The Complexities of Electrical Energy Regulation
The Energy Supply Systems have three fundamental parts - Load, Distribution, and Generation or demand, distribution, and supply. The U.S. model of supply and distribution is constructed and controlled to match load. The great hope of the smart grid is that it will be a balancing mechanism for Load and Generation with less generating capacity. Time will tell whether this assumption has significant merit. The current U.S. model is likely to continue for the near future since it has served the U.S. well for a century.
Many theoretical market designs attempt to stay within this model while inducing correct price signals so that financial incentives drive the market including demand management. The big unanswered question is what is the correct price signal? Followed by who should get these signals. These points are worthy of debate and bringing to a logical resolution before creating any market design.
First, the common all-or-nothing approach is not the only option. Many argue for real time residential pricing. Let us deal with the smart meter tangent of this issue before getting going. The big strength of smart meters is not some pie in the sky future possible use. It is remote telemetry - they eliminate a person going from house to house reading meters and the associated risks, dog bites, locked gates, dealing with crazy homeowners and such. Smart meters turn a profit, they save time, fuel, and vehicles. The ability to support endeavors like real-time pricing once installed does not make that a logical step.
Back to real-time pricing; what is the correct price signal, and who should get it and what are its components? The common flawed view is that energy is the driver of the price signal. It is easy to say confidently, as a former power trader, that energy is a minor component of a valid price signal. The major driver of a valid signal is capacity.
Consider the date successful ERCOT market design where generation is reduced to only energy for simplicity. Out of necessity, this model will be changing and incorporating more rules. Without change, Texas will face more frequent rolling blackouts induced by a lack of incentive to build peaking capacity. ERCOT was fortunate that the ISO took over at beginning of the 2000-2004 overbuild. It is just now consuming this windfall. This has been a large contributor of its success in spite of the lopsided energy-only market design. Anyone truly interested in the flaws of an energy-only design should read the report prepared for ERCOT by the Brattle Group.1 The report goes into good detail and shows that even a $9000/MWH price cap will not provide Texas with its desired reliability reserves.
What this means using real-time pricing as a homeowner paying $9/KWH for his 10KW load will not produce enough incentive to investors to build more generation. A homeowner during very hot weather could use 3 hours per day for 4 days and have an energy charge in excess of $1000 for just those hours while still not providing adequate incentive to increase generation to provide adequate reserves and drop prices. Would this reduce consumption? Of course it would, between the blackouts and in coming months when half the customers have their electrical service disrupted for nonpayment it should create a sizable reduction. If a few old people have to die from the heat it will be well worth it to implement an improved market with improved pricing signals. Hopefully, everyone recognizes this as cynicism, but we do need carefully analyze the potential consequences of energy market rule changes including real-time pricing.
Few people and no regulators at all understand the difference between energy and capacity. Electrical energy exists in the moment. Its value is determined by fuel and variable operations and maintenance cost. Capacity is determined by the hardware of generation and T&D its real, it is often steel, it is the ability to convert another energy source into electrical energy and move it to the end user. When tapped out, it does matter how much primary energy, such as natural gas, is available. Full utilization of capacity combined with U.S. reliability standards induces massive price spikes. No one's generation costs come close to the inadequate $9000/MWH price incentive purposed by ERCOT. For perspective, a $2000 10KW portable home generator burning $5 gasoline is around a $1000/MWH assuming only a 500-hour machine life. Is that the goal for our system to digress to a system like Nigeria's where anyone that can afford it has his or her own inefficient, polluting portable generator to supply back up power? This approach and incentive seems counterproductive.
In conclusion: We need to be smart, fair and understand the effects of our actions before adopting the next poorly thought out bumper sticker-type solution. It is a complex system with complex interactions with those least able to afford it bearing the greatest risk and bound to suffer the most discomfort. This is only the tip of the iceberg, one small corner of the picture, five more articles addressing markets designs risks and flaws will follow to try to provide view that is a little more complete of the complex picture.
