Smart grid technology, economics, and policy (Part 1 of 5)

Lynne Kiesling

This week I’ll be writing a series of posts about smart grid technology, economics, and policy. The buzz around the idea of smart grid is palpable:  old companies like GE and new companies like Google are changing their business models to incorporate more smart grid activities and products, entrepreneurs are exploring new products and services at unprecedented rates, and federal legislation supports smart grid investments and proposes to direct $40 billion of taxpayer funding to smart grid investments under the “stimulus bill”. In fact, on Tuesday the Senate Committee on Energy and Natural Resources will have a hearing on smart grid initiatives and technologies. None of this is new to readers here, though, because for the past four years I have been working on smart grid economics and policy through my membership on the GridWise Architecture Council and through my participation in the GridWise Olympic Peninsula research; these activities have led to several smart grid posts at KP over the years.

What is the definition of smart grid, and what are its most important and relevant features? I encourage you to think of smart grid from two different directions simultaneously — its technologies and its functionalities. Technologically, a smart grid is a digital communication overlay and integration into the electric power network. This communication technology includes

  • Digital switching networks
  • Remote sensing and monitoring in wires and in transformers
  • Fault detection
  • Devices for automated fault repair
  • Intelligent end-use devices in homes, stores, office buildings, garages, and factories.

These various smart grid technologies enable a variety of functionalities in the electric power network, such as

  • Transactive coordination of the system (many of the following functionalities contribute to this coordination)
  • Distributed resource interconnection, including renewable generation
  • The ability of a resource/agent to be either a producer or consumer of electricity, or both
  • Demand response to dynamic pricing
  • The ability of an agent to program end-use devices to respond autonomously to price signals
  • Distribution system automation by the wires company, leading to better service reliability

The integration of these technologies into the electric power network will embed distributed intelligence in the systems that the network comprises. Please note that when I refer to the grid or the electric power network I am including distributed human agents (and their private knowledge-preferences-intelligence) in the definition of the network, not just the physical assets.

The potential ways that smart grid capabilities can create value are large, and they transcend the traditional utility-provided “plain vanilla” electricity generation and delivery value proposition. By enabling better, and more decentralized, coordination of electricity supply and demand, smart grid functionalities contribute to the optimization of resource use in the entire electricity system. This optimization has both economic (cost reduction) and environmental (reduced resource use, reduced emissions) implications, which I’ll delve into later in the week. Note, though, that the distributed intelligence => decentralized coordination connection allows these economic and environmental benefits to converge. One example of this convergence is how dynamic pricing induces consumers to shift consumption away from expensive peak hours, which leads to a reduced need for expensive infrastructure investment that is built to meet peaks and then sits idle for 95 percent of the year. Avoiding that investment saves costs and saves resources.

Investments in smart grid technologies to achieve the functionalities that we want in the electric power network do not occur in an institutional vacuum, though. There are existing regulatory policies that serve as barriers to such investments, and the policy environment that affects who does (and who can, under regulation) make such investments is complicated because it is composed of federal, regional, and state policies. So we’ll discuss some of them this week; here’s my plan:

  1. Monday: introduction to smart grid
  2. Tuesday: a transactive smart grid — if a grid’s not transactive, it’s not smart
  3. Wednesday: intelligent end-use devices are going to be transformational
  4. Thursday: smart grid and renewables interconnection
  5. Friday: federal and state smart grid policy

If you are looking for background and useful introductions to smart grid ideas, I recommend these sources:

Tomorrow: if a grid is not transactive, it’s not smart

Other posts in this series:

The retail electric power market shakeout in Texas

Michael Giberson

One last Texas electric power post for the day, this one on the upheaval among some electric power retailers in Texas, via Platts:

The shrinking field of retail marketers is not an indictment against restructured power markets but an expected result of the credit crisis and its impact on retailers, Jim Burke, CEO of TXU Energy said Monday morning.

Burke’s comments at the KEMA Executive Forum in Houston came after NRG announced plans Monday to buy Reliant Energy’s retail business in Texas for $287.5 million. Integrys Energy Services’ parent last week said it would wind down or sell IES, which is one of the larger retail marketers operating in competitive retail markets…

Integration of generation assets and retail market assets, as evidenced in the NRG-Reliant deal and in the business strategy of marketers such as TXU and others, also makes sense and may be a future trend, Burke added.

In many states that restructured, unbundling of vertically integrated utilities often simply produced the spin-off of retail and generation units into separate entities still under the same corporate parent, sometimes with limited sales of utility-owned generation to independent power companies. The point wasn’t to break up companies, per se, but to separate the power generation and retail ends of the business from the transmission and distribution wires companies. In Texas, they pushed a little harder than most states on developing a competitive retail sector separate from the former regulated utilities.

