A heatwave in the American Midwest has resulted in a peak demand being recorded by several utilities, blackouts in other utility regions and a massive spike on the wholesale electricity market. This may lead to losses of millions for some companies.
The heatwave came in late June, but its full ramifications did not become clear until last month, when utilities disclosed that they had been hit by trading losses. Others, with power to sell, made millions.
During this period, Detroit Edison recorded its all-time demand record of 10 523 MW, surpassing the previous high of 10 337 MW, which had been recorded in August 1996. The Tennessee Valley Authority also recorded a record demand peak of 27 024 MW.
The blackouts brought on by the heatwave affected a number of industries. A Ford Motor Co assembly plant in Chicago was forced to close several times. The company’s new contract with Commonwealth Edison Co, signed in February, allows for supply interruptions. Steel company LTV Corp experienced interruptions in plants in Cleveland, Pennsylvania and Illinois.
Wholesale power marketing companies were also hit badly by the shortage of electricity. As power became scarce, the prices on the spot market rocketed. Normally trading at around $30-75/MWh, they climbed to above $7000/MWh according to Dow Jones.
Two power trading companies, Federal Energy Sales Inc and Power Co of America LP, reneged on agreements to deliver power during the crisis. The Portland utility PacifiCorp lost at least $13 million on a wrong bet on prices, affecting its second quarter earnings.
In contrast, analysts believe that other companies with power to sell were able to take advantage of the situation. Analysts have suggested that UtiliCorp in Kansas City, PSE&G in New Jersey, Baltimore Gas and Electric, and the San Francisco utility PG&E may all have been able to make money from the turmoil. Enron Corp is also expected to have profited.
The problems have been blamed variously on deregulation of the electricity market and on a drop in capacity margin in some parts of the US. The North American Electricity Reliability Council claims that the capacity margin in some regions will fall to 11-12 per cent in July and August. The national average is 22.4 per cent. Further power cuts are expected.
The problems that were posed by the demand peak have led to questions being raised about the maturity of the wholesale market and the way that it is regulated. There have also been questions raised about whether utilities restricted access to their own grids during the crisis, exacerbating the situation. These, and other questions, are likely to reverberate throughout the US industry in the coming months.