References 1) http://www.ercot.com/content/news/presentations/2012/Brattle%20ERCOT%20Resource%20Adequacy%20Review%20-%202012-06-01.pdf
Comments
[QUOTE] A homeowner during very hot weather could use 3 hours per day for 4 days and have an energy charge in excess of $1000 for just those hours while still not providing adequate incentive to increase generation to provide adequate reserves and drop prices. Would this reduce consumption? Of course it would, between the blackouts and in coming months when half the customers have their electrical service disrupted for nonpayment it should create a sizable reduction. [/QUOTE]
This is simple fear-mongering based on lack of insight. Obviously, the new "smart meter based" market system simply needs to provide the customers IN ADVANCE a choice of whether to consume electricity at that price OR NOT. The key is to provide the information in the most useful manner possible. The IMEUC market design does this by 1) having individual customers' programmable electronic agents purchase fixed options to consume fixed contracts for energy for short time intervals the following day. and 2) providing capability to constantly evaluate the price of any excess consumption above contracts and refuse to consume if that price reaches a fixed set of thresholds. The key is ALSO giving the customer's market negotiator agent control of the customer's sheddable loads (A/C equipment, decorative lighting, water heating, auto charging).
Independent Market for Every Utility Customer - Preliminary Business Case
Independent Market for Every Utility Customer - Part 2 - Market Operation
The convergence of automation, advanced telecommunications technologies and advances in small-scale power generation have improved small-scale's viability. Such is the case for evolving for micro-nuclear power, gas-fired micro-turbine power and small-scale hydro-power. A single computer (with back-up) can manage the operation of multiple such facilities from a distance and at low cost.
For industrial customers, private regulation may determine prices as lawyers for the power providers and their customers negotiate mutually-agreed-upon compensation for electric power. The era of a central governmental agency regulating electric power across a state or a province is an obsolete model. There needs to be more highly localized market regulation, including private regulation between power providers and customers.
Thank you for labeling me as a insider, I love to be of someone that their thoughts and opinions could make a difference.
I realize it will difficult for you, but try to keep an open mind and avoid joining the gullible masses that are wrongly convinced that dynamic pricing will be a long-term benefit to ratepayers. You might even take the time to read the Brattle Group ERCOT Report I referenced. Try to overcome your technology bias (anything that support your field is good) and be realistic. Do a little math with the Brattle Group numbers.
I have several more articles if EP accepts that will go into more detail, but here is one arguing point you can clarify and help me understand how customers will benefit. What about risk transfer? Real time dynamic pricing massively shifts risk from generators and utilities to ratepayers. Poor maintenance, poor planning, even the failure to construct adequate capacity before it is needed will increase revenues to generators and pass the risk directly to ratepayers in the form of higher prices. Solve this with IMEC, California learned this lesson the hard way once already, they transferred this risk from generators to LSEs which bankrupted several large players and cost ratepayers tens of millions in the process.
If I remember from former posts your rather simplistic solutions is technology to shut off appliances during price spikes, air conditioning being the only one that will make a significant impact, your solution is to suffer the heat during the hottest time, maybe good for Canada not so much for the southern US. Before you throw daggers come up with a realistic solution that is not basically to revert to the era before comfort cooling. Even requiring ISAC’s is more realistic than thinking the price signals alone are a correction that does not change the risk structure.
Jerry Watson
IMEUC anticipates and handles your concern on "massive risk shift" by imposing requirements for absolute delivery to contracts (future options to consume) using very damaging financial penalties for failure to deliver. The risk is returned to the generators because no generator could afford to dare enter a delivery contract on which they could not deliver, either with their own equipment or with power purchased from a competitor. If a generation owner poorly maintains a unit which they continue to sell into the market, they will quickly discover that the penalties they pay on breakdown events far outweigh the savings by reduced maintenance, and they will be rapidly forced out of the market.
