Archive for May, 2009

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Jeremy Rifkind, thinking big about distributed energy resources

May 12, 2009

Michael Giberson

I’m not generally a fan of Jeremy Rifkind’s work. But, as a commenter is quoted as saying at the end of this BBC News report on Rifkind’s latest ideas for energy policy, “The world has room for visionaries.”

At a Prague conference, Rifkind outlined a grand scheme for solving economic and energy problems by rapidly moving Europe to distributed renewable energy resources integrated with smart grid systems. If you strip out the seemingly-obligatory-in-public-pronouncements-these-days promise of millions of “green jobs,” it is a vision of what a smart grid system can do for distributed energy.  Sure, too ambitious by half, but that is part of what makes it a vision and not a program for immediate action.

Although, I’ll have to say, there is an odd bit of centralization in a distributed energy proposal in which at “any one time the system will know what every washing machine is doing in Europe” and in the case of “peak demand, [with] not enough supply, software can say to two million washing machines ‘forget the extra rinse’.” (Though Rifkind notes his system is entirely voluntary and participants would be paid for their contributions.)

In my visionary moments, I imagine a future, more distributed, smart grid system accomplishing much the same sort of interaction and response, but no central system needs to know what every washing machine is doing in Europe in order to achieve my vision.  Instead, my local smart grid agent is monitoring local prices (current prices, future prices over the next several hours) and then scheduling home appliance energy use to maximize value against some model of my demand for service from my home appliances (dishes washed, hot water available for bathing, home temperature within a comfortable range, and so forth).

If area demand for electricity is reaching a peak in which sufficient supply is not available, no doubt spot prices will be getting high and my smart grid agent can cycle off my hot water heater, or my air conditioners, or skip the rinse cycle on dishwasher, whichever option (or all three!) that makes sense given my demands for energy services and the current prices available. Maybe I have a rooftop solar array, and at current prices it makes sense for the house to dramatically cut power use and become a net supplier of power to the distribution system.

Sometimes it will be more important to me to have the hot water available and sometimes it will be more important to keep the air conditioners going full blast, but if I’m not home and not going to be home for a few hours, why not make a few bucks off that rooftop solar array? I’d rather the system the manages those tradeoffs be local, not centralized in a system also responsible for millions of other distributed energy resources.

Related, BBC News reports that the UK has unveiled a plan for every home to have a smart meter by 2020.

(HT to Big Gav at the Energy Collective for the link to the story on Rifkind.)

Posted in Electricity, Energy markets | Tagged , | 1 Comment »

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Illinois Smart Grid Initiative final report

May 12, 2009

Lynne Kiesling

Last year I worked on the project team for the Illinois Smart Grid Initiative, in which we brought together a wide range of stakeholders to discuss the opportunities, benefits, and costs of different models of investing in smart grid infrastructure and technologies. We also discussed the important regulatory institutional changes that would be required to unleash all of these potential benefits and creating “good value for money” for consumers and investors.

The ISGI final report is now available. From the web site:

The ISGI Report outlines how a smart grid can fundamentally improve reliability and efficiency, integrate renewable energy on the local level, and empower consumers to take charge of and reduce their electricity bills–while saving energy and reducing carbon emissions.

The ISGI Report identifies several steps that can be taken right now to improve the electricity system for the benefit of all Illinois citizens. It encourages increasing consumer choice by pairing real-time electricity rates with smart technology, and urges regulatory rule changes that encourage public and private investment in energy efficient smart grids. Finally, investing in the smart grid can open the door to new ‘green power’, high-tech business opportunities in communities throughout the state.

Currently, Illinois is the national leader in offering residential customers real-time pricing options, and is among the leading states in mandating increased renewables and energy efficiency. Using the economic stimulus bill as one catalyst, the ISGI Report maps out how Illinois can transform the electric grid into a smart grid and set the standard for the nation in stimulating the economy and protecting the environment.

Here’s a direct link to the pdf of the report. While the discussion is specific to Illinois, we are leading the smart grid policy debates at the state level, along with a few other states, so I think in the spirit of the “laboratory of the states”, this report has a lot of valuable information for anyone interested in smart grid policy.

Posted in Economics, Electricity | Tagged , , | 1 Comment »

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Hartford Courant editorializes against zone pricing ban in Connecticut

May 12, 2009

Michael Giberson

From the Hartford Courant (May 11, 2009):

A bill in the General Assembly that would force gasoline wholesalers to charge the same price to retail dealers across Connecticut would likely raise the price of fuel for most motorists and make the market less responsive to competition.

Legislation to ban so-called zone pricing has been tried a number of times. The ban’s drawbacks are far outweighed by the advantages of allowing the market to continue working as it already does.

