Getting the Smart Grid to Make Sense

For the smart grid to make economic sense, we need a way to pay for it by reducing the cost of generation, as well as the cost of wires, not just increase the cost of wires by the investment in the smart grid. There has to be some cost offsets. To accomplish those cost offsets, we need to change the load profile of the customers behind the meter, the cash register of the electric system. To change that load profile means we must give the customers economic incentives, which means changing the prices that are being charged to the customer. Yes, that means higher prices when things are going bad, but also lower prices at other times, including some times when things are going so well that they are going bad.

How can there be too much of a good thing such that “things are going so well that they are going bad?” I wrote of that in “Renewable Electric Power—Too Much of a Good Thing: Looking At ERCOT,” Dialogue, United States Association for Energy Economics, 2009 August. Prices for electric generation in the “wind patch” of West Texas were negative for about 25% of the month of April 2009. Things got so good, with so much wind, that things got bad, with prices that seem so unusual. And it need not just be the “wind patch” of West Texas where there is too much power. If my neighbor puts in a 1 MW wind mill in my residential neighborhood, that will overload the wires and cause too much of a good thing, as I wrote in “Microgrids And Financial Affairs,” Industrial Fuels and Power, January 2008.

The same concept applies to charging electric vehicles, as I wrote in “Dynamic Pricing: Using Smart Meters to Solve Electric Vehicles Related Distribution Overloads,” Metering International, Issue 3, 2010. This article was my response to a pro-EV group which wrote

In a study conducted by EPRI, plugging in just one plug-in hybrid electric vehicle (PHEV) to charge at 220 V overloaded 36 of 53 transformers examined during peak hours and five of 53 transformers during off-peak hours. It is, therefore, important to identify where GEVs are parked and charged so that utilities can make the upgrades necessary to maintain reliable service. (Electrification Roadmap, November 2009, p. 102, emphasis added)

The Market Can Handle “Peak Oil”

On Friday, 2010 December 17, I attended the NCAC-USAEE lunch with Robert Hirsch as the speaker.  Hirsch’s study of the petroleum industry has led him to accept the “Peak Oil” theory advanced by Matt Simmons, in which the world is running out of the supply of petroleum.  As Hirsch and others pointed out after the presentation, “Peak Oil” hysteria has occurred before, such as during the embargoes of the 1970’s, during the 1920’s, and even as early as 1860 when Pennsylvania said that Colonel Drake’s well, which began producing in Titusville in 1859, had only a few months of production.  Hirsch acknowledged the possibility of the fable of the “Boy Who Cried Wolf,” that again the doom and gloom might be overstated, though he feels this time is different.  But he finished with the reminder that the wolf finally did eat the shepherd boy.

Hirsch’s showed three specific Administrative Mitigation mechanisms, Rationing, Forced Carpooling, and Forced Telecommuting, and then spoke about the need for non-conventional supplies.  He also expressed a doom and gloom effect on the world economies as petroleum became scarce and prices rose.  Considering that the presentation was in Washington, D.C., it is almost understandable that the first mitigation measures Hirsch identified were Administrative.  But have lived through the “shortages” of the 1970’s, I am not sanguine about the feasibility of Administrative Mitigation.  I also believe that the market is more robust than is suggested by his doom and gloom prognosis, if only the market is allowed to operate without Administrative Mitigation.

During the early 1970’s, President Nixon’s administration developed wage price controls.  This concept was based on the wage price controls on which Nixon worked while in the Army during World War II.  Wage and price controls didn’t work well during the war, nor did they work well during the 1970’s.  Perhaps I am jaded in that respect because I got my first job after getting an SM from MIT’s Sloan School of Management in 1971 and for five years was told that I had to stay at the bottom of the pay scale because of the wage price controls.

But we also had oil embargoes that nominally created shortages in the US.  The government developed various forms of rationing, the most famous of which were limitations based on one’s license plate.  Odd license plate numbers were allowed to get gas on some days and even license plate numbers on other days.  Another time the federal government implemented regional allocations.  A friend tells of finding a gas station in DC and filling his car on a Friday.  On Saturday, he drove his wife to the Shenandoah region of Virginia, with his mind set being driving until his gas tank was down to half, and then turning around.  Because of the regional allocation, there was a surplus of gas in the Shenandoah, even sales at the gas stations.  So my friend was able to forget about his plan of driving only until his gas tank was down to almost half.  There was plenty of gas to get back to DC.