Your further reverting to scare mongering (basically to revert to the era before comfort cooling) is simply foolish. We both know that only a very small load reduction at peak is all that is required to bring prices back to normal ranges, by no means the complete shutdown of an entire region's cooling systems. Setting 10% of residential A/C into a managed 50% on/off cycle, along with a few additional gains from commercial and industrial sites, would handle any worst case event without exposing anyone to "death by heatstroke" which you threaten, (eg. in LA that could amount to perhaps 400,000 x 4kw units reducing operation by 50%, equals an 800 MW reduction, sufficient to swing any market. For just perhaps 5 days per year, not a terrible imposition).
The key point is to compare that to the system you support, that where some quasi-government body decides years in advance exactly how much power the region should have, then adds a 15% extra cushion and forces all ratepayers to pay for it regardless of their individual propensity for efficiency or conservation is much worse. It provides no FINANCIAL INCENTIVE for individual customers to reduce consumption by any personal actions, because as you clearly point out, the risk decision has already been taken (long prior) by some un-elected regulator group and they will have to pay the piper regardless of their own initiatives.
Your model worked quite well while the market was strongly growing and we could all agree that was a good thing. BUT, now the electricity market has matured, and needs a system which can figure out proper balances between consumption, conservation and price AND which properly rewards those who choose not to consume mindlessly, which your proposals cannot do.
I gather by your comment you envision a system where generators cannot afford not to generate. I know a little about generation and energy trading. No generator owner will sell it into a market where the natural reliability of that equipment will bankrupt the owner at some time during the machines life cycle. Generators are manmade machines and are fallible. If memory serves another time you stated all fallibility is completely predictable which is absurd.
I have sold power with many differing terms and conditions from Economy to Firm with Liquidated Damages (LD) the firmer the product the higher the price. A super firm product as you propose will demand higher prices than one with risk speard across a system. It fails to maximize the benefits of being a part of a herd.
Having a portfolio with its own backup capacity reduces risks but will discourage new entrants into the power sector that lack this depth which favors larger players and incumbents which again seems counter productive.
I have a couple of more pieces in print queue with EP that I hope they will include that may be clarifying. My conjecture is that your perspective is fundamentally flawed since you still purpose an energy only market place with capacity incentive derived from energy price spikes. One of us are wrong, my vote is that it is you.
You are purposing a completely new market structure which will not be the case in the real world. Assuming the likely mode of US implementation, I do not believe a energy only market design can work long term or will produce the optimum benefit to ratepayers. I am convinced the opposite is the reality of the situation.
So back to my previous comment in migrating to real time prices, how will risk transfer not take place given the current playing field and the only change being customers are charged real time prices for energy? The question at hand is, on the planet earth in the US, do real time pricing schemes transfer risks from utilities and generators to ratepayers? Is so how does this benefit ratepayers? The single answer usually given is it will lower their energy costs. Based on my own history and understanding of this business, I say only short term at best.
A monumental accomplishment and good starting point before we talk about implementing real time prices would be determining what constitutes a fair and equitable real time price.
In conclusion, you are correct I do support a planned system; it is unlikely that random chance and market incentives will consistently produce a stable grid. Besides do you really believe that ratepayers have equal status with generators and utilities in controlling prices? My belief is just the thought real time retail pricing makes the IOUs start to salivate. But of course it is not this simple, The Munies on the other hand have little incentive since they are not for profits and are owned by their customers, but even for them without adequate capacity planning it will cause crushing price spikes for retail customers. This is assuming that currently installed capacity will not be eternally adequate and suitable.
b) "determining what constitutes a fair and equitable real time price." An agreed price between a willing seller and a willing buyer 24 hours in advance of delivery. No regulator doing any "determining" at all. If you start thinking in terms of 15 minute contracts rather than month or year-long contracts, it begins to come clearer.
Are we crossing nuclear completely off the list or are you purposing that investors will shell out $7 billion and see how a plant with a 40 year life does in the 15 minute market. Have I mentioned that investors and lenders like certainty. There was lot of speculation by banks and utilities in 1999-2002 in which both got burned and sold assets far below the money spent on them. It will be years, if ever again, that investment dollars flow so free into the power sector.