“Zone pricing” is the practice of gasoline wholesalers setting prices for sale to gasoline retailers by area, based upon a projected ability of the area to support higher or lower prices. While specific practices vary by wholesaler, typically incomes in the area and the level of competition between retailers would be taken into account as wholesales select the price it wishes to charge.  It is asserted that zone pricing harms retail station competitiveness and leads to higher retail prices.

Over the past several years zone pricing bans have been often debated in Connecticut and elsewhere. Numerous points have been made by both proponents and opponents of zone pricing bans. Until recently the evidence for and against zone pricing has been primarily theoretical, or experimental, or based on inferences from similar practices in other industry.

But last November neighboring New York implemented a law (partially) banning zone pricing.  So my advice to the people of Connecticut is that they continue without a zone pricing ban a little longer, and commission a few economic studies of the effects of New York’s zone pricing ban instead. Why not find out how this idea actually plays out in the real world?

Better to spend thousands of dollars on economic studies than make a million dollar mistake.

Previous zone pricing posts on Knowledge Problem:

Posted in Energy markets, Politics, Regulation | Tagged , , , | Comments Off

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Whirlpool: smart grid appliances by 2015

May 11, 2009

Lynne Kiesling

Last week Whirlpool announced that by 2015 all of their appliances would have embedded digital intelligence to make them responsive, transactive smart grid devices. There have been a few articles on this point, most recently this Reuters/GreenBiz one. Of course the crucial work here will be in developing open interoperability standards:

The home appliance manufacturer, famous for brands that include KitchenAid, Maytag, Amana, and its namesake, Whirlpool, among others, will form public-private partnerships to create an open, global standard for home appliances to transmit and receive signals by 2010. Once the standard is in place, the company will roll out compatible, electronically controlled appliances over the next five years.

The partnerships also will design policies that reward and incent manufacturers, utilities and consumers for offering and using the peak demand reduction abilities.

Game on, baby!

Relatedly, here’s an interesting GigaOM/Business Week article on the NIST interoperability standards work that I’ve been discussing. This article does a nice job of capturing the challenges, comparing the electricity industry standards development to other technology infrastructure industries, and highlighting the opportunities that open up if we can come up with an architecture for an open, interoperable smart grid that can become a platform for innovation. I particularly like the conclusion:

There’s the risk that the time crunch and complexity of the smart grid standards process could result in wrong choices. More likely, given the condensed timeline, is that standards bodies could set such broad guidelines that they’ll have little teeth. That’s probably a good thing, as companies, utilities and policymakers are just starting to discover what the real value of the smart grid is and will need market competition (not policy, standards, or technology) to help shape its future.

Hmmmm, where’ve I heard that before … ?

Posted in Economics, Electricity | Tagged , , | 2 Comments »

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Munson: From Edison to Enron to Casten

May 11, 2009

Michael Giberson

Richard Munson’s book From Edison to Enron provides a pretty engaging run through the history of the electric power business in the United States.  The title actually understates the scope just a bit on each end, with Munson touching briefly on developments before Thomas Edison gets involved and discussing developments after Enron’s 2001 collapse up to the book’s 2005 publication date. The book provides a good background for anyone seeking to understand the current state of the industry including the variety of state and federal regulatory experiments affecting electric power.  Advanced students of the industry will want to go much deeper than Munson does, but Munson’s book offers a good beginning.

David Sicilia offers a more penetrating and critical review of the book on EH.net, pointing out a few flaws and offering alternative interpretations of some episodes.

Sicilia highlights singles out for critique several issues related to monopolization in the power industry. He finds Munson “innaccurate or unpersuasive” on topics of economies of scale, utility regulation, and natural monopoly. I’ll agree that Munson’s discussion doesn’t compel the reader to believe, for example, that no additional economies of scale were available in the industry after 1967.  But Munson is telling a story, not arguing a legal brief, so I’m not concerned that Munson doesn’t beat every point to death with supporting arguments and data.

On this issue of economies of scale and central station power verses distributed power, however, it may bear mentioning that Munson has served as Secretary for the U.S. Combined Heat and Power Association. You can take this fact as indicating either that Munson surely knows what he is talking about, or that he has  may have some sort of financial conflict of interest. Reasonably, I think, you can conclude that his writing and his career reflect a consistent set of beliefs about the present and future of the industry.