I don’t know whether Hirsch is correct about “Peak Oil” occurring in 2010-2012.  But if it does, I am optimistic about the market being able to handle it, certainly much better than the federal government did with odd/even license plates, regional allocations, etc.  “Peak Oil” would certainly cause some sort of a shortage, but the economy will respond, if we allow a market to operate.  The growth in the spot market for petroleum has been impressive, at least I keep hearing about the size of the spot petroleum market.  Some say that the market is three to five times the amount of petroleum that is delivered, depending on who you listen to and what is being measured.  Others point out that a significant portion of all petroleum deliveries are intra-company, not actually be sold in the spot petroleum market but transferred from Exxon’s production company to Exxon’s refineries.  The spot market may influence that transfer price, but such transfers are not part of the spot market.

Solar PV might be sufficient but needs storage and agnostic pricing

It has been said that the US Department of Energy is supposed to be technologically neutral.  Many people say that DOE isn’t technologically neutral, but let’s build on the concept anyway.

We should have imbalance prices that are technologically neutral.  If I pump more solar PV into the grid than I have under contract, I will want to get paid for that surplus.  That surplus will be absorbed by someone with a shortage, who should pay for absorbing that surplus.  Given that there are hundreds, or thousands, or tens of thousands, or even millions (think of the number of solar roof tops) of parties participating in this balancing act of surpluses and shortages, the real time balancing price needs to be uniform (except for geographic differentiation.)

We could price my solar PV surplus differently from a simultaneous coal surplus, or from a simultaneous solar PV shortage, or from every other surplus or shortage, but that would be an accounting nightmare.

One way to handle the shortages and surpluses is with storage.  The uniform simultaneous price concept would be a way for storage to be compensated for its actions, buying the surpluses when the price is low and selling the shortages when prices are high.  This pricing concept should also be technologically neutral with regard to the form of storage, whether the lead acid or lithium ion batteries discussed by others or thermal storage that would fully handle the surpluses and only indirectly handle the shortages by turning of the charging power.

2010 World Energy Outlook by International Energy Agency

Yesterday, December 3, I went to the International Energy Agency’s presentation of its 2010 World Energy Outlook in Washington, D.C.  I ended up with two takeaways, a claim that the demand for petroleum was less price-responsive than it had been and a claim about the huge fossil fuel subsidies being provided around the world, especially by those governments that are major exporters of fossil fuel.  Iran was identified as the leading “offender.”  These takeaways were reinforced after the presentation in talking with people I knew in the audience.

I mentally challenged the issue of a lowering of the price responsiveness of petroleum demand.  During the great petroleum price spike of 2008, the US made a political decision to finish filling the Strategic Petroleum Reserve.  This political decision was likely to distort any estimation of the price responsiveness of petroleum demand.  This was part of the reason I mentally challenged the claimed lowering of the price responsiveness of petroleum demand.  As an aside, two days earlier a friend had commented about testifying against the decision to finish filling the SPR, so that nugget was in my mind.  Also, I remembered a presentation about that time that China had also been making political decisions during the same time period that could have influenced the demand for petroleum further distorting the price responsiveness of petroleum demand.

I believe that the use of storage has a major impact on the price of commodities, whether the petroleum discussed specifically in this blog entry, or natural gas, electricity, and wheat.  I remember the Soviet agricultural crisis in the 1970s (?).  The federal government allowed the Soviets to export US wheat in large quantities.  Our wheat storage was full, almost overflowing.  Too late it became known that much of the wheat in storage had already been bought by the Soviets, who just needed the export licenses.  The wheat prices soared once people realized that the wheat in storage was not owned by domestic speculators but was owned by the Soviets intent on exporting the wheat.  Thus, I am sensitive to the amount of a commodity in storage, as well as the amount going into and out of storage, in determining the price of the commodity.  And when those decisions on storage are political, should that be considered a change in the price responsiveness of demand?

After the presentation, an Iranian I know came up to me quite incensed.  He said that the claimed decline in the price-responsiveness of petroleum was in conflict with the call for Iran to reduce the “subsidies” for fuel.  Further, they had the numbers wrong. 

