Recently in Electricity Category

Michael Giberson

The marginal cost of generation from a wind power generator is essentially zero, which means once the generation is installed you pretty much want to use every bit of wind power generated. A problem, of course, is that wind-based generation is not particularly dispatchable. You don't tell it when to run, you just try to use as much of it as you can while it is available.

A further wrinkle is that, at least for some wind power locations, the winds are strongest overnight and early morning when the demand for power is lowest. And, when wind power is generated far from the consumers who'd like access to cheap power, it requires adequate transmission capability to move the power to the people. If the transmission system is limited in its ability to move all of the power available, then some of the wind generation capacity will be wasted.

Ramteen Sioshansi and Walter Short observed that there may be mutual benefits available for a power system with a large share of wind generating capacity from also implementing real-time pricing for ultimate consumers. In a paper they describe simulations they ran using data from Texas to examine the potential benefits of real-time pricing for use of wind power resources.

They find useful synergies:

• Real-time pricing tends to smooth out the normal ups and downs in consumption, because consumers tend to decrease consumption in high cost hours (which are the high demand hours), and to increase consumption in low cost hours. Smoothing out consumption means that the transmission system is less likely to be congested and therefore it is less likely that distant wind generation will be shut in by transmission limits.
• In addition, because wind power comes at a low marginal cost, whenever it is plentiful it will drive down electric prices. That effect encourages consumers to adapt their consumption to the patterns of wind power availability.

It is true that the effects can be small, but even with some conservative assumptions in the simulations, the authors found that usage of wind power could be increased by more than 80 percent. Don't get hung up on that number, which very much relies upon the assumptions going into the simulation. Take away the idea that a series of small marginal adjustments in consumption, responding only to price signals, can have significant effects on the use of low marginal cost renewable (or any other form of) power generation.

The authors also note that many political analysts object to the idea of exposing consumers to highly variable real-time power prices. They re-ran the simulations limiting the real-time pricing regime solely to commercial and industrial consumers. Commercial and industrial consumers represented a little over 60 percent of the demand in their historical data, and the new runs of the simulation showed that just about 60 percent of the benefits were retained with the more limited application of real-time prices.

(Like the Hogan talk mentioned yesterday, the Sioshansi and Short paper was presented at "The Economics of Energy Markets" conference at IDEI.)

Michael Giberson

Recently, William Hogan gave a presentation at IDEI and the Toulouse School of Economics titled Electricity Market Design: Coordination, Pricing and Incentives, or, as he more colloquially puts it early in the talk, "Electricity market pricing, and how to think about it."

The 42 minute video is available from the EU Energy Policy Blog. Slides from the talk are also available.

Hogan's presentation was part of a conference on "The Economics of Energy Markets", the 2008 version of the annual Conference on Energy at IDEI. Papers from the conference are also available.

Michael Giberson

What is the current and future state of regional wholesale electricity markets?

FERC wants to know, and so it has assembled a panel of experts to appear at a July 1, 2008, technical conference to be held at the Commission. All interested persons are invited to attend, and there is no registration required.

The conference also will be webcast - the official notices says it will be available for a fee, but the event page on the Commission's web calendar says the webcast is free. I don't know which version is correct, but maybe someone from FERC will clear up the confusion.

The agenda (as included in the second notice):

Review of Wholesale Electricity Markets

9:30 Opening Remarks

9:45 ISO New England, Inc.

Gordon Van Welie, President and Chief Executive Officer
Hung-po Chao, Director, Market Monitoring

New York Independent System Operator
Karen Antion, Interim Chief Executive Officer
David Patton, President, Potomac Economics

PJM Independent System Operator, Inc.
W. Terry Boston, President and Chief Executive Officer
Joseph Bowring, Manager, Market Monitoring Unit

12:00 Break

1:00 California Independent System Operator

Yakout Mansour, President and Chief Executive Officer
Keith Casey, Director, Department of Market Monitoring
Frank Wolak, Chairman, Market Surveillance Committee

1:45 Midwest Independent Transmission System Operator

T. Graham Edwards, President and Chief Executive Officer
David Patton, President, Potomac Economics

Southwest Power Pool, Inc.
Nick Brown, President and Chief Executive Officer
Richard Dillon, Director, Market Development and Analysis

3:15 South and West Regions

Charles Whitmore, Senior Market Advisor Division of Energy Market Oversight, Office of Enforcement

4:00 Adjourn

For those of you interested in looking this stuff up on the FERC website, the official docket number is AD08-9-000.

Lynne Kiesling

This ars technica article on energy storage provides a concise summary of the challenge of energy storage and the current technology options. Focusing on the power needs of datacenters, the article describes the intermittency problem associated with renewable sources (in normal language, the sun doesn't necessarily shine and the wind doesn't necessarily blow at times that coordinate naturally with electricity demand).

Energy storage is the Holy Grail of the electricity system. Even if we did have dynamic pricing to enable decentralized coordination between supply and demand, it would be highly unlikely to match up perfectly all the time. Storage bridges that gap. Storage also changes the market power dynamic; if I have a storage option I can buy more when it's cheaper and use it when it's pricier. That alternative creates a substitute for generated on-demand peak power.

Lynne Kiesling

The Economist has an article this week on the energy efficiency and reliability-enhancing characteristics of intelligent appliances, with the catchy title of "fridges of the world, unite!". They discuss the GridWise Olympic Peninsula Testbed project in which I participated, although they focus on the frequency control aspect of the project and not on the price-responsive capabilities of the devices.