Chapter Seven, Entrepreneurs, stands out in the book by being focused primarily on a single individual, Tom Casten, a serial entrepreneur in congeneration and perhaps not coincidently a harsh critic of monopoly regulation of electric utilities.  (By the way, both Lynne and I are fans of Casten’s entrepreneurism in electric power, e.g., see this post.) Perhaps also of note is that shortly after From Edison to Enron was published, Munson left his position as executive director of the Northeast-Midwest Institute to become a senior vice-president at Recycled Energy Development, a cogeneration project developer for which Tom Casten is chairman (and Sean Casten is president and CEO). Perhaps another reason for any reader suspicious of Munson’s narrative to see a potential conflict of interest. To me it just appears as Munson acting in concert with a consistent set of beliefs about the industry.

Whether the book tells a good story or not has little to do with Munson’s interests outside of the book. While the book has its flaws, I find it a good introduction to the history of the industry in the United States.

Posted in Economic history, Electricity, Regulation | Tagged , , , | Comments Off

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My favorite question on my electric power industry final exam

May 8, 2009

Michael Giberson

  • What is unusual about the retail electric power market in Lubbock? Is this regard is Lubbock a harbinger of the industry’s future or a relic of the industry’s past? Why?

This turned out to be my favorite question on the final exam I gave in my electric power industry class.

It wasn’t the most complicated of questions, nor did it elicit the deepest of answers. But most of the answers demonstrated mastery of the fundamental concepts involved in the question and put the Lubbock case into the broader context of industry restructuring. Some students cited possibilities related to distributed energy resources and referred to related readings in ways I had not considered when drafting the question.

Positive surprises are always good when grading page after page after page after page of short essays. Fortunately, I’m done now.

If you’re not from around here, you may be surprised to learn that Lubbock is served by two distribution utilities and most of the city is double-wired (a small part of the city actually can choose from among three distribution companies).  Some of the students who grew up in Lubbock thought it was normal to have more than one electric utility in town and to be able to switch if you were unhappy with your current service.

I didn’t keep score while grading, harbinger vs. relic, but the clear preponderance of responses argued that Lubbock’s competitive wires companies were a harbinger of the future. I’m sure most in the industry would regard double-wiring a city as unnecessarily wasteful, and therefore unlikely to happen.

Ten years ago, folks in the phone and cable industries probably thought the same thing.

Posted in Economics, Electricity, Energy markets, Regulation | Tagged , , , | 11 Comments »

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Electric power consumers in New Jersey are pursuing lower prices

May 7, 2009

Michael Giberson

An NJBIZ story reports that non-utility electric retailers in New Jersey are having more success attracting smaller and mid-size customers in recent months, largely because the non-utility retailers can provide a price based on currently-low spot energy prices while utilities have their energy costs established in the state’s periodic “basic generation service” auction. From NJBIZ:

Regulated utilities, such as PSE&G and Jersey Central Power & Light, are unable to take full advantage of the current fall in energy prices, because they spread their electricity purchases over three years, Lopez said. So the utilities have bought only a third of their power requirements in the latest annual wholesale electricity auction; they would buy the remainder in auctions — held each February — in the next two years, he said.

Utilities like PSE&G cannot offer lower electricity prices proportionate to the fall in current market prices because “they have to layer in the more expensive prices they paid a year or two years ago,” said John Berg, manager of commercial and industrial sales for the Northeast operations of Direct Energy, a Houston-based electricity and gas retailer.

By contrast, energy suppliers like ConEdison Solutions or Direct Energy buy their electricity at current market prices after they negotiate fixed-price contracts for specified periods, said Berg, who’s based in the Iselin section of Woodbridge.

“With us, you get a flat, fixed rate” that protects customers from volatility in electricity prices, Berg said. PSE&G’s current average rate for a mid-tier commercial customer is 11.9 cents per kilowatt-hour; that could be as low as 11 cents with a competitive supplier, he said….

But PSE&G’s model for fixing rates works both ways, said Tony Robinson, the utility’s director of energy acquisitions in Newark. “Just as our customers didn’t see a spike in prices this summer when oil was $150 a barrel, our rates do not also reflect as quickly when prices decline as they have since January,” he said.

The story reports that about 20 percent of PSE&G’s large and mid-sized customers switched to competitors last year, with the rate of switching picking up in November.  No doubt that when wholesale power costs start increasing again, customers will become less enthusiastic about renewing contracts at then-current rates.

But Robinson said he’s unfazed by customers preferring other electricity suppliers, since it doesn’t hurt the utility’s bottom line — PSE&G earns a return on the assets it uses in distributing energy, but makes no profit on the electricity supplies. At the same time, PSE&G customers who decide to buy their electricity from other suppliers still have to use the utility’s distribution infrastructure.

“If we lose a customer to an alternative supplier, he is free to go,” Robinson said. “We don’t care if he comes or goes.”

