The Electric Transmission Grid and Economics

Tuesday, 2013 October 8, I went to the MIT Club of Washington Seminar Series dinner with Anjan Bose of Washington State University talking about Intelligent Control of the Grid.  Anjan began with giving two reasons for the transmission grid but then seemed to ignore the predicate in explaining what the government has been doing in regard to the grid.

The first slide identified two reasons for the electric transmission system.  The first was to move electricity from low cost areas (such as hydro-electric dams) to higher cost areas.  This is an obvious reference to economics.  The second was to improve reliability.  Anjan did not get into the discussion of how that is an economics issue, but it is.  Reliability is greatly improved by increasing the number of shafts connected to the grid.  We can produce the same amount of electricity with five 100 MW generator or one 500 MW generator.  The five units provide greater reliability but also higher costs.  The higher costs are associated  with various economies of scale, including higher installed cost per MW, less efficient conversion of the fuel into electricity, and the need for five sets of round the clock staffs.  A transmission system allows dozens of 500 MW units to be connected at geographically dispersed locations, achieving the reliability of many shafts and the lower cost of larger generators.

But, the presentation had little to do with the economics of the power grid, and the investigations into those economics.  I noticed that much of the discussion during the question and answer period did talk about the cost of operating the grid, so people were indeed interested in money.

Anjan said that the financial people used different models than did the engineers who operate the system.  I have long said that we need to price the flows of electricity in accord with the physics of the system, by pricing the unscheduled flows.  The engineers and operators may plan to operate the system in a prescribed way, but the flows of electricity follow the laws of physics, not necessarily the same was the way some people have planned.

Anjan said that deregulation[1] has caused a dramatic decline in new transmission lines, especially between regions such as into and out of Florida.  My feeling is that new transmission lines would be added more willingly if the owners of the new transmission lines would be paid for the flows that occur on the transmission lines.  For instance, twenty years ago a new high voltage transmission line in New Mexico began to carry much of the energy that had been flowing over the lower voltage transmission lines of another group of utilities.  The group of utilities called the service being provided “vampire wheeling” and refused to make any payment to the owner of the new transmission line.  The new line provided value in the reduced electrical line losses and perhaps allowed a greater movement of low cost power in New Mexico, but that value was not allowed to be monetized and charged.

I note that a pricing mechanism for the unscheduled flows of electricity would have provided a different mechanism to handle the 2011 blackout in Southern California, which began with a switching operating in Arizona.  Engineers swarmed to the area to find data to assess the root causes but were initially blocked by San Diego Gas & Electric’s attorneys who feared that any data could be used by FERC to levy fines pursuant to the 2005 electricity act.  I remember a discussion at the IEEE Energy Policy Committee on that proposed aspect of the bill.  The IEEE EPC voted to suggest creating mandatory reliability standards.  I was the sole dissenting vote, arguing that the better way was to set prices for the unscheduled flows of electricity.  Thus, SDG&E and the Arizona utilities would have been punished by the market instead of risking a FERC imposed fine.

[1] I prefer to use the more accurate term restructuring, since the entire industry is still regulated, even though generation is often subject to “light handed regulation” by FERC, which approves concepts instead of specific prices.