence E3’s recommendation to continue the
       inclusion of the price elasticity of demand multiplier.

                                                                 8

								
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