California´s Electricity Crisis

California went to a competitive market structure to capture the efficiency benefits of supplier competition through lower prices. This worked when there was a surplus but the efficiency savings were overwhelmed by increased costs measured in tens of billions of dollars when the market stopped functioning. The government has stepped in to provide price stability and reliability. The new industry structure is still evolving. California´s experience is a reminder that the physics of electricity, whereby production and consumption must be perfectly coordinated in real-time, is testing economics and free market principles. There must be flexibility and will to adjust market rules and operations in light of market performance. Competitive electric markets must be designed in recognition of the fact that electricity is different from other commodities (no storage, network effects, short time constants) and that market economics and engineering realities have to be harmonized.