The most advanced project is the brainchild of the American Department of Energy's Pacific Northwest National Laboratory (PNNL). Last year it completed the first residential trial of its "Grid Friendly Appliance" controller--a small device that listens to the AC-frequency hum of the electricity supplied by the grid. If the hum goes a little flat, that indicates too much demand on the grid, so whenever a controller notices the American standard 60Hz grid frequency dipping to 59.95Hz (something that usually happens at least once a day) it shuts off the heating element in the appliance it is regulating for two minutes. If, at the end of that time, the grid is still unstable, the element stays off for another two minutes, and so on until a maximum of ten minutes have elapsed.

It then goes on to discuss a British firm, RLtec, which is making refrigerators with "Dynamic Demand" technology to enable them to adapt dynamically to even smaller fluctuations in grid conditions. They believe that in aggregate, even such minute responses can lead to meaningful improvements in efficiency.

Michael Giberson

Rich Sweeney, at Common Tragedies, raises the question "Is dynamic pricing green?"

Riffing off of Lynne's article in Smart Grid News and a complementary post here on Knowledge Problem, Rich acknowledges that dynamic pricing for retail power can encourage load shifting away from peaks and may even reduce consumption overall. But, he suggests, even if dynamic pricing reduces consumption a little it may not reduce overall emissions from power generation.

The reason, he says, it that much peak load generation is natural gas fueled, while baseload generation tends to be mostly coal fueled. All the load shifting that dynamic pricing encourages will move consumption away from gas and toward coal. Given that coal generation tends to produce much higher levels of pollutants than gas, load shifting can increase emissions.

As a general matter, I think Sweeney is right, but a more precise answer could be had looking at the question on a region-by-region level.

• Some areas have more baseload hydro, for example, or nukes, in which case the shift from peak to off-peak could reduce emissions even absent any net conservation.
• In some cases -- fewer and fewer with oil prices the way they are -- peak generators run on fuel oil, and some small generators run on diesel. Coal typically produces higher emissions than fuel-oil powered generators, but the contrast isn't as great as with gas.
• In the longer run, reducing peak consumption helps delay investment in new generating plants and transmission lines, thereby helping to avoid the environmental costs associated with that investment.

The real lesson here is that there is a difference between economizing on the consumption of electricity and economizing on the use of environmental resources. Putting a real price on retail electricity will bring about more efficient use of electric power, but if you want more economical use of environmental resources -- such as, for example, clean air -- then we need to put a real price on it, too.

Lynne Kiesling

There are a couple of very interesting recent solar developments that have substantial economic implications. First, the blue sky stuff: courtesy of Slashdot, a team of researchers in the Netherlands have demonstrated avalanche effects in semiconductors that can be used in solar cells (here's the original article). Avalanche effects mean that instead of having a 1:1 relationship between a photon and an electron, in which 1 photon releases 1 electron, it's physically possible in these nano-scale semiconducting materials to have 2:1 or even 3:1 -- 2 or 3 electrons released per photon in the material. This means twofold or threefold increase in the possible energy intensity of the solar cell material. These nanocrystals are even inexpensive to manufacture. How cool is that?

What are the economic implications of this new material and new knowledge? The low energy intensity of solar cells has been a factor in making solar a less cost-effective means of generating electricity than fossil fuels, which are extremely energy intensive. This avalanche effect can mean smaller, more energy intensive solar cells, which changes the cost structure for solar. I think it will certainly shift the long-run average cost curve downward, which creates an opportunity for solar retailers to reduce prices. A lower solar retail price shifts the price ratio between solar power and all other electricity power sources. For example, the price ratio between solar-generated and coal-generated electricity would shift such that at the margin, consumers would substitute out of coal-powered electricity and into solar-powered electricity. If I were better at generating the isoquant and indifference curve graphs electronically, I'd show it here graphically ... but the logic is straightforward.

In brief, innovations like this one increase the margin on which solar can compete with fossil fuels.

Another solar development that's amenable to economic analysis is described in this Financial Times article from Monday.

The solar power business is bracing itself for a collapse in prices that could lead to a shake-out in one of the most promising areas of the renewable energy sector.

However, a price slump could hasten the take-up of the technology which would help boost the overall volume of future activity, even as margins fall, industry analysts and officials add.

Expectations of falling prices have been partly sparked by a surge in the level of manufacturing capacity for solar panels. This is likely to lead to demand outstripping supply for the first time in years.

Another factor driving prices is uncertainty over the degree of government subsidies in some key markets for the technology.

Interesting, interesting, interesting. Over the past decade the demand for solar cells has shifted out, leading to increased prices and to supply pressure on inputs like silicon (which is also an input into a lot of other products, so it's a very competitive global market). Now we are starting to see the supply response, with more solar manufacturing capacity coming online and the use of other materials, as entrepreneurs wanting to enter the market innovate around input supply constraints and costs. This market entry is shifting out the supply curve, and from the sounds of the FT article, the magnitude of the supply shift is large relative to current demand. Consequently, they anticipate a fall in solar cell prices due to the large supply shift. Even if the demand curve stays the same, this supply shift means that retail prices of solar cells would fall, leading to increased adoption of solar technology. More realistically, demand is likely to continue shifting out, which may mitigate some of the price reduction.

Another interesting fact in this article: where is a lot of this new manufacturing capacity coming online? China.

Think about the economics of the interaction of these two developments. Taken together, they imply a potentially dramatic decrease in solar power manufacturing costs and retail prices. It will be fascinating to see how this market continues to develop.

Lynne Kiesling

One of the things I like about publication is that I don't ever seem to lose that childlike fascination that Steve Martin had in The Jerk when he saw his name in the phone book and declared "I'm somebody!"