Any system with only short term balanced schedules will almost certainly need lots and lots of demand side management occasionally referred to as blackouts.
In your vision are proposing a system without reliability convenants where generators have the right to withhold generation until they get the price they want. If so the large players will like that.
In IMEUC, generators are free to withhold product as long as they percieve that as an economic advantage. The interesting aspect is that you believe that present "reliability covenants" coerce generators to provide electricity even when they believe that to do so will damage them economically (eg. they for some reason will provide supply below cost simply because their contract runs longer than 15 minutes). Please explain that type of activity.
Huh? the last time I looked around the system we currently have was functioning smoothly. I fear you have been watching too much TV. The new show "Revolution" is doing well and shows how silly and limited our general understanding is. I guess the TV scenario would be possible if the US congress would repeal the laws of physics.
FYI, capacity has a finite value of $6-10 per kw month even using the high end a 10KW customer doubling up to 20KW uses an additional $100/month in capacity. The problem is capacity is real and does not exist in the moment alone. The utility has that capacity year round for many years so its commitment is $1200/KW year for many years. If that capacity is required for only a few hours a year. It makes those KWH very expensive. If it is needed 20 hours per year and only 10KW all other hours those hours have a $60 per hour capacity cost that is socialized across all customers. If seems somehow we have forgotten the purpose of all of these schemes is to simply subject each customer to the cost of the capacity they are using.
There is no mandate or reason that anyone should be subjected to forced load shedding during normal operation. It may well be worth the $60/hour to some customers and not to others. I am amazed how seemingly askew we have gotten on this manageable task. Even the 20th KW is still worth only $100/KW year if it is only used one hour per year that KW hour cost somebody a $100 plus the fuel to convert it to energy. Scaling up to MW that is $100,000/MWH power which is 1000 times higher than typical $100/MW residential rates. It is the way these numbers ramp up as capacity factor drops that is used to justify all manner of scheme.
In the US even the ISO's reserve the right to demand generation to preserve reliability. The rules generally insure the generator as at least made whole for expenses other than the cost of ownership. Large players like SOCO, and Progress control more MW than the entire eastern interconnect could have out of service on even a typical summer day. They could literal demand their price or put large numbers of customers into forced blackouts. They currently operate within a framework that does not allow this. In fact SOCO charter is just the opposite they are charged with maintaining the system in their territory.
We are just as well to agree to disagree, I will never be convinced that unleashing greed and freeing the market will benefit ratepayers or that they will have power equal to multibillion dollars generators. It is not even David and Goliath match, it more like David verses the Persian Empire.
a) smooth out as much as possible the variations in load between peak hours and off-peak hours
and
b) to provide to exploit as much as possible those load shedding opportunities which do not have a negative impact on the overall economy; ie. it is MUCH smarter as an economic strategy to shed a megawatt at peak by re-scheduling home cooling in 500 homes to off-peak periods (thermal storage walls, ice storage) than to shut down a 1 megawatt production line of an industrial facility, curtailing economic output and causing plant owners to need to pay workers to stand about unproductively.
How do you propose, under your strategy, to adequately compensate those homeowners willing to invest in thermal storage systems? A large team of civil servants inspecting and verifying, no doubt.
Sure. Software can be spiked to report more electricity used than is actually used..
How are consumers protected against this?
Here;s an example. Swiss radio internetional Hans Buehler programs.
Malcolm
Malcolm. My point is, as long as we're going to have to pay for these electronic meters anyway (and we must, because the utilities no longer want to pay crews for manual readings every month or so, so have convinced regulation to allow them to force us to pay for them) then we should get not just a system for the benefit of the utilities, but a new market system which allows us to purchase directly from the generator companies, at prices comparably low such as large industrial customers pay.