While at first this sounded like a less-than-consumer-service-oriented attitude, upon reflection this is good news.

With retail restructuring, it is good for the local wires company to be indifferent among the energy retailers chosen by consumers (including and especially if one of the retailers is an affiliate of the local wires company).

Posted in Electricity, Regulation | Comments Off

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FERC is to ERCOT as SPIDER is to ______.

May 6, 2009

Michael Giberson

“Will you step into my parlor?” said the spider to the fly;
“’Tis the prettiest little parlor that ever you did spy.
The way into my parlor is up a winding stair,
And I have many pretty things to show when you are there.”

Jon Wellinghoff, the chief spider at the Federal Energy Regulatory Commission, invited ERCOT to step into the federal parlor. Or, at least, that is what it will sound like to some folks in the ERCOT area.

Actually, Platts reported FERC chairman Wellinghoff was only suggesting that the “Electric Reliability Council of Texas should consider increasing the capacity of ERCOT’s now-minimal interconnects with neighboring grids.”

“If Texas could be more strongly interconnected to the Midwest, forexample, they could integrate even more wind into the system,” Wellinghoff said in a teleconference from Chicago.

“It would be a benefit to them, from that standpoint, and should be something that they ought to consider. Maybe we could still give them an exemption from FERC,” Wellinghoff said, making a reference to ERCOT’s desire to remain largely outside FERC jurisdiction.

Did he say “Maybe we could still give them an exemption”? “Maybe”? Just “maybe”?

Wellinghoff is going to have to be a little more wily if he hopes to get this particular fly into the FERC parlor.

By the way, there are sound economic reasons for strengthening interties between the regions. And whether or not the interties are strenghtened, the rules governing power flows over interties could be made more dynamic and responsive to changing spot prices in the two regions. But for some of the same reasons that federalists applaud states as “laboratories of democracy,” it is useful to have a part of the U.S. power system under somewhat separate regulatory authority. ERCOT can do its own thing to a degree not possible elsewhere in the States, and FERC and the rest of the world can learn from the successes and failures.

However, there is an alternative to strenghtening the interties between ERCOT and the Eastern Interconnection (and banking on the “maybe exemption”), and that is to expand existing transmission lines from the Southwest Power Pool into the wind power rich areas of central west Texas, and allow wind farms in the region to choose between delivering into SPP or into ERCOT.

It is already the case that ERCOT will build power lines into the Panhandle and South Plains portions of Texas, an area long outside of ERCOT and in SPP, in order to encourage wind power resource development in that area.  Another transmission project proposes to reach out from ERCOT to interconnect generation currently linked to the Entergy Texas system in the southeast corner of the state. A few existing generators are connected both to ERCOT and to the Eastern Interconnection.  So this kind of competition around the ERCOT fringes is already happening a tiny bit.

SPP is already planning to add more transmission capability into the Panhandle and South Plains part of Texas.  All the feds would need to do is encourage SPP to add lines a little deeper into the state, and the PUC of Texas should accommodate the effort.  Overlapping transmission capability would make it easier for both systems to accommodate variable wind power output.

The move would enhance wholesale power competition in the region and encourage the development of renewable energy resources, both priorities of the current Commission.

ERCOT may well be wary of too readily accepting the Chairman’s invitation. The fable of the spider and the fly turned out badly in the end, from the fly’s point of view. But there is real value from increasing the ability to trade power between systems, so some sort of deal should be pursued.

(N.B.: When you go into arm’s length negotiation with a spider, always remember it has eight arms.)

Posted in Electricity, Energy markets, Regulation | Tagged , , , | 1 Comment »

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Some smart grid consumer value propositions

May 6, 2009

Lynne Kiesling

Katharine Hamilton, President of the GridWise Alliance, wrote a letter to the editor in the Wall Street Journal that summarizes some of the consumer-facing benefits of smart grid technology:

I would ask consumers this question: Do you want to adjust your energy usage based on your monthly bill, then wait until the next month to see if what you did had any effect? Wouldn’t you rather know that your TV converter box uses twice as much electricity as your refrigerator and that, even though appliances are turned off and cell phones disconnected from their chargers, those outlets are still using electricity? Rather than having to call when your power is out, wouldn’t you like the utility to know who is out so that they can respond more quickly?

Customers can now see on-line what their bank account contains and make adjustments without having to wait until they get the monthly statement in the mail. Wouldn’t that also make sense for your electricity account? Perhaps you could even automate your energy use preferences based on utility prices.

Let me pile on here: wouldn’t a lot of us be better off (higher individual utility) if we could choose from among these various value propositions? Haven’t we had more and more such valuable options available to us in other industries over the past two decades due to business innovation around technological change?