With that same childlike fascination I am pleased to announce that you can now pre-order my forthcoming book on electricity restructuring at Amazon. And I just put the edited page proofs in the mail to the publisher yesterday. Here's a summary of what it's about:

Over the past 50 years the US economy has experienced economic dynamism and technological change at a dizzying pace, driven substantially by innovation in digital communication technology. This dynamism has had limited effects in the electricity industry, and institutional change within the industry to adapt to these changes has been variable. Many states in the U.S. do not participate in open wholesale markets, and even more states have either no retail markets or have implemented such a restricted and politicized version of retail markets that potential retail market entrants still face substantial entry barriers. This book explores institutional design and regulatory policies in the US electricity industry that can adapt to unknown and changing conditions produced by economic, social, and technological change.

Whereas the dominant regulatory paradigm has traditionally been centralized economic and physical control based on natural monopoly theory and power systems engineering, the ideas presented and synthesized by Kiesling compose a different paradigm - decentralized economic and physical coordination through contracts, transactions, price signals, and integrated intertemporal wholesale and retail markets. Digital communication technology, and its increasing pervasiveness and affordability, make this decentralized coordination possible. Kiesling argues that with decentralized coordination, distributed agents themselves control part of the system, and in aggregate their actions produce order. Technology makes this order feasible, but the institutions, the rules governing the interaction of agents in the system, contribute substantially to whether or not order can emerge from this decentralized coordination process.

This book will be of interest to students and researchers engaged with electricity regulation and deregulation in the US, as well as institutional economics and technological change in industry.

Although they didn't get the title quite right; it's Deregulation, Innovation and Market Liberalization: Electricity Regulation in a Continually Evolving Environment.

Lynne Kiesling

Wired provides a wiki for collecting ideas and techniques for automating your home. Even though we do not yet have widespread retail choice in electric power service as residential customers, these ideas can reduce energy bills and reduce overall resource use:

Aside from the nerd bragging rights, fully-automated homes can be much more energy efficient. Left the light on in the basement after that last-minute laundry dash? That's money out of your pocket. But an automated home could have killed the lights as soon as you came upstairs.

Ditto for the A/C you left running all night or the blinds you always forget to close in the afternoon heat. Your forgetfulness is wasting money and using energy you don't need to use. Automation cuts down on your energy use by doing the smart and simple tasks for you.

Aside from the potential savings in money and energy, you can perform other practical tasks like monitor your pets, detect unwanted visitors or even send yourself an e-mail when the water pipes in your basement burst.

And then just imagine how valuable and useful it will be to have that automation capability once we really do get retail dynamic pricing! Then we really can deliver on the promise of sending prices to people, and their devices!

Lynne Kiesling

I've written a lot here before about dynamic pricing, and Mike has too. Electricity is one of the most poorly-priced services we consume; only water is priced in a way that communicates even less about its scarcity and about the true costs of providing the service. If we are going to meet the combined challenge of rising electricity demand, environmental quality, and cost minimization, implementing dynamic retail pricing of electricity is crucial. Without dynamic retail pricing, we will continue to invest in expensive and underutilized generation and wires resources to meet peak demand, peaks that could be reduced using the price signals inherent in dynamic pricing.

Smart grid technologies, including communicating digital meters, enable this dynamic pricing by reducing the costs of communicating price signals to more and more consumers. Smart grid technologies also enable the communication of more varied and diverse information, in addition to reducing the costs of communication.

I've written a short article on the symbiotic relationship between smart grid technology and dynamic pricing in the Smart Grid Newsletter, which is a great resource for smart grid information.

Dynamic pricing is one of the most valuable direct consumer benefits enabled by a Smart Grid. Dynamic pricing makes the value and cost of their energy use transparent to consumers, and it enables consumers to see when cost exceeds value. Dynamic pricing particularly benefits consumers whose consumption is flexible; however, it does not harm the inflexible customer because it reduces the quantity of peak power demanded, thereby reducing average prices paid by inflexible customers. When dynamic pricing reduces peak demand, it also reduces transmission and distribution losses, and associated operating costs.

The rest of the article focuses on how the combination of smart grid technology and dynamic pricing can deliver environmental benefits.

Lynne Kiesling

As authorized by the Energy Independence and Security Act of 2007, the U.S. Department of Energy has announced the Bright Tomorrow Lighting competition, the L Prize (here's the prize website). Cash prizes and other inducements for the development of solid state lighting to replace standard incandescent and fluorescent bulbs.

Rather like the Google Lunar X Prize, but with taxpayer money instead of private money.

Solid-state lighting is a big deal. The light is emitted from a block of semiconductor material instead of in a vacuum in a tube or by exciting a gas in a tube. If you have any LED lights, that's an example of solid-state lighting. They use very little energy per lumen of light, and they emit very little waste heat.

There are a couple of academic research centers working on solid-state lighting, and there are some companies that offer solid-state lighting. Mass-market solid-state lighting is not there yet.

I have my concerns about government research funding crowding out private research funding, particularly when we get in this murky area that is moving toward commercialization research. I also have my doubts about the assertion in the DOE's solid-state lighting strategy statement that "its unique attributes drive the need for a coordinated approach that guides technology advances from laboratory to marketplace".

However, if the alternative to this kind of policy is command-and-control technology standards and building standards, then this prize-based policy is more likely to generate effective, commercializable solid-state lighting. At least it stipulates the performance objectives without stipulating how the technology is to achieve those objectives (other than the technologies having to be solid-state).

I think that's the real on-the-ground realpolitik comparison to make, although I also think that we should not ignore the crowding out question (especially as fuel prices and electricity prices rise).

Michael Giberson

Geothermal power generators use temperature differences between the surface and areas deeper in the earth to move a gas or liquid through a loop and drive a turbine. (One example is the Chena Geothermal Power Plant in Alaska. See the related project at the Chena Hot Springs Aurora Ice Museum, which uses 165°F water from a geothermal well to help keep the ice museum cold.)

