The Complexities of Electrical Energy Regulation
The Energy Supply Systems have three fundamental parts - Load, Distribution, and Generation or demand, distribution, and supply. The U.S. model of supply and distribution is constructed and controlled to match load. The great hope of the smart grid is that it will be a balancing mechanism for Load and Generation with less generating capacity. Time will tell whether this assumption has significant merit. The current U.S. model is likely to continue for the near future since it has served the U.S. well for a century.
Many theoretical market designs attempt to stay within this model while inducing correct price signals so that financial incentives drive the market including demand management. The big unanswered question is what is the correct price signal? Followed by who should get these signals. These points are worthy of debate and bringing to a logical resolution before creating any market design.
First, the common all-or-nothing approach is not the only option. Many argue for real time residential pricing. Let us deal with the smart meter tangent of this issue before getting going. The big strength of smart meters is not some pie in the sky future possible use. It is remote telemetry - they eliminate a person going from house to house reading meters and the associated risks, dog bites, locked gates, dealing with crazy homeowners and such. Smart meters turn a profit, they save time, fuel, and vehicles. The ability to support endeavors like real-time pricing once installed does not make that a logical step.
Back to real-time pricing; what is the correct price signal, and who should get it and what are its components? The common flawed view is that energy is the driver of the price signal. It is easy to say confidently, as a former power trader, that energy is a minor component of a valid price signal. The major driver of a valid signal is capacity.
Consider the date successful ERCOT market design where generation is reduced to only energy for simplicity. Out of necessity, this model will be changing and incorporating more rules. Without change, Texas will face more frequent rolling blackouts induced by a lack of incentive to build peaking capacity. ERCOT was fortunate that the ISO took over at beginning of the 2000-2004 overbuild. It is just now consuming this windfall. This has been a large contributor of its success in spite of the lopsided energy-only market design. Anyone truly interested in the flaws of an energy-only design should read the report prepared for ERCOT by the Brattle Group.1 The report goes into good detail and shows that even a $9000/MWH price cap will not provide Texas with its desired reliability reserves.
What this means using real-time pricing as a homeowner paying $9/KWH for his 10KW load will not produce enough incentive to investors to build more generation. A homeowner during very hot weather could use 3 hours per day for 4 days and have an energy charge in excess of $1000 for just those hours while still not providing adequate incentive to increase generation to provide adequate reserves and drop prices. Would this reduce consumption? Of course it would, between the blackouts and in coming months when half the customers have their electrical service disrupted for nonpayment it should create a sizable reduction. If a few old people have to die from the heat it will be well worth it to implement an improved market with improved pricing signals. Hopefully, everyone recognizes this as cynicism, but we do need carefully analyze the potential consequences of energy market rule changes including real-time pricing.
Few people and no regulators at all understand the difference between energy and capacity. Electrical energy exists in the moment. Its value is determined by fuel and variable operations and maintenance cost. Capacity is determined by the hardware of generation and T&D its real, it is often steel, it is the ability to convert another energy source into electrical energy and move it to the end user. When tapped out, it does matter how much primary energy, such as natural gas, is available. Full utilization of capacity combined with U.S. reliability standards induces massive price spikes. No one's generation costs come close to the inadequate $9000/MWH price incentive purposed by ERCOT. For perspective, a $2000 10KW portable home generator burning $5 gasoline is around a $1000/MWH assuming only a 500-hour machine life. Is that the goal for our system to digress to a system like Nigeria's where anyone that can afford it has his or her own inefficient, polluting portable generator to supply back up power? This approach and incentive seems counterproductive.
In conclusion: We need to be smart, fair and understand the effects of our actions before adopting the next poorly thought out bumper sticker-type solution. It is a complex system with complex interactions with those least able to afford it bearing the greatest risk and bound to suffer the most discomfort. This is only the tip of the iceberg, one small corner of the picture, five more articles addressing markets designs risks and flaws will follow to try to provide view that is a little more complete of the complex picture.