It was my impression that utilities are becoming more proactive in advancing load shedding, even to the consumer level. I've even attended local meetings about this topic. Presumably, they want to do this because they can save money by not turning on expensive generation so much. Widely applied, maybe it can even lower demand increase. I don't know. That's what they say.
Anyway, the point is they seem to really want a top-down approach; the utility shuts off loads that it got permission to shut down. My notion of IMEUC is that it would cap to some higher, but not outrageous value, so a consumer looking the other way wouldn't get hammered because of one bad day. You make the valid point that the grid today is basically socialized (not necessarily a BAD thing!) in that a small number of hours of electricity might be VERY expensive, but these costs are spread around to the entire consumer base and over a wide period of time. The net gain is reliable and continuous power.
There are no rules that bind those willing to break them, If you do not trust your service provider install your own meter in your house at your elecrical panel and verify your usage.
Len,
Smart meters should be self funding, added charges for them in my opinion is greed. Their benefits should outway their costs but it is used as an opportunity to cut cost and have cost saving funded by another source. It is a revenue stream. It is like the gold plating of systems and them recovering on the wasted expenditure. It happens right or wrong again I consider it a integrity and greed issue.
Earlier you asked what I purpose, I wrote a piece that I think EP will include in the future; however, my solution for capacity is simple, charge for capacity. That is what ratepayers are really buying why not pay for it rather buying it indirectly through energy price spikes which involve waiting for high and frequent enough price spikes to incourage investement Once someone purchases (uses) it is theirs for the following year. Then flattening of ones load profile would reduce charges. If the price works out to be $60/KW year, then reducing your peak usage by 5KW would save $300 and justify and investment of several thousand dollars in a ISAC or other technology.
The power customer who has successfully bid for demand curtailment is paid to have the CAPACIY to shed a specific amount of load, whether it is exercised or not.If and when they are called upon to shed the load, they must comply, or face severe penalties. Probability of actually being called upon to shed the load is estimated at a very low average annual percentage (1-3%?), if memory serves me correctly.
The smart grid with smart metering and real-time pricing is too expensive and complex for your average residnetial consumer. A simple traffic light indicator for the customer to refer to when setting the thermostat, cooking dinner, or running the electic clothes dryer would be all they need. Two red LED's, one yellow, and two greens. Two greens mean power is at it's cheapest, go ahead and use freely for the lowest possible rates (typically night time). Two reds mean power is going to be very very expensive for the next hour or so, so think hard about all of your discretionary power usages: AC, lighting, laundry, electric cooking, etc. Perhaps used with an accompanying LED bar that indicates relative average power consumption, in 500whr divisions. This provides the "typical" residential user with enough info to dial back without brain strain (god knows how many people are math-challenged and would be mentally swamped out by a realtime power management interface that the rest of us would find to be "really sweet"!
Finally, the generation & T&D elements should be left free to bid their products into the both the day ahead and realtime markets, with regulators applying appropriate floor and ceiling prices. RTO's and ISO's would need to maintain some "contingency pool" fund to cover expenses of the facility owners during periods of extra high or extra low demand, perhaps backed by a federal pool operated similarly to FDIC (a $0.0001/kwhr gross generated power as an "insurance fee") to fund the pool.
As recent history has shown us, totally free, totally unregulated financial markets tend to create conditions ripe for implosion (yes the mortgage markets and the financial derivatives markets were, and for the most part still are, free of regulation). I suggest people use the approach that "Too much of a good thing is ALWAYS bad!" (this does not include conceptual "things", or ratios representing concepts such as efficiency, stability, etc. etc.) It's more along the line of something like "Compost is a good thing - but try not to cover the planet a foot deep in it, ok?"
Regards to all,
Rich Vesel
Demand side management is inherit to what I purpose, If one avoids using capacity then they will not be charged for it. It is in every customers control. There is nothing new about demand side management utilities rates have included it for years. The issue I have seen with active demand side management (interruptible customers) is as long as they get a big discount and do not actual get managed (interrupted) they love it. Several of a former employer of mine industrials wanted the rate, but would be on the evening news complaining anytime they were actually asked to load shed.