Ocean thermal power systems work on similar principles, but, to state the obvious difference, underwater rather than underground. A story in the LaCrosse Tribune (Wisconsin) discusses work by an 80-year old Wisconsin engineer who obtained some patents on related inventions in the early 1980s, but saw interest in ocean thermal generation drop off as energy prices fell.

The system uses the difference between the heat of the ocean's surface water, about 80 degrees in the tropics, and the colder water deeper down to force ammonia through a turbine that turns a generator to produce electricity.

The electricity then can be converted into various sources of power, such as hydrogen, and then used to operate something like a hydrogen-cell car.

...The proposal describes the energy system as free of pollutants and, like the wind, cost-free as well.

"This can work 24 hours a day, 365 days a year, because of the enormity of this source," Foust said. "It goes all the way around the earth, deep and wide."

The term "cost-free" is incorrect, of course, both in reference to ocean thermal and wind energy power systems. The system cost something to build, cost something to maintain, and occupy real space in the water that would otherwise be available for other uses. Which is why, as inventor Foust is quoted as saying later in the article, "These alternate energy programs are only viable when the cost of energy is high."

A recent report by the Texas Comptroller of Public Accounts assessing energy resources for the state was dismissive of the prospects for ocean thermal energy conversion, saying, "ocean thermal energy conversion (OTEC) is the least accessible form of ocean power, and perhaps the least useful for the U.S." (From the Texas state government's The Energy Report 2008.) But all such assessments depend on the particular resources and technologies assumed, and both technology and our understanding of resources constantly changes.

In particular, the report observed that the relatively shallow waters in the Texas Gulf do not have sufficient temperature differences between the surface and the ocean floor. Offshore Hawaii, on the other hand, has more potential. Another alternative would be to use temperature differences between surface water and geothermal sources beneath the ocean floor. For example, use offshore oil and gas wells in the Gulf to gain access to higher temperatures under the ocean.

At some price for electricity, such possibilities become economical.

Michael Giberson

Stephen Hadden and Shannon Messer, writing at Energy Central/T&D Automation:

The concept of an intelligent electric utility infrastructure or "Smart Grid" is attracting wide interest among utilities, consultants, regulators, and other utility stakeholders. The widespread interest, however, is accompanied by widely differing expectations about when Smart Grid will emerge. Some consultants and vendors confidently proclaim that the Smart Grid is here or "just around the corner."

... [But] we may never be able to declare that we have achieved the Smart Grid. The very concept of a Smart Grid is likely to continue to evolve with the developing grid automation technology. Today's Internet is more than the vision of the National Information Infrastructure (NII, remember that?) described 15 years ago. But no one rang a bell when we "achieved" the NII. Today's vision of the information superhighway remains ahead of us, yet to be attained ... Similarly, by the time our operating electric distribution system becomes what we now call Smart Grid, the concept of Smart Grid will have been further advanced and the "finish line" will have moved ahead of us into the future.

But as they explain, just because the finish line naturally keeps moving, that doesn't mean it isn't worth racing toward Smart Grid goals.

Lynne Kiesling

Google's blog has a post describing their new investment in BrightSource Energy and linking to lots of background information on their renewable investments. BrightSource does large-scale solar.

This is part of Google's RE < C initiative, through which they channel their investments with an objective of making renewable energy cheaper than coal-fueled energy. Their FAQ gets at the question of why Google would be doing this:

This initiative is not just about creating clean, affordable electricity for Google - though we are keenly interested in making our business as environmentally sustainable as possible. If successful, this effort would likely provide a path to replacing a substantial portion of the world's electricity needs with renewable energy sources. We want to do our part, but that won't be enough alone to thwart climate change; we need a worldwide green electricity revolution to do that.

OK, fine. But what's the return to Google? They clearly don't see it as a short-run bottom-line reduction in their own energy costs. So what's motivating it? Brand capital and reputation capital? I have my ideas, but I would like to hear yours.

Lynne Kiesling

The WSJ Environmental Capital blog has been doing a great job of keeping up with the wind power industry in the U.S. lately. Today's post about Iberdrola's planned investment in wind power in the U.S. is a good summary, with links to some of their other recent posts on the subject.

How to read this? For starters, it's another sign the U.S. wind power market is going great guns regardless of what Congress does for clean-energy tax credits. As we noted last week, the Department of Energy figures wind power could provide 20% of U.S. electricity by 2030--with or without subsidies. And T. Boone Pickens put the first $2 billion down on his $10 billion bet on the world's biggest wind farm in Texas last week, without waiting for the tax credits to be renewed.

One interesting aspect of Iberdrola's investment plans is how the New York Public Service Commission's concerns about electricity prices may influence some of their investment decisions:

But the New York Public Service Commission, the five-person body that has to give the final green light, is leery. It's worried Iberdrola's deal could harm consumers by raising power prices; it argues the deal would give Iberdrola a virtual monopoly, since the Spanish utility could control both generation and transmission of electricity. So, the New York commission is proposing that the world's biggest wind-farm operator divest some of its wind farms to win regulatory approval.

The post then goes on to note that those who are interested in environmental policy are upset about the NYPSC's objections, because their highest priority is increasing renewable energy capacity to meet New York's goal of having 25% of their power generated from renewable sources by 2013. I think increasingly we will see the tension between the regulatory objective of low electricity prices and the regulatory objective of reduced fossil fuel generation that is evident in this example.

Michael Giberson

As I mentioned yesterday, I thought the Washington Post's story ("Decade of deregulation felt in climbing bills") on various costs embedded in electric power bills was reasonably good. But the article covers several aspects of the overall picture without always being clear about the role played by the charges. From the economics point of view, the vital element of any charge included in the consumer's bill is whether it tends to contribute more or less to efficiency in the production and consumption of electric power. One step toward sorting out the issues here is to sort out the different charges depending on whether they arose under the old or new regulatory regime.