Unbundling of electric utilities doesn’t require divorcement between generation and retailing, however, and as the comments above suggest, the combination makes some sense. The combined company finds itself naturally hedged against price risk, and it may be cheaper to hedge the risk in this manner than through contracts.

I recall that Sally Hunt makes this point well in her book Making Competition Work in Electricity.

While many restructured states are not experiencing a similar “shakeout”, it is mostly because they never saw much of a “shake in” in the first place.

Lower prices for electric power in Texas

Michael Giberson

Are your electric power rates falling?  Are they below what they were two years ago?

They might  be if you live in parts of West Texas.  The Abilene Reporter-News reports:

Electric rates available to West Texans are less expensive, on average, than they were two years ago.

In addition, residential rates offered in Abilene and San Angelo are among the lowest in the deregulated parts of Texas — in contrast to two years ago when West Central Texans were paying some of the highest rates in the state….

In April 2007 the average monthly cost of electric plans available to residents in Abilene and San Angelo was about $139 for customers who used 1,000 kilowatt hours of power per month.

The average price of plans currently available on www.powertochoose.org, the state’s clearinghouse of electric prices, is about $120 a month. That’s a 13 percent decrease over two years.

The article notes that while the numbers are suggestive of deals available to consumers, they don’t necessarily represent exactly what all consumers are paying now.  For example, consumers may be on one- or two-year fixed price contracts that have yet to reach term, and could be paying higher rates than now offered to new customers (on the other hand, such consumers may have avoided the high prices facing new customers last summer).

Lower natural gas prices are part of the reason prices are lower in West Texas, but wind capacity and transmission grid limits also play a role:

Abilene and San Angelo are uniquely positioned because the wind energy that is produced in the region has a hard time moving to more densely populated parts of the state. So the glut of wind power produced here has helped push the wholesale price of electricity down — which in turn pulls down residential retail rates in the area. Wholesale prices are unique to each of four regions in the ERCOT grid.

Generators “have to curtail the wind generation at times when more is blowing than can be transported out of that region,” said [Potomac Economics VP Dan] Jones, who monitors the wholesale electric market in Texas. “When they do that, the prices become very low.”

But the lower prices may only last for the next few years — until the state can follow through with a plan to beef up its electric transmission system.

Once the transmission build out is completed – estimated to be in the 2014/2015 time frame – wind power will be much less likely to be shut in by grid congestion, so prices will be equalized across the state more of the time.  Still, the large and growing number of wind turbines in the region should help the region remain a low cost power area.

My local utility – I may have mentioned before that I live in the non-ERCOT portion of West Texas – took out a large ad in yesterday’s Lubbock Avalance-Journal to remind ratepayers that our rates are going down.  The local regulated privately-owned electric utility (Xcel) got approval for various rate changes including an immediate reduction in rates due to lower fuel costs, and the local municipal electric utility (LP&L) has matched the rate reduction to stay competitive (because they know what will happen to the customer base if they don’t).

(HT to Michael Grable, ERCOT general counsel, who mentioned the Abilene newspaper story at today’s FERC technical conference on integrating renewable power to the transmission grid.  BTW, a webcast of the event will be available online soon and remain available for about 3 months.)

Does “Competitive Electricity Markets” want to be free?

Michael Giberson

Cover Al Roth at his Market Design blog draws attention to Competitive Electricity Markets: Design, Implementation, Performance, a book edited by Fereidoon Sioshansi, which contains 15 chapters on power market design by some of the best workers in the field. As Roth notes, it has been out for a year or so, and it appears to be an outstanding collection.

So far, however, I haven’t ordered a copy, deterred by the $150 list price.  (Hey, look: just $120 at Amazon-you save $30!).  Maybe the library should pick up a copy…

But a Google search on “Competitive Electricity Markets” “Elsevier Science” turns up a site offering a free download of the book. I wonder, is this a legitimate offer or is someone infringing on Elsevier’s copyright?

Does “Competitive Electricity Markets” want to be free?

UPDATE: Checking again this afternoon, I see that at least one of the sites that was offering a free download of Competitive Electricity Markets no longer has it available. (The Google search result links to a page that now returns a “403 Forbidden” code, indicating that the page has been taken off line.  For the moment, at least, the cached page at Google still shows the page, though the download links don’t appear to be functioning.)

I’ll assume that means the answer to the title question is, “No,” so I’d better start saving my nickles and dimes….