Usually they wanting to know what the utility was going to do to make sure their interruptible service was actually firm service. Also, if DSM start being used frequently participants start dropping off the program. The more demand side management is needed and used the smaller the pool to pull from sort of a death spiral effect.
Besides DSM is generally looked at as an emergency measure. If it is needed often a utility will likely be adding capacity to cover it. Even if the system was only completely tapped on a couple of days for a few hours the typical heavy load on the surrounded days will drive capacity expansion. DSM may well save the system during critical times but will be far from a one to one capacity offset, as is the fantasy.
To be effective it needs to be a pattern of load reduction or profile flattening. DSM management is a great thing my argument is needs to be a consistent pattern of behavior not a stop gap used in emergency that is treated as lower capacity demand.
I do believe they should be rewarded for flexibility for allowing load shedding I just do not believe it should be price of adding new capacity. I am sure there is a PHD much smarter than me the could actually quantify the benefit. It is just hard for me to imagine the benefits are completely equal to more peaking capacity unless it use it very fluid and can be used as a routine economic replacement for peakers then is at parity with capacity.
Key points of IMEUC, which any alternative proposal must respond to as well.
1) designed to encourage very strongly, complete flattening of the load curve eventually, getting all consumption moved onto low-cost high-efficiency baseload units.
2) designed to maximize economic efficiency, pushing load shedding away from interfering with large industrial customers onto small residential and commercial customers.
3) designed to implement onto customers and do a basic effective job with no customer interaction at all. IF a customer gets interested and decides to interact, or hire some private third party to do so for them, to gain additional savings, then all possible hooks and helps are already available and accessible at no added cost.
4) design is prepared for the future, managing smart responsive appliances (refrigeraters, dishwashers, laundry units, climate control, etc) as well as electric auto charging and possibly micro-CHP units like WhisperGen.
My argument remains simple, it is very improbable that a completely new system will be implemented anywhere. The validity of the IMEC model really is not relevant, which is also true of my proposal. I hope to somehow plant a seed that encourages someone that possibly can make a difference to understand the relation between capacity and energy. I hope someone with influence considers the effects of real time dynamic prices for ratepayers rather than almost blindly thinking, it is all good.
As an energy trader, I witnessed millions of dollars being transferred from ratepayers to power traders in 1998 from unintended consequences of FERC order 888. It happened again with the new California model in the next couple of years. I was directly involved in several million moving from the ERCOT ISO to the now defunct firm I worked for in 2002. In fact, ERCOT was smart enough to call an emergency board meeting and change the market model on the fly to stop the bleeding, which showed they could be responsive unlike in California where the hemorrhaging of the model defects were allowed to continue.
Real time Dynamic pricing is likely unstoppable since it has seemingly universal support. If does happen my bet is it will play out like the above mentioned events, millions will move from customers to other parties. Only then will adjustments be made and what will likely remain is an overall dysfunctional model with enough Band-Aids to make it tolerable, otherwise known as the American Way
“If customers like Mr. Hirschberg choose to entirely ignore the system and consume beyond their electronic agent's estimates at 2:00 PM on the hottest day of the year while deliberately overriding the default upper price limit on their electronic agent, then they will receive some shocking high bills...”
I didn't know I had a dog in this fight as I very rarely post anything about smart metering or topics related to “marketing” of electricity, etc. But it is nice to be mentioned.
I do recall (some years ago?) mentioning on this site how well my co-op utility here in hillbilly country mitigates the peaking problem. They can cut off my heat pump/ AC or my water heater as they wish under possible peaking conditions. (I don't have any other big users!) Although they have been doing this for quite a few years I have very rarely noticed – and I get rewarded with a discount on my bill. I would gladly do it without any reward. I believe I have also opined here that a more sophisticated system could hardly be justified for folks such as me.
Thanks!!
Jerry Watson 7578945132