Re-reading the article, I counted about nine overlapping categories of costs or charges that feed into a consumer's bill. Below I identify the nine types of costs and assign them to one of three categories: (1) Costs left over from the old regime, (2) Costs arising in the new regime, and (3) Continuing cost types. Each of the categories is illustrated by a quote from the article.

Of course the biggest factor of influence over the bill -- fuel costs -- is mostly ignored in the article by design. The focus was explicitly on elements of a consumer's bill "that have nothing to do with the rising price of fuel."

Costs left over from the old regime/Transitional costs:

• Stranded costs - "Virginians are paying Dominion Power tens of millions of dollars a year for a nuclear plant the company planned in the 1980s but never built."
• Rate freezes (aka Performance-based ratemaking) - "The charges include $238 million for a new nuclear reactor at its plant outside Richmond. Dominion canceled plans to build the plant 26 years ago amid safety concerns about nuclear power. The last of the charges was set to expire in 1999. But when rates were frozen during the transition to deregulation, the charges stayed. They'll continue until at least next year.

Costs associated with the new regime:

• Congestion pricing - "Federal rules that accompanied deregulation also increase costs to consumers. Because of them, customers pay a premium for living in a congested region thirsty for power."
• Uniform marginal price - "Now, on hot summer days, for example, when the demand for electricity is high, the price is set by the last, most expensive plant that is needed to supply power. These are typically natural gas plants. But the rising price of natural gas has produced a windfall for owners of older nuclear and coal plants."
• Capacity market payments - "And although they began paying surcharges last year so power companies will invest in new plants, the charges have resulted in relatively few additional megawatts. These charges account for about 25 percent of the price of electricity in the District and Maryland and less in Virginia."
• Structural impediments to competition - "Critics say the supply has increased so little because the existing system not only benefits the companies in the region, it gives them an incentive to constrain the supply of electricity to keep prices high..."

Same as it ever was:

• Funds for eventual decommissioning of nuclear plant - "More than 1 million residents of the Washington-Baltimore area paid $920 million to take the Calvert Cliffs nuclear ... off-line in 2034...."
• Continued political influence over rates - "The deal reached between Constellation and Maryland Gov. Martin O'Malley (D) this month blunted two years of recrimination over a 72 percent rate increase for 1.1 million Baltimore Gas and Electric customers. They will get a $170 one-time credit and relief from future decommissioning costs.
• Flawed consumer incentives to use power economically - "PJM spokesman Ray Dotter said the Aug. 1 price reflected the cost to produce electricity that day. But customers pay a flat rate, giving them little reason to use less power, he said. "A more ideal situation would be that the price sends a signal that people conserve more.""
• Hmmmm... - "Electric bills in Virginia are expected to climb when the state returns to regulation next year, although it's unclear by how much."

This is just sort of a rough draft approach at a sorting. I know we have some expert readers and I'd be happy to receive comments from them. Each of these topics could bear individual attention. I'll post on some of them over the next several days.

You may have noticed I referred above to "the old or new regulatory regime," and not to "the regulated or deregulated regime." Yep. I am one of those wackos that prefers the ugly word "restructuring" to the apparently more catchy term "deregulation" when talking about the changes in public policy toward certain elements of the electric power industry over the last ten to twenty years.

Michael Giberson

The Washington Post today contains a story titled, "Decade of Deregulation Felt in Climbing Bills":

As they watch their bills climb, electricity customers in the Washington region might be surprised to know they are paying costs that have nothing to do with the rising price of fuel.

Virginians are paying Dominion Power tens of millions of dollars a year for a nuclear plant the company planned in the 1980s but never built.

More than 1 million residents of the Washington-Baltimore area paid $920 million to take the Calvert Cliffs nuclear plant -- now owned by shareholders of Constellation Energy Group -- off-line in 2034 before state lawmakers agreed to a deal this month requiring the company to take over the federally mandated decommissioning costs.

Maryland customers also paid almost $1 billion to reimburse power companies for constructing plants. Today, thousands of Virginians are still paying these charges, regulators say, although the plants' value has soared.

These costs were added to residential customers' bills under deals struck by lawmakers almost a decade ago when the region's electricity markets were opened to competition.

Federal rules that accompanied deregulation also increase costs to consumers. Because of them, customers pay a premium for living in a congested region thirsty for power. And although they began paying surcharges last year so power companies will invest in new plants, the charges have resulted in relatively few additional megawatts. These charges account for about 25 percent of the price of electricity in the District and Maryland and less in Virginia.

The article hits many of the key parts of the story behind retail electric rates in DC, Maryland, and Virginia over the last ten years. Overall the story is probably good enough to deserve a thoughtful going over, to explain with more care the background and context of some of these "key parts."

For now, however, just my initial reaction: For a story purportedly about deregulation and climbing bills, the story seems to spend a lot of time talking about legislative and regulatory decisions made five or ten years ago. Some of those decisions of ten years ago involved deciding how consumers would be made to pay off the costs of regulated utility and regulator choices of ten+ years earlier which turned out to be mistakes.

So how is this a "deregulation" story?

And, by the way, while consumers do continue to pay for decades-old choices made under the old regulatory regime, these payments are relatively fixed and have almost nothing to do with the "climbing bills." In general, the climbing part of the bill is almost all "the rising price of fuel."

Michael Giberson

In a post at Common Tragedies, Erica Meyers reports the release of an addendum from the RGGI auction design team that responds to certain of the comments filed in response to their earlier report. As she reports, "One of the more interesting findings is that 'clock auctions' may be more susceptible to explicit efforts to collude than sealed-bid formats."