  • If indeed the demand for petroleum is not price-responsive, why would a government’s decision to subsidy the price of petroleum products matter, such as in Iran.  His argument seems correct, at least if the concept of a decline in price-responsiveness had finally reached zero, which had not been the claim of the IAE, at least not that could be determined from the presentation.
  • IAE said that the price of gasoline in Iran was $0.08/liter.  The Iranian claimed the price was almost 40% higher, $0.11/liter.  In English units, these prices would be about $0.31/gallon and $0.40/gallon, perhaps an eighth of the price of gasoline in the US and much less than a tenth of the price of gasoline in Europe.  He didn’t seem to mind that his quibbling was about a factor of 1.4 when others were talking about factors of 8 or 10.

We also talked about “smuggling,” people buying tanker trucks full of gasoline in Iran (whether at the $0.08/liter price of the $0.11/liter price was irrelevant) and selling the gasoline across the Turkish border.  I thought that the transfers of a legal commodity across the border made sense, in that it should reduce the price of gasoline in Turkey, or at least that region of Turkey, and raise the price of gasoline in Iran, at least in that part of Iran.  The Iranian’s ire seemed to be directed toward the concept of violating government policy, one of not exporting gasoline from Iran, or at least not allowing small entrepreneurs to make money from the practice.  I guess his point was that the practice should be limited to licensed vendors.

This week Iran had shut down most of Tehran on three different days because of severe pollution, nominally caused by gasoline driven cars.  Shades of Los Angeles, Denver, and parts of China.  Eliminating the Iranian gasoline subsidies would reduce driving in Iran, including Tehran, at least if the IEA claim of reduced price sensitivity could be ignored.

During the presentation on subsidies, I began to wonder how subsidies should be defined.  My work on utility rate cases would often identify subsidies as relating to paying one’s fair share of the cost of the operating the utility.  Fair share included subjective decisions about cost allocations, so there were debates as to whether industrial customers were subsidizing residential customers or vice versa.  But these debates had as an underlying premise that the measurements were to be relative to the cost actually incurred by the utility.  Under that mind set, was the Iranian government recovering all of the cost it incurred in producing oil?  Yes, the world price for gasoline was much higher than the Iranian price, but did the enterprise as a whole lose money?

I have heard that Iran is currently considering raising the price of gasoline and of other energy supplies.  The revenue generated by this process would be used to provide Iranians with cash.  One thought is that the cash would be distributed equally per person, much as Alaska distributes cash to its residents from the taxes on oil production.  Last Wednesday, another friend had said that beneficiaries of the very low gasoline prices were those few Iranians driving huge gasoline guzzling SUVs.  Thus, the reform of gasoline prices, when coupled with an Alaskan style distribution, would hurt a few, the owners of the gas guzzlers, and benefit many, anyone who doesn’t own a car and uses little energy. 

The conversation about Turkey and the huge price differential between Turkish gasoline and Iranian gasoline made me think about the people who would really be severely hurt by an increase in Iranian gasoline prices, the smugglers.  It would make sense for them to be very adamant about keeping the status quo, much as the illegal gambling industry sought to prevent legislation legalizing sports gambling in the Bruce Willis movie The Last Boy Scout.

The IEA discussion about subsidizing fossil fuel commodity prices left undiscussed other subsidies that exist in the energy industry.  In the electric industry, renewable resources are heavily subsidized, whether by the tax credits offered by various governments, the renewable portfolio standards of various US states, or the feed-in tariffs that exist in many European countries.  My concern as an electrical engineer is that such subsidies are making the supply of electric energy to be less price responsive than it had been, perhaps even more so than the effect on the demand for petroleum.  Last year I looked at the prices paid for electricity generated in ERCOT, the Electricity Reliability Council Of Texas.  (See “Renewable Electric Power—Too Much of a Good Thing: Looking At ERCOT,” Dialogue, United States Association for Energy Economics, 2009 August available for free download on my web page.  Just register your name and data.)  For a quarter of the month of April 2009, the prices in West Texas, with a lot of renewable generation, were negative.  The wind generators had to pay ERCOT to take the electricity off their hands.  And the negative prices reached Houston for about 1% of the month.

The concept of negative prices in juxtaposition to the concept of subsidies leads to the issue of taxes on energy, essentially negative subsidies.  These negative subsidies have led to very high gasoline prices in Europe, though according to the IEA less sensitivity to price analysis, these high gasoline prices are no longer restraining the consumption of gasoline in Europe. 

I wonder!?