Hamilton was writing in response to “Smart Meter, Dumb Idea?” by Rebecca Smith in the Wall Street Journal. In this article Ms. Smith spends almost no time discussing the variety of ways that smart meters can enable new products and services, including new products and services that would reduce energy use and save consumers money. For example, she devotes all of one paragraph to a cursory mention of how California policymakers see smart meters as a means of enabling consumers to choose dynamic pricing. I’m disappointed to see yet another article from Ms. Smith that demonstrates her failure of imagination with respect to how we could innovate around a smart grid platform.

However, her utility-centric perspective does provide a cautionary note as we move forward with smart grid policy and the crucial regulatory reform that must accompany it. If we think of the scope of smart grid investments as being focused on utility benefits, reducing the cost of providing customers with the same plain-vanilla electricity product that we’ve been getting for a century, then she may very well be right. If we do that, we truncate the consumer-facing product and service innovation that would be the source of real benefits (and that I’ve been talking about at KP for years).

Smart meters provide a platform for retail service innovation … but existing regulatory institutions and a mindset that cannot imagine those possibilities can stifle those benefits.

Posted in Economics, Electricity | Tagged , , | 8 Comments »

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Resilience, sustainability, and loosely-coupled systems

May 4, 2009

Lynne Kiesling

The NIST smart grid interoperability roadmap workshop I attended last week has gotten me thinking about the similarities between system architecture (as the computer systems folks call it) and institutional design (as we political economy social scientists call it). Of course there’s quite a bit of similarity, as the work of the GridWise Architecture Council (to which I’ve been honored to contribute) demonstrates. And I’ve always argued for institutional design that allows for adaptation to unknown and changing conditions, applying institutions to what I think of as an evolutionary test.

One of the concepts that fall logically out of this way of thinking about systems and institutions is resilience. This article from the forthcoming issue of Foreign Policy (thanks to Jesse Walker at Reason) focuses on resilience, in the context of thinking about the financial crisis of the past year:

Resilience, conversely, accepts that change is inevitable and in many cases out of our hands, focusing instead on the need to be able to withstand the unexpected.

The author contrasts this dynamic, adaptation-focused concept with sustainability, which he views as a more static, maintain-the-status-quo approach. I’m not sure I agree with that; I think it’s possible to have a dynamic concept of sustainability … but then it becomes resilient sustainability. Or at least that’s what I teach my MBA students, that true sustainability is in fact resilience.

One crucial aspect of resilience in a complex “system of systems”, whether it’s a network of computer systems or a network of individual economic agents interacting in a network of markets (or the intersection of the two!), is the extent to which the different parts of the systems are “coupled”. That’s what I’ve been mulling over for the past week — loosely-coupled systems. Loose coupling is a term of art in computer systems. Interestingly, its Wikipedia entry caught my eye for the precise reason I wanted to incorporate it into this post:

Loose coupling describes a resilient relationship between two or more systems or organizations with some kind of exchange relationship. Each end of the transaction makes its requirements explicit and makes few assumptions about the other end.

This definition highlights the aspects that are important, especially from a smart grid architecture perspective and an institutional design perspective: different systems or organizations with some kind of exchange relationship. Loose coupling means that entities that are engaged in exchange have to understand and exchange certain kinds of information to make those exchanges happen, but these requirements are explicit, and they are not exhaustive. When I buy milk at the grocery store, I don’t have to know the name of the cow whose milk I’m buying … but I do want to know some product features, such as its fat content, the sterility of its production environment (here, admittedly, aided by safety regulations), as well as its price. If my transaction relies on that specific cow, that’s a more tightly-coupled relationship, and if she dies and the transaction relies on it being her milk, then the transaction fails. A simple-minded example, but you get the idea.

Loose coupling is like having shock absorbers at the interfaces between different entities and different systems in a complex “system of systems”. Loose coupling can help prevent the negative consequences of unexpected actions from propagating through the network, and that’s how it contributes to resilience.

The electric power network today is very tightly coupled, both physically and economically, which reduces its resilience in the face of unknown and changing conditions. One of the most important arguments in favor of smart grid investments is that digital smart grid technology enables looser physical coupling and looser economic coupling, to the mutual benefit of both producers and consumers. At an architectural and institutional design level, that means developing architectural principles (including interoperability principles and standards) and legal and regulatory institutions that enable individual economic agents in the electric power network to create long-lasting, resilient value in these loosely-coupled systems.

I’m going to continue thinking about how these ideas relate; at this point I’m just thinking out loud, so please chime in to help me refine my ideas.

Posted in Economics, Electricity | Tagged , , | 12 Comments »

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