In my post on the initial RGGI auction design report, I concluded that while it presented "a thorough examination of the market design problem and a well-thought out justification for their final design proposal," it nonetheless failed to address one critical issue. The report recommended quarterly auctions which each offered two "vintages" of the RGGI carbon emissions allowances, and the auction design proposal failed to account for the substitutability between the two vintages. (Follow the link for more detailed discussions.)

The substitutability could be readily addressed using an ascending price clock auction. Peter Cramton, who highlighted the substitutability issue in comments submitted to RGGI, urged use of the ascending price clock. In my post, I endorsed that recommendation, saying, "Simultaneous ascending clocks [are] becoming the industry standard for these sorts of market situations. ... There is little doubt that such a design would do the job."

So I was fascinated to learn that I could be wrong. In the addendum, the auction design group address three issues:

1. the choice of auction design (clock versus sealed bid) and how this affects the efficiency of the auction and the ability of parties to collude,
2. variations on design for clock auctions, and
3. auctions that combine different vintages of allowances.

Among their findings: "In laboratory auctions with communication among participants, successful collusion is more effective in clock auctions than in discriminatory and uniform price auctions." They elaborate on this finding in the addendum and cite some related work. Erica provides good coverage of this topic in her post, "The Potential For Collusion in Ascending Price Auctions."

Because of the potential collusion issues, the auction designers suggest sticking with the sealed-bid auction design, but they do propose two changes in response to the comments filed. From their summary:

The New England and New York ISO proposal that allowance owners be able to offer allowances for sale in the RGGI auction has definite advantages. We have different suggestions about how this might be implemented. The uncertainty of supply that results can help reduce the potential of collusion.

Since RGGI allowances are bankable, a bid for a later vintage could be treated as a request to purchase either a later vintage or an earlier vintage, whichever is less expensive. Interpreting bids in this manner prevents a price inversion in which the uniform price for the later vintage is higher than the price for the earlier vintage, although theory suggests this price inversion is inefficient and would not occur in the secondary market. This addendum describes a simple procedure for combined vintage auctions that implements this idea.

This last point largely addresses the substitutability issue while keeping the simplicity of the sealed-bid market design.

Overall, the addendum suggests useful tweaks to the RGGI auction design.

(NOTE: In addition to the post cited above, I commented on RGGI auction design topics in "RGGI auction design comments available online," and "RGGI picks uniform-price sealed-bid auction design." Erica Meyers' previous post on the RGGI auction design: "Combined Vintage Auctions For RGGI.")

Michael Giberson

Employment prospects must be looking up for economists with experience in electric power.

Three times in the last week I have received unsolicited notices - first, from out West came an email hoping I could recommend someone with expertise in state utility policies; then a day later, from a friend and former manager, a casual note asking if I know of any available electric power economists (or at least someone with good analytical and writing skills), and finally just now a Gmail alert returned an ad posted on Washington Post on-line, seeking an economist to analyze the competitive performance of electricity markets.

[Note to prospective job seekers: If I don't know you, or at least know someone who knows you, I can't offer a recommendation. But don't worry, despite all the headlines, my totally informal, spontaneous sample says things are just fine (at least if you have economics training and a electric power background).

Note to prospective employers: So far as I know, none of the other electric power economists I know are looking for new opportunities.

Note to my current employer: That doesn't mean you shouldn't offer a preemptive pay increase, just in case. Better safe, then sorry, I always say (if the implication is that I should be paid more).]

Michael Giberson

In a post titled "The $100 Billion Windfall: Why Utilities Love Cap-and-Trade", Environment Capital notes the release of a new study by Point Carbon, financed by the WWF, which sought to estimate the "potential and scale of windfall profits in the power sector in selected countries (UK, Germany, Spain, Italy and Poland) during the second phase of the EU Emissions Trading Scheme (ETS), which runs from 2008 to 2012." Point Carbon provides an estimate of between 23 and 71 billion Euros, depending on assumptions.

We should be clear here. It isn't the cap-and-trade that utilities love, its the multi-billion Euro windfall.

(NOTE: Rich Sweeney at Common Tragedies also comments on the Point Carbon study and Environmental Capital post.

Michael Giberson

From Viet Nam News:

Ceiling prices set in accordance with each power station's capacity technology and costs have been suggested for Viet Nam's proposed competitive energy market in Viet Nam.

British energy-industry consultant Campbell Carr made the proposal at a seminar to discuss the design of a competitive power market in Ha Noi yesterday.

The Trade and Industry Ministry's Electricity Regulatory Authority of Viet Nam, ERAV, organised the discussion as part of the project to overcome difficulties in organising the electricity market.

The Public-Private Infrastructure Advising Facility, PPIAF, sponsors the project; Campell Carr is its principal consultant.

Application of a ceiling price would avoid the risk of market domination by generators who might otherwise increase their prices to influence the market price, the consultant said.

A floor price should apply but it would need to be the same for all power stations to avoid the risk of market manipulation through lower prices.

I don't know enough about Viet Nam's power industry to comment productively, but if I were evaluating the proposal I'd ask the consultants about other markets in which similar approaches have been successfully implemented.

Michael Giberson

A few scattered stories:

In testimony to the US House and Senate Joint Economic Committee on Wednesday, Fed chief Ben Bernanke said, "the one small silver lining" in $100/barrel oil is that "a lot of alternatives become economically feasible." In fact, well before $200/barrel, biking to work would become feasible for a lot of Americans, and so would staying home for Thanksgiving instead of taking that trip down I-95 to see grandma, and chopping down trees in the neighborhood to stay warm in winter. I think this is a "cart before the horse" conclusion that comes from spending too much time in Washington policy circles.

EnergyBiz Insider on the U.S. effects of the Asian energy boom: "In 2006, China built 90,000 megawatts of coal-fired power plants, which exceeds the entire generation capacity of the United Kingdom by 13,000 megawatts... India built 22,000 megawatts of new electricity plants in the last five years... [Stanford researcher Jeremy] Carl says that Asia's electricity boom is causing them several problems. 'China has vacuumed up the technology and personnel needed to implement these power plants,' he says. Hence, domestic utilities are having problems with 'equipment availability, getting construction equipment on time, and obtaining the necessary number of engineers,' he says."

At Grist, Ryan Avent says transit is "the forgotten solution." He asserts that "our best hope for near-term reductions in emissions is a significant increase in transit investment." Interesting, but I don't think so. I'd like to see the analysis that underlies such a bold claim.

The Baltimore Sun reported on April 1: No collusion found in Maryland power auctions:

Steven B. Larsen, chairman of the Public Service Commission, told state lawmakers yesterday that the regulatory body found no evidence of collusion in the 2005-2006 wholesale power auctions that caused a 72 percent price increase for households buying power from Baltimore Gas and Electric Co., which is a subsidiary of Constellation....

O'Malley, a Democrat, asked Larsen to look into the auctions last year after the Illinois attorney general filed a complaint alleging price manipulation by energy suppliers that helped lead to a $1 billion rate rebate for customers there. O'Malley had campaigned on a pledge to roll back steep BGE rate increases.

But after O'Malley took office, the PSC concluded that it had no cause to deny rate increases sought by BGE, finding that Constellation followed the auction procedures set up by previous PSC members.

Michael Giberson

On Monday night, Republicans in the Kansas House voted to apply a tax of $37 per ton of CO2 emitted from coal fired power plants for emissions in excess of 110 percent of the statewide average. Proceeds from the tax would be distributed to the large coal plants in the state with the lowest average carbon emissions.

The Salina Journal quoted Rep. Clay Aurand, R-Courtland, as saying, "This is like a giant race to be the cleanest."

Only, as written, the tax would apply to a single power plant in the state, one owned by the Kansas City Board of Public Utilities, and the money would flow to one or more of the competing coal-fired generators owned by Westar Energy, Kansas City Power Light and Sunflower Electric. Generators with much lower emission rates, which includes just about everything from gas-fueled generators to nuclear power to wind power, would neither be taxed or subsidized. Some members of the Kansas House saw the proposal as an attempt to punish opponents of proposed coal-fired power plants in western Kansas.

Not exactly the approach the members of the Pigou Club have in mind.

Apparently on Tuesday morning Kansas House Republicans reconsidered their enthusiasm for carbon taxing, and voted to eliminate the carbon tax proposal.

Pigovian taxes are great in theory, but even in theory sometimes quantity regulation is preferred. And, of course, in practice both price- and quantity-based regulation will be shaped by lobbyists and politicians, perhaps motivated by factors beyond pure economic efficiency. Economist-advocates should mind the gap between theory and practice; the Kansas coal carbon tax caper provides an illustrative example.

(HT the Carbon Tax Center blog.)

Michael Giberson

I was out in West Texas this past weekend and had a little spare time available Saturday morning. What better for an energy policy geek to do than visit the American Wind Power Center in Lubbock, Texas?

The AWPC is a museum showing off about 150 years of windmill technology. Most of the windmills in the collection were intended for pumping water, or sometimes for milling grain, but they have a few historical electrical generators and a pair of new models including a 660 kW Vespa which powers the site and is interconnected to the local utility. On the ground in the above photo is a disassembled GE 1.5 MW generator that will become the centerpiece of a planned addition.

Thanks to a canceled school tour I was able to get a personal tour of the site from executive director Coy Harris. I asked him whether they had any trouble interconnecting the generator to the local power company. He said it took a bit of effort, but they had to work a lot harder with the city in order to install the tower inside the city, at a facility with public access and near a residential neighborhood.

Harris tipped me off that the Farmers Cooperative Compress located on the Southeast edge of town was installing a number of wind turbines, so I headed over to take a look.

NOTES: It turns out that there are a few other windmill museums, see links to museums and other windmill resources here (from Vintage Windmills online magazine).

The student paper at Texas Tech University discussed the AWPC in this 2006 article.

Lynne KIesling

Can someone please explain the logic of the argument in this Wired Autopia blog post to me?

EV advocates say the California Air Resources Board is trying to kill the electric car -- again.

Under a proposal pending before the Air Resources Board, state regulators would slash -- from 75,000 to as few as 27,500 -- the number of zero-emission vehicles automakers must build between 2012 and 2017. Under the changes, the big automakers could put fewer than 2,500 nonpolluting cars on the road in the next four years. That's only 300 more than Tesla Motors plans to produce in the next two.

Ummmm ... first of all, the whole reference to killing the electric car "again" is a reference to the fact that the technology was not scalable and commercializable the last time California passed an electric car mandate. Wishing didn't make it so then, and it still doesn't, despite all of the arguments about government policy being "technology forcing". High gasoline prices and increased environmental concerns at a distributed, decentralized level are much more effective at inducing resilient technological change than government mandates. Such mandates run much more of a risk of the unintended consequences of governments having the hubris to think that they can pick technology winners. They cannot. What if, for example, such mandates induce researchers to shift entirely into electric vehicles and out of plug-in-electric hybrids, and what if it turns out that the PHEV has a larger portfolio of benefits and is more consumer-friendly than the EV? Then the government has picked wrong, and we all bear the cost of the coercion.

Second, does it occur to any of these so-called EV supporters that with the electric car plans of Tesla and GM, such government policy is irrelevant? That last sentence of the quote -- that Tesla itself will be producing almost as many as are named in California's mandate -- belies the argument that more government forcing is needed.

I think the carrot is there, the lures are all around, and the commercial electric vehicle (and plug-in hybrid) is in the near future. How can changing a government target in a wishing-it-to-happen piece of legislation reverse that? Ridiculous.

Michael Giberson

It is rare that these little "learning moments" come nicely packaged, but the two near contemporaneous power system emergencies in Florida and Texas on February 26, 2008 present such a package. Still, otherwise intelligent industry observers seem to miss the point. Example, the Smart Grid News of March 26, which presents an overly harsh interpretation of the "challenges" of working with wind, and points to the Texas event as supporting evidence.

ERCOT operators had to react promptly on February 26 to balance load through demand response (DR) because of system reliability problems caused by wind intermittency. But systems reliability was not the only issue caught in the headlights by this event. The Wall Street Journal also spotlighted the economic impact; namely that the unexpected loss of wind generation caused wholesale power prices to soar from $30 per MWH to $105 per MWH in West Texas.

The article continues with a discussion of "system reliability and pricing challenges" and concludes with an ominous, "Federal and state incentives and mandated renewable standards, along with investor interest ..., will all drive additional wind generation. Whether the grid can keep up is another matter."

No mention was made of the Florida event, but here is the short version: a worker's error while performing maintenance led to a fire at transmission substation which tripped a series of transmission lines out of service and shut down several major power plants. About 2600 MW of capacity was lost from the system. About 2.5 million Floridians lost power during the event.

So in Florida, 2.5 million people suddenly could not buy power at any price, because in the few seconds that the transmission lines went down and power plants went off line, the local integrated utility system operators didn't have time to react.

In Texas, later that same day, wind power unexpectedly dropped well below day-earlier forecasts over a period of several hours. Some other non-wind generators in Texas were operating below schedule at the same time, and evening electrical load was beginning to shoot up. The combination of factors left the independent power system operators at ERCOT scrambling to keep the system in balance, which they did in part by calling on market-based voluntary load reductions. No one lost power, though prices did spike in reaction to the emergency conditions.

As the Energy Legal Blog notes, ERCOT has recently released its operations report on the event. One problem - ERCOT has relied upon day-ahead forecasts of wind power capacity, but the wind is not (yet?) so reliably forecasted so far in advance. The Texas grid operator is seeking to advance a wind forecasting tool under development, which was scheduled to be added to the system in conjunction with a switch in the ERCOT market system later this year.

While in Florida businesses were shut down and millions of people were made significantly worse off, in Texas mosts residents were likely unaware of the problems until they read about in the newspaper the next day. Of course there is much more to the picture than is captured in these two public events, but my point is that the "unreliability of wind" just needs to be kept in perspective. (Or better, just priced appropriately.)

It is not yet clear whether Florida Power & Light will be integrating an improved worker error forecasting system into its operations.

Michael Giberson

Even in the Houston area, with an economy built on the oil industry, some consumers are looking for a little extra -- and sometimes a lot extra -- energy efficiency in their home purchases. Via the Houston Chronicle:

Local builders for years have touted the energy efficiency of their homes, such as better insulation and power-saving appliances, but some are taking it to a new level.

One company, for example, is creating an entire community where all the houses will have solar power. Another builder claims its new green homes will cut up to 50 percent in heating and cooling usage.

"Just about every other person I come across is wanting at least one of these green features," said real estate agent Stephanie Edwards-Musa, who specializes in green homes. "But it's still making its way here because we are still overcoming the misconception that it's too costly."

[...] But rising energy costs are fueling demand.

In a move to bring solar power to the masses, Houston developer Land Tejas plans to power its 2,700-home Discovery at Spring Trails community with the help of solar power.

The solar systems will offset about 15 percent of the electric usage in a 4,000-square-foot home that uses an average 3,000 kilowatts a month, said Craig Lobel, a planning consultant hired by Land Tejas.

Of course, just because you slap a solar panel on your roof doesn't make your home energy efficient. It may not even make much sense economically - perhaps a good shade tree strategically placed would provide more cooling than a solar-panel powered air conditioner.

But the houses are to be built to "Environments for Living" program standards, and each of them will get a General Electric designed dashboard to track water and power use, and measure solar power production. At least it looks like a pretty good set up, just judging from a newspaper story and a few pictures on the internet. At least if you are looking for a new home just north of Houston.

Lynne Kiesling

Have you seen the Galvin Electricity Initiative Sad Socket ad?

In the half-century since our electric power system was completed, little has been done to update it -- and it shows. We're relying on an obsolete electricity grid that is dangerously vulnerable, even to forces as predictable as thunderstorms and as tiny as squirrels. And blackouts and power interruptions cost public facilities, businesses and households at least $150 billion a year. Power plants generate as much pollution as they do electricity, and then two-thirds of this energy is lost before it ever reaches the end-user. Meanwhile, consumers are no more than passive participants without real choice. [emphasis added]

The technology already exists to address these unhappy circumstances, save you money, improve the quality of electricity service and give you control.

But regulatory policies stand in the way of progress.

The Galvin Initiative's website suggests five things you can do to help accelerate the transformation of the electric power network:

1. Use the power of the purse
2. Demand control -- by federal law, your utility is required to provide you with a time-of-use rate and an enabling meter. Call them and ask for it!
3. Call for policy change -- write your elected representatives
4. Use less power
5. Share your business story with the Galvin Initiative, to show how widespread and dispersed the inefficiency of the existing electric power network is

Lynne Kiesling

Mike's two recent posts about turning animal waste in to electric power and John Doerr's focus on methane recovery from animal waste prompt me to mention one of the innovative entrepreneurs in this space: RealEnergy. RealEnergy builds, installs, and manages distributed generation and combined heat and power (CHP) systems, and can do so within a local microgrid if the regulatory barriers to interconnection and to the construction of microgrid power lines across roads are removed.

Real Energy has done many projects ranging from urban installations in San Francisco to dairy farms. On dairy farms they turn animal waste into biogas, which is pretty much a methane conversion, as far